The media has been fairly sensationalist with headlines on the PSLF program as of late. I personally received a huge number of messages over the NPR piece entitled, “Why Public Service Loan Forgiveness is So Unforgiving.” Vice.com 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.”
Why is Everyone Getting Rejected for PSLF Right Now?
Recent stats for 2018 showed that only 96 borrowers out of more than 28,000 actually received loan forgiveness. I’m frankly surprised the rejection rate was as low as it was.
The PSLF program got passed in September 2007 with the College Cost Reduction and Access Act. However, setting up federal loans to be forgiven takes a while when people owed 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. I’m drawing all the stats about historical debt amounts from the Federal Loan Portfolio database. Only direct loans were eligible for PSLF. That meant around 20% of the total pool of debt was even possibly eligible approximately 10 years ago.
Here are the stats for the PSLF program as of June 2018. (Just over 20,000 apps were denied due to failing to meet the requirements and 8,000 apps were denied due to incomplete paperwork. The number of loans discharged is in millions.)
Income Based Repayment Has Been Tough to Get Until Recently
How many of those borrowers with Direct Loans were on an income-driven repayment program? Keep in mind, borrowers have only been able to access the Income Based Repayment program (IBR) since about September 2009.
Before that, the only option to pay based on your income was ICR, aka Income Contingent Repayment. The ICR plan is definitely the least understood, most complicated, dumbest kind of income-driven repayment. ICR is confusing to sign up for, the payment is significantly higher than the other IBR, PAYE, or 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 started being easily accessible in early 2016.
Another clue of how poorly income-based repayment adoption was 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 percent since 2013. (The figures shown below are in billions and the percentages are the % of total federal student loan debt.)
|Total Federal |
|Direct Loans |
on an IDR Plan
Notice a trend? Income-based options aren’t going anywhere folks. Give it another decade and the majority of Americans will be on an income-based 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 that it was a very bad idea to have people depending on this program try to hunt down their old employers from 10 years ago in order to certify their credit. That’s one reason why they created the Public Service Loan Forgiveness Employment Certification Form, or ECF.
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.
How many people do you know who work ahead and document everything they do? The average person certainly waits till the last minute and doesn’t cross their T’s. That’s the average PSLF applicant. They were put in a place by the structure of the federal student loan system to not qualify.
If you are one of the lucky few, you likely had a best friend at the Dept 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 over 8,000 borrowers who applied and had a paperwork mistake likely were hurt by not having access to this certification form 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 enough.
Direct loans have only been around for everybody since 2010
Did you know that the FFEL loan 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 these 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 are 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.
I’ve been asked if any physicians have received PSLF yet, and my answer is almost surely no. If you graduated med school in 2008 to begin your 10 years of credit, you would have started borrowing in 2004 at a minimum. There’s almost 0 chance that you would’ve had the chance to borrow only Direct Loans. There’s also a small chance you had the ability to consolidate back in 2008 to make them qualifying loans.
The only stories I’ve seen of people who qualified already are folks who had shorter degree programs or have debt primarily from undergrad. That’s because of the way the PSLF program got implemented.
The pool of eligible PSLF borrowers right now is incredibly small
Starting in 2008 when borrowers could be eligible for PSLF today, let’s look at the potential pool of people who could get their loans forgiven.
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. $2.44 billion would now be eligible.
According to the CFPB, about 25% of the American workforce could be eligible for PSLF one day.
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.
However, how many people actually 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 would 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 approved $5.5 million, and FedLoan has said 300 are approved pending the forgiveness disbursement. Perhaps $15 million total will be wiped off the books thanks to PSLF over the next few months.
Chronological milestones that will show the PSLF rejection rate is a fluke
There are several big moments that will happen soon causing the PSLF rejection rate to drastically improve.
- IBR becomes widely accessible, late 2009
We know that 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.
- Direct Loans become primary loan type, 2010
Starting in 2010, the FFEL loan program went out of existence and the Direct Loan program became by far the typical way students borrowed. That’s going to be huge when PSLF applicants would’ve had the right kind of loans to qualify without having to have done anything special.
- Employment Certification form becomes widely available, 2012
We know the PSLF ECF is incredibly important for folks tracking progress towards PSLF. In fact, it’s designed to prevent fiascos like these from happening when you apply. Borrowers starting in 2022 will have had the PSLF ECF around for 10 years. This will significantly reduce the error rate for applications because there won’t be any mysteries when you apply.
- PAYE Became Available, 2013
At the University of Iowa at a campaign rally, President Obama used executive powers to create the PAYE program. Limited funds meant he had to limit it to folks who took out their first loan after October 1, 2007 and who took out at least 1 new loan after October 1, 2011. Basically, this was done so the Class of 2012 of undergrads would qualify. This program improved the incentive for a borrower to sign up for an income-driven option.
- REPAYE Became Available, Early 2016
A lot of people couldn’t access the PAYE plan when it came out. The REPAYE program is open to everyone with Direct loans though. In 2016, it became even easier to get access to the PSLF program with REPAYE becoming the default recommendation for what to do with your loans for every clueless loan servicer phone rep everywhere.
What’s the Current Status of the PSLF Program?
Public Service Loan Forgiveness Employment Certification Forms (ECFs)
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 she graduated in 2014. She would have been steered into an income-driven repayment plan as the default suggestion.
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 almost 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 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%!
- 96 Borrowers Got Approved. 1 Million Set to Be Approved in 2028.
- Projected Cost of PSLF Program in 2018 Set to Increase by 1000% 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 CFP financial planner you know. 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).
Are you considering PSLF? How will these changes affect you?