A lot of Student Loan Planner clients depend on the Public Service Loan Forgiveness program (PSLF). They’re making life and career decisions based on it. After all, receiving tax-free loan forgiveness after 10 years of income-driven payments is pretty awesome. So when a Fedloan lawsuit was filed alleging several borrowers were incorrectly told they were eligible for PSLF, there was a veritable panic online.
Following a court ruling in February 2019 that was in favor of the borrowers, the Department of Education finally settled the PSLF lawsuit a year later.
The settlement is great news for anyone depending on the future of PSLF because this lawsuit and its results show that the federal government can’t just up and change the eligibility rules on a whim.
For most clients and readers who are pursuing PSLF, I don’t think you need to worry about the future of the program, especially because the vast majority of PSLF student loan borrowers clearly qualify based on their employment with a government or 501(c)(3) entity.
I’m a student loan consultant, not an attorney. But I’ve advised people on more student debt than anyone in the country. Here’s what the PSLF Fedloan lawsuit actually means.
Why did borrowers sue the Department of Education over PSLF?
The lawsuit centered on a big group of lawyers being wrongly told that they were on track for loan forgiveness. And this mistake was caused by FedLoan Servicing, which is known for being a sub-par loan servicer. FedLoan Servicing is the loan servicer for federal loans under the Pennsylvania Higher Education Assistance Agency (PHEAA).
The government tasks private companies with handling the servicing and payment processing for federal student loans. And the Department of Education chose to name FedLoan servicing as the sole PSLF loan servicer. So, whenever someone tries to track their PSLF progress, their loans automatically get transferred to FedLoan.
And it turns out that FedLoan sent out information for at least a couple years that some borrowers were eligible even though they actually weren’t.
We can’t know for sure, but here’s how I think this situation happened:
- FedLoan issued approval letters to several borrowers from the American Bar Association (ABA), Vietnam Veterans of America, and other organizations in 2014 saying that they qualified for the PSLF program.
- In the twilight of the Obama administration, the Department of Education reviewed several PSLF cases more carefully as politicians realized the program would be far more expensive than they thought. Emails between FedLoan and the Department of Education show rules made up on the fly. A February 2019 court ruling found that the Department of Education made rules about PSLF in an “arbitrary and capricious” manner in violation of the Administrative Procedure Act (APA), which basically means they didn’t give proper notice and follow standard rule-making guidelines.
- FedLoan then issued rejection letters in 2016 even though the borrowers had been approved previously. U.S. District Judge Timothy J. Kelly found that the original determination letters had language in them that seemed final, in contrast to the Department of Education’s claim that it was provisional.
- Four borrowers affected by these years of lost PSLF credit decided to go further with their complaints and sue.
On top of all of this, the Consumer Financial Protection Bureau (CFPB) was sued due to the abuses of loan servicers and lack of oversight. The lawsuit also cited more issues with the way PSLF is being handled.
Who was included in the PSLF Fedloan lawsuit?
Obviously, the folks who spent years working toward the goals of the loan forgiveness program were rightfully upset. The affected group was mostly lawyers working at the ABA.
But there were others in the lawsuit who worked for public interest organizations with not-for-profit type names like the Vietnam Veterans of America (VVA). These borrowers argued that the Department of Education committed to these individuals that they were eligible for PSLF and should restore the few years of eligibility they lost as a result of FedLoan’s mistake.
They also wanted their organizations listed as qualifying employers so that they don’t lose lawyers to other organizations.
Judge Kelly prioritized the claims of the individuals over the organizations. In other words, he told FedLoan to reconsider its rejection for three of the four borrowers because of the APA violation. The fourth borrower he found ineligible because the VVA didn’t provide direct services.
And in February 2020, the Department of Education did just that.
After three years of litigation, the federal government agreed to fulfill its end of the bargain for the ABA lawyers who sued. The government recognized ABA employees as dedicated public servants who are eligible for PSLF going forward.
The reason this PSLF Fedloan lawsuit is a big deal
The PSLF application has not been used by a massive number of people so far. The Employment Certification Form (ECF) is the primary way to track progress toward the 10 years needed for PSLF. If a group of borrowers were incorrectly told they had eligibility, borrowers are rightfully worried whether they can trust FedLoan to provide accurate information.
Because plenty of borrowers are working in jobs solely to get the PSLF benefit, a change in eligibility requirements would alter people’s lives and only add to the student debt crisis. So there is legitimate angst emanating from a lawsuit like this.
What the ruling of Judge Kelly and the ultimate outcome of this lawsuit says, in my view, is that borrowers will be protected aggressively.
I think you could make a convincing case that their service did not originally qualify under the rules of PSLF.
However, given the Department of Education made rules willy-nilly and the initial finding was that the borrowers qualified for PSLF, it appears they were given the benefit of the doubt. And because of this, now ABA employees have full clarity that they work for a qualifying employer when it comes to PSLF.
What is a PSLF qualifying employer?
The first caveat to the PSLF program is that you must be employed by a “qualifying employer.” The program defines a qualifying employer in the following way:
Qualifying employment includes employment by the government, employment by a not-for-profit organization that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code, AmeriCorps position, a Peace Corps position, or employment at a public service organization. Nurses, social workers, and other public service professions typically qualify.
You must also make qualifying loan payments based on your income on Direct loans for 10 years while employed by this qualifying employer.
Here’s where the first problem with the borrowers’ eligibility in the lawsuit presented itself.
The American Bar Association is an industry-specific membership organization that’s governed by Section 501(c)(6) of the IRS Code. That status means the ABA is a “business league” that’s allowed to engage in “unlimited lobbying” for the economic benefit of its members.
So, the only way the ABA would be considered a qualifying employer is if it were considered a public service organization. It now is thanks to this lawsuit.
What about the borrower who worked for Vietnam Veterans of America? Surely that’s an eligible not-for-profit employer? Actually, that organization is a 501(c)(19) under the IRS Code. The only way its workers would qualify for PSLF is if the VVA is considered a public service organization.
So, the first rule you can take away from this PSLF lawsuit is to check to see if your employer is a government or 501(c)(3) organization. If it’s not, you could have trouble qualifying for student loan forgiveness programs like PSLF.
What is a public service organization?
We’ve established the only way these specific borrowers could have eligibility for PSLF is if they work for a public service organization. Here’s how public service organization is defined within the ECF public service workers need to submit to track PSLF progress:
A public service organization is a private not-for-profit organization that is not a labor union or a partisan political organization and that provides at least one of the following public services: (1) emergency management, (2) military service, (3) public safety, (4) law enforcement, (5) public interest legal services, (6) early childhood education, (7) public service for individuals with disabilities and the elderly, (8) public health, (9) public education, (10) public library services, (11) school library services, or (12) other school-based services.
So, the only way the ABA and VVA lawyers could qualify is if their employers are not labor unions or partisan political organizations and if the work they do qualifies according to the PSLF definition of public interest legal services. Given that the ABA and VVA don’t seem to be labor unions or partisan organizations, let’s see if they fit the definition of public interest legal services.
Public interest legal services refers to legal services that are funded in whole or in part by a local, state, federal, or tribal government. Clearly, the VVA is not funded in whole or in part by a local, state, federal or tribal government. The ABA is also not funded by a government.
Additionally, you could argue that the VVA is a lobbying organization for Vietnam veterans. While that’s a worthy cause with a well-deserving group of Americans, it’s not technically public interest law.
Under PSLF rules, working at the VVA is more like lobbying for a worthy cause. The judge seems to have ruled that way as the VVA doesn’t provide direct service but rather primarily advocacy.
The ABA is not technically a labor union, but it is a professional or trade organization that seeks to maximize the economic well-being of lawyers. It does a lot of other good things, too, but the government argued that it didn’t matter in this case. But the government ultimately settled and agreed that the ABA would be a public service organization for purposes of the PSLF program.
Even though the VVA lawyers don’t qualify under the PSLF program, they may have other options for their student loan debt.
If they owe less than 1.5 times their income and do not plan to utilize PSLF through a different qualifying organization, these borrowers would be better off refinancing their student loans and paying them back.
Many have taken new jobs at clearly qualifying organizations because of the importance of this program for their finances.
FedLoan messed up by telling them the wrong thing
I think it’s clear from the spirit of the PSLF certification form that the individuals in the lawsuit did not originally qualify. The analogy I’d make is if someone at the IRS incorrectly processed my taxes.
It doesn’t mean the IRS can’t send me a correction and ask for more money. If a judge incorrectly says “not guilty” when the jury verdict reads “guilty,” it doesn’t mean I can’t get sentenced.
I understand that to receive this notification years after you were wrongly notified you were eligible for PSLF is terrible. It’s why basically all of the loan servicers, not just Navient, are some of the worst organizations for customer service anywhere. FedLoan really messed up badly.
However, the court ruling prioritized borrowers and said that a violation of laws and normal rulemaking procedures shouldn’t ruin somebody’s finances. That’s great news for everyone pursuing PSLF.
Anyone who had their PSLF service disqualified who worked at a non-501(c)(3) nonprofit organization should appeal the finding. This lawsuit allows others in similar situations to appeal their lack of qualifying PSLF credit because of the APA violation by the Department of Education.
How I think this PSLF error happened
People are only human. No matter how detailed a procedure manual is. My bet is that some representative charged with making PSLF determinations at FedLoan looked through these certification forms and saw a not-for-profit that didn’t have a clearly partisan or labor union name.
FedLoan likely also didn’t check to see how the organizations receive funds and how they aren’t government-funded. So, they just checked the box that the borrowers, later sued, were eligible. It’s no surprise to me, as FedLoan cost my wife thousands of dollars with its poor service.
The PSLF FedLoan disaster as a domino effect
When the borrowers called in with complaints, the representatives on the phone looked at the note on the profile that said “eligible” and then merely repeated the mistake its processing folks made.
Once that initial mistake happened, it snowballed as nobody at FedLoan would overturn the previous ruling. Then outgoing officials at the Department of Education wanted to do one final review of PSLF determinations made by FedLoan before the Trump administration took over.
Why this PSLF lawsuit probably doesn’t affect you
Here’s the reason why you probably shouldn’t worry. If you’re going for PSLF, you’re almost certainly at a 501(c)(3) or a government employer. If you’re not at one of those kinds of employers, and aren’t at AmeriCorps or the PeaceCorps, you probably don’t qualify for PSLF.
Most people going for PSLF are at qualifying organizations and are thus unaffected by this PSLF Fedloan lawsuit. Yes, you probably can’t trust FedLoan servicing. But If you’ve interacted with student loan servicers much, you probably already knew that.
How to know you’re on the right track with PSLF
If you are depending on PSLF, check your employer’s tax status right now. Ask the human resources department for financial documents, and look and see if your employer is a 501(c)(3). You may be able to google the tax status, too. That’s what I did to find out the ABA was a 501(c)(6) and the VVA was a 501(c)(19).
Another clue is your retirement account. If you have a 403(b) or a 457, you’re probably eligible for PSLF. The American Bar Association has a 401(k), which is for corporate employers. That should have been a clue that its employees weren’t originally eligible for PSLF. But things fortunately worked out in their favor.
How to protect yourself against something bad happening to PSLF
Because things can change with programs like PSLF, it’s a good idea to take measures that protect your finances. The first step is to independently check if your employer is actually eligible. If you’re curious, ask in the comments below. Maybe we can crowdsource it.
Next, make sure you’re on the right repayment plan — an IDR plan — and don’t make extra student loan payments if they might be forgiven. Instead, open an account with Vanguard if you don’t need advice or Betterment if you do.
Then, invest what you would’ve used to pay extra on your student debt. Finally, save as much as you can in your retirement plans (currently $19,500 maximum in 2020 for employer plans or $6,000 for Traditional IRAs).
Make sure your finances can withstand PSLF going away just in case
Plan on PSLF, but prepare for its repeal just in case. Anybody with PSLF in the promissory note will probably qualify. The chief threat to PSLF could actually be a means test imposed by the president or Congress. That’s already been proposed by President Obama, although it got shot down by members of his own party.
The Republican Congress tried to repeal PSLF entirely, but only for new borrowers. That means grandfathering for PSLF borrowers is very likely going to occur long-term.
I think there’s over a 90% chance current borrowers will get to take advantage of forgiveness and grant programs like PSLF in its current form, so you shouldn’t be super worried about this.
Want help? Let’s craft a personalized student loan strategy for you
Here’s the bottom line for PSLF borrowers working in public services: Save a lot. And make a plan.
Independently verify your eligibility for PSLF and get a detailed account review from your loan servicer. And appeal the denial decision if you work for a nonprofit organization that doesn’t have a 501(c)(3) tax status.
If you have six figures of student loans, don’t put all your trust in your financial future to a student loan servicer. That’s the biggest takeaway from the PSLF Fedloan lawsuit for me.
Perhaps you’ve read all this and wonder how you might get competent help with your student loans. I provide student loan help for a flat fee, and I’ve consulted on hundreds of millions in student debt for clients. Just click the button below to get in contact with me.
Caitlin See contributed to the reporting for this article.