As it relates to the Public Service Loan Forgiveness (PSLF) program, the media reports stats without context. I received a huge number of messages about the National Public Radio (NPR) piece entitled, “Why Public Service Loan Forgiveness is So Unforgiving.”
Vice decided to throw caution to the wind and warned borrowers, “You’re Probably Not Getting that Loan Forgiveness You’re Counting On.”
No one seems to understand the PSLF program. In fact, the acceptance rate for applications will be exponentially increasing over the next few years thanks to the “PSLF Snowball Effect.”
Not only is PSLF working, it will be America’s most popular loan forgiveness program within only a couple years.
Why is everyone getting rejected for PSLF – and who qualifies?
As of March 2019, from the most recent data I could find, 864 borrowers have been approved for PSLF out of the 73,554 who applied. The initial success rate was about 0.5%, and now it’s above 1% only a few short months later. You might think that’s still ridiculous, but it shows the exponential path to a 50% success rate that will happen over time.
Congress passed the PSLF program in September 2007 with the College Cost Reduction and Access Act. However, setting up federal loans to be forgiven takes a while when people owe hundreds of billions of dollars.
In fact, around the time of the bill’s passage in 2007, Direct Loans only constituted $106.8 billion of the total federal loan portfolio of $516 billion, according to the Federal Student Loan Portfolio database. Only Direct Loans were eligible for PSLF. That meant only about 20% of the total pool of debt was even possibly eligible approximately 10 years ago.
Here are the stats as of March 2019 for what’s been forgiven under the PSLF program — actually forgiven and not just approved to be forgiven, which takes more time. Just over 40,000 applications were denied because they failed to meet the requirements, and 18,600 applications were denied due to incomplete paperwork. The number of loans discharged is in millions.
- Borrowers: 73,554
- Borrower discharges: 518
- Loans discharged: $30.7MM
How has Income-Based Repayment hurt the PSLF success rate?
How many of those borrowers with Direct Loans were on an income-driven repayment program? Keep in mind that borrowers have only been able to access the Income-Based Repayment (IBR) program since about September 2009.
Before that, the only option to pay based on your income was the Income-Contingent Repayment (ICR) plan. ICR is definitely the least understood, most complicated, dumbest kind of income-driven repayment. It’s confusing to sign up for, and the payment is significantly higher than the IBR, Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) options.
Additionally, the Extended and Graduated plans probably have lower payments in many cases than ICR does. If you were a borrower back in 2007 or 2008, then you might have just chosen the lowest cost repayment plan without knowing about PSLF.
Borrowers first gained access to the 10%-of-your-income PAYE plan in 2013. REPAYE became easily accessible in early 2016.
Another clue of how poorly adopted income-driven repayment adoption has been historically is to look at the first available data in 2013 for how many people used it. In late 2013, $72.3 billion of Direct Loans were enrolled in an income-driven repayment plan out of over $1 trillion. That’s barely 7% — and that’s in 2013!
What was the percent of borrowers who had figured out ICR back in 2007 and 2008? Likely minuscule. Here’s the percentage since 2013. The figures shown below are in billions, and the percentages equal the percentage of total federal student loan debt.
Direct Loans on IDR Plan
in Billions of Dollars
Total Federal Loan Portfolio
in Billions of Dollars
Direct Loans on an IDR Plan (%)
Notice a trend? Income-driven options aren’t going anywhere, folks. Give it another decade and the majority of Americans will be on an income-driven repayment option. That would sever the tie of the amount of debt you borrow to your payment.
The PSLF employment certification form is just starting to help
Back in 2012, the government decided it was a very bad idea to have the people depending on this program try to hunt down their old employers from 10 years ago to certify their credit. That’s one reason why the Public Service Loan Forgiveness Employment Certification Form, or ECF, was created.
This allows you to submit paperwork to certify your status in the program as often as you like, usually yearly.
How did borrowers certify their PSLF status before 2012? The answer is they didn’t. Any borrower applying now either tried to certify their status when the form came out and is battling FedLoan for an accurate payment count, or they never submitted the certification in the first place.
Do you know many people who work ahead and document everything they do? The average person certainly waits until the last minute and doesn’t cross their T’s. And that’s the average PSLF applicant, too. The structure of the federal student loan system put them in a place where they wouldn’t qualify.
If you’re one of the lucky few, you likely had a best friend at the Department of Education who was telling you about all of this stuff back in 2007 and 2008. (I keep mentioning those years because only borrowers with Direct Loans back then could have the necessary 10 years of credit to receive PSLF.)
The borrowers who applied with a paperwork mistake likely were hurt by not having access to the ECF sooner. They left off a single signature from an employer, maybe failed to check something on the application or didn’t document their employment history.
Direct Loans have only been around for everybody since 2010
Did you know that the Federal Family Education Loan (FFEL) Program was the primary system of student loan borrowing prior to 2010? This program has no PSLF eligibility, and the only way to qualify for PSLF if you have FFEL Loans is to consolidate them.
The typical American is worried about doing a good job at their place of work, taking care of their family, achieving happiness in their relationships and just living their lives. They aren’t nerding out on repayment rules, reading promissory notes and running numbers in spreadsheets (that’s why people hire us).
Before 2010, you had to rely on being at the right institution that just happened to offer Direct Loans. Certainly for grad school, FFEL loans were far more commonly offered.
Physicians and PSLF
I’ve been asked if any physicians have received PSLF yet. Structurally, it will be impossible for large numbers of physicians to get PSLF until mid-2020 at the earliest.
If you graduated from medical school in 2008 to begin your 10 years of credit, you would have started borrowing in 2004 at a minimum. There’s almost zero chance that you’d have been able to borrow only Direct Loans. There’s also only a small possibility that you could consolidate back in 2008 to change your loans into qualifying ones.
The earliest class that would have been able to get PSLF eligible loans finished med school in 2010. That’s when they could have conceivably consolidated their ineligible FFEL debt into a Direct Consolidation Loan and signed up for IBR. Realistically, though, the consolidation process was a wreck back then. It was still a wreck as of 2011, too. Every graduating med school class until 2014 would have had significant FFEL loans. This is because the Direct program became the only option in 2010, and med school lasts four years.
Without having hired a student loan consultant, the first physicians getting PSLF en masse will be in 2024.
The only stories I’ve seen of people who qualified already are folks who had shorter degree programs, got lucky by attending a school that pushed taking out Direct Loans or have debt primarily from undergrad. That’s because of the way the PSLF program got implemented. That will also change over time.
The pool of eligible PSLF borrowers in the late 2010s is tiny
Let’s look at the potential pool of people who could get their loans forgiven starting in 2008, when borrowers could be eligible for PSLF.
In June 2008, there was about $122 billion of Direct Federal Loans.
In 2013, 2% of federal student loan debt was on the ICR program. So let’s assume that 2% of the $122 billion could have been in a qualifying repayment program. So $2.44 billion would now be eligible.
That means we need to take 25% of the $2.44 billion figure now to see how many borrowers could have had qualifying loans in an eligible job an income-driven option (the only one back then was ICR).
That figure is now $610 million.
How many people were continuously employed for those 10 years, used no forbearance or deferment, took no time off in between jobs and shrugged off all the misinformation coming from their loan servicers? Would you guess one-third of that amount? I’d say that’s far too high, but let’s go with it. Now we have a potential eligible pool of $203 million.
How many borrowers in that cohort:
- Realize they qualify?
- Can track down signatures they need proving their 10 years of qualifying employment?
- Submitted their paperwork already?
- Will be applying later in the year?
It’s hard to know for sure, but maybe $50 million worth? The government has already approved $30 million, and FedLoan has approved hundreds more, pending the forgiveness disbursement. Out of the potentially eligible pool of loans, it seems that almost 25% or more are being forgiven as we speak. That’s not a 1% approval rate.
The pool of eligible PSLF borrowers in the late 2020s will be huge
According to the Consumer Financial Protection Bureau, about 25% of the American workforce could be eligible for PSLF one day.
With over 1,000,000 unique borrowers certified for the PSLF program, the question is not if but when the government will start handing out billions of dollars for this loan forgiveness program. I wouldn’t be shocked if the cost of this one program exceeds the annual budget of NASA by 2029.
Milestones that will make the PSLF success rate rapidly grow
There are several big moments that will happen soon, causing the PSLF rejection rate to drastically improve at the years below plus 10 (because you need 10 years of qualifying service to get forgiveness).
1. IBR becomes widely accessible: Late 2009
We know this happened around the end of 2009. That means the crop of PSLF borrowers in 2019 would have been able to use IBR instead of the drastically more confusing ICR. This will significantly broaden the pool of eligible borrowers.
2. Direct Loans become primary loan type: 2010
Starting in 2010, the FFEL Program ceased to exist, and the Direct Loan program became by far the typical way students borrowed. That’s going to be huge when PSLF applicants would have had the right kind of loans to qualify without having to do anything special.
3. Employment Certification Form becomes widely available: 2012
We know the ECF is incredibly important for folks tracking progress toward PSLF. In fact, it’s designed to prevent fiascos like these from happening when you apply. Borrowers starting in 2022 will have had the ECF around for 10 years. This will significantly reduce the error rate for applications because there won’t be any mysteries when you apply.
4. PAYE Became Available: 2013
At University of Iowa campaign rally, former President Barack Obama used executive powers to create the PAYE program. Limited funds meant he had to restrict it to folks who took out their first loan after Oct. 1, 2007 and who took out at least one new loan after Oct. 1, 2011. Basically, this was done so the Class of 2012 undergrads would qualify. This program improved the incentive for a borrower to sign up for an income-driven option.
5. REPAYE Became Available: Early 2016
A lot of people couldn’t access the PAYE plan when it came out. But the REPAYE program is open to everyone with Direct Loans. In 2016, it became even easier to get access to the PSLF program, as REPAYE became the default recommendation for what to do with your loans for every clueless loan servicer phone representative everywhere.
6. Media makes borrowers aware of the program’s poor success rate: 2018
All publicity is good publicity, right? A lot of borrowers have never heard of PSLF. However, thanks to the large amount of coverage in the media, many more people know about this program today than even in the mid-2010s.
7. Borrowers begin to realize the PSLF program is legit: 2020-2022
If you weren’t counting on getting PSLF because of negative media attention, you might change your mind as 2020 ushers in the first relatively large cohort of borrowers who will receive tax free forgiveness. Once more borrowers see that it works, more of them will commit to the 10-year process of qualifying for the program.
What’s the current status of the PSLF Program?
Public Service Loan Forgiveness Employment Certification Forms (ECFs)
Direct Loans on IDR Plan
in Billions of Dollars
Total Federal Loan Portfolio
in Billions of Dollars
Direct Loans on an IDR Plan (%)
Source: FedLoan Servicing, Federal Government, SLP Calculations
By 2024, a med student who started school in 2010 would have taken out exclusively Direct Loans until they graduated in 2014. She would have been steered into an income-driven repayment plan as the default suggestion. And she would have learned in residency to apply for PSLF with the ECF and submit it every year.
In 2018, maybe she contacted Student Loan Planner for a consult where we told her to max her pretax retirement accounts, think through her tax filing status with her spouse and avoid the misinformation surrounding the PSLF program.
She continued to stay the course, save in her tax bomb account and not freak out. In 2024, she applies with a clear paper trail proving her credit, and she receives the forgiveness.
Along the way, there will be attempts to repeal the program. One might be successful, but it will likely grandfather in current borrowers. There are now over 1 million people depending on PSLF. If you were a congressperson, would you want to piss off 1 million highly educated people who all vote?
Please media, tell the full story about the PSLF snowball effect
More accurate headlines would say something like:
- Breaking News: Design of PSLF Program Sucked in 2008. Lousy Congress and President to Blame
- PSLF Program Sees 99% Rejection Rate. The Program Was So Confusing 10 Years Ago, We’re Surprised it’s Not 100%!
- Over 800 Borrowers Got Approved. 1 Million Set to Be Approved in 2029.
- Projected Cost of PSLF Program in 2019 Set to Increase by 1,000% Per Year
- Media Causes Thousands to Abandon Loan Forgiveness Program They Likely Would’ve Qualified For
Financial media has long been a huge cause of behavioral mistakes in investing. Just ask literally any Certified Financial Planner you know. And now this misinformation is spreading to managing student loans.
I think reporters are trying their best to highlight the poor design and implementation of PSLF. Please just be careful and try to tell the full story. Millions of people are making decisions now based on what you say.
If you want expert help evaluating all your options for your student loans (if they’re between $50,000 and $1 million), reach out for help.