– PSLF Lawsuit –
Many people rely on the Public Service loan forgiveness program (PSLF). We are making actual life and career decisions based on it. After all, after 10 years of income-driven payments, earning tax-free loan repayment is pretty awesome.
There has been a real freak out online and on Twitter over the new PSLF lawsuit involving many lenders who were mistakenly told they were eligible for the PSLF system.
A recent court decision, however, could make three of the four PSLF lenders liable after all, in February 2019. Those cases and their outcome will feel good to anyone based on PSLF’s future.
I don’t think you need to worry. The vast majority of lenders from PSLF specifically qualify as they are government employees or 501c3. Here is really what the PSLF lawsuit means.
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Why Are People Suing the Department of Education Over PSLF?
The freak out relies on being wrongly told by a large group of lawyers that they are on track for loan forgiveness. The Department of Education allows private companies to manage student loan servicing and payment processing.
A single private company called FedLoan Servicing was granted PSLF service rights by the Department.
Whenever someone tries to track their progress in the system, their loans are shifted to that servicer because of the government’s FedLoan PSLF monopoly over them.
For at least a couple of years, Fed Loans sent out reports that some lenders were eligible, which were not actually eligible.
We can’t know for sure, but here’s how I think this situation happened:
- FedLoan issues approval letters to several borrowers from the American Bar Association, Vietnam Veterans of America, and other organizations in 2014 saying that they qualify. FedLoan is an authorized agent of the Department of Education.
- In the twilight of the Obama administration, the Dept of Ed reviews several PSLF cases more carefully as politicians realize the program will be far more expensive than they thought. Emails between FedLoan and Dept of Ed show rules made up on the fly (the Feb 2019 court ruling found that the Dept made rules about PSLF in an “arbitrary and capricious” manner in violation of the Administrative Procedure Act (APA). That basically means they didn’t give proper notice and follow standard rule making guidelines.
- FedLoan then issues rejection letters in 2016 when the borrowers had been approved previously. Judge Timothy J Kelly of the DC Circuit Court found that the original determination letters had language in them that seemed final, in contrast to the Department of Ed’s claim that it was provisional.
- Four borrowers affected by these couple years of lost credit decided to sue.
Who is Included in the PSLF Lawsuit?
Obviously, the folks who spent a couple of years or more in a job thinking they worked towards loan forgiveness are pissed off rightly. The group concerned is mostly lawyers who work at the American Bar Association.
There are also others in the case who work for the public interest and not for names like the Vietnam Veterans of America (VVA) for benefit form.
Such lenders contend that these persons were misled by the Department of Education to be eligible for PSLF and should recover the few years of eligibility they lost as a result of the Fed Loans mistake.
They also want their organizations to be listed as qualifying employers, so that other organizations don’t lose lawyers. Judge Kelly made the individuals ‘ allegations a priority over the organizations.
In other words, because of the APA breach he asked FedLoan to rethink its denial for three of the four borrowers. He found the fourth borrower ineligible because the VVA had failed to provide direct services.
The Reason this PSLF Lawsuit is a Big Deal
A massive number of people haven’t used the PSLF program right now. The Jobs Certification Form (ECF) is the primary means of tracking progress towards the 10 years PSLF requires.
If a group of lenders were wrongly told that they had qualifications, everyone is concerned that no one can trust the Fed Loans private company to tell them the exact information.
If that’s the case, then no one knows whether the trust they supposedly built up with PSLF actually counts for anything. Since many people work in jobs solely for the benefit of PSLF, that would change the lives of people. So this case emanates genuine fear.
In my view, what Judge Kelly’s ruling says is that the lenders will be vigorously secured. I think you could put forward a convincing case that their service did not count under the PSLF regulations.
Since it was a gray area, though, the Department of Education made rules willy nilly, and the initial conclusion was that they qualified, it seems like they are being given the benefit of the doubt.
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The number of people who’ve been financially derailed by the public service loan forgiveness program is piling up, and so are the borrowers interested in bringing their servicers to court to seek damages.
Investigations have shown that there is systemic misinformation and misdirection by loan servicers. In addition to injury abuse, the lawsuit also charges that even if a borrower is in the right repayment plan, loan servicers make mistakes in keeping track of qualified payment counts.
An annual letter announcing the employer of the applicant to be accepted would state that a letter with the sum of eligible payments is on the way.
It may not have been submitted months later and previous annual letters aren’t usually retrievable. Sadly, after hopes have been raised by these loan servicers, it becomes more frustrating that 99% of people who applied for public service loan forgiveness have been rejected.
Student Loan Forgiveness: Debt Statistics
The U.S. Department of Education released the statistics for public service loan forgiveness:
- As of December 31, 2018, 53,749 student loan borrowers submitted 65,500 applications for public service loan forgiveness.
- Of that total, approximately 58,000 applications have been processed. Another 7,200 applications are pending.
- Of that total, more than 73% of applications have been denied due to student loan borrowers not meeting the program requirements. For example, borrowers did not have eligible student loans, make 120 qualifying payments or have qualifying employment.
- Another 25% of applications for public service loan forgiveness were denied due to missing or incomplete information on the employment certification form.
How Many Student Loan Borrowers Were Approved?
What’s a PSLF Qualifying Employer?
First of all, you must be a qualifying employer. And what is that?
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.
You must also make qualifying payments based on your income on Direct loans for 10 years while employed at this qualifying employer.
Here’s the first question in the case about the qualifications of the lenders. The American Bar Association is an industry-specific affiliate organization governed by IRS Code Section 501(c)(6).
This status means that the ABA is a’ profit league’ allowing its members to participate in’ unlimited lobbying.’ So the only way the ABA is a legitimate employer is if they are considered an agency of the public service.
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 that employment qualifies for PSLF is if the VVA is a public service organization.
So the first rule from this PSLF lawsuit is to check that your employer is a government or 501(c)(3) organization, or that you might have trouble qualifying.
Perhaps the judge in the case seems to have suggested that time should count for the ABA lawyers. Note he didn’t say the ABA qualified as an organization for the public service. He said the severe impact on the finances of these borrowers and the flaws with the PSLF ECF process should force a reconsideration of their cases.
What is a Public Service Organization and What Does it Mean?
So we’ve established the only way these lawyers could have eligibility for PSLF is if they work for a public service organization. Here’s that definition from the ECF you 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 can 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.
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Judge Ruling Is a Mixed Bag for Who Qualifies for PSLF
Clearly, the Vietnam Veterans of America is not funded in whole or in part by a local, state, federal, or tribal government.
The American Bar Association is also not funded by a government. Additionally, you could argue that the VVA is a lobbying organization for Vietnam veterans. That’s a worthy cause with a well deserving group of Americans, but 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 argues that it doesn’t matter in this case.
It seems like the ABA lawyers could qualify because they did qualifying work. However, the ABA organization itself will not be given PSLF status. Confusing isn’t it?
If the lawyers owe less than 1.5 times their income and do not plan to utilize PSLF, 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 lives.
What Did FedLoan Do?
FedLoan is accused of grossly mismanaging their responsibilities related to the PSLF program, and the TEACH Grant program, each of which they are solely responsible for servicing.
According to the lawsuit, FedLoan mismanaged the PSLF Program’s annual certification process so badly that it’s lead to hundreds of thousands of borrowers experiencing significantly higher student loan costs.
Not to mention all the stress, frustration, and wasted time spent attempting to correct FedLoan’s many mistakes.
Maura Healey, Massachusetts Attorney General initiated this lawsuit, stating that FedLoan “jeopardized the financial futures of teachers and public servants across the country” by screwing up the required annual certification processing for anyone enrolled in PSLF or the TEACH Grant Program.
Each of which offer excellent Federal Student Loan Forgiveness Benefits, but which also require borrowers to annual prove their income and payments in order to receive credit toward their eventual loan forgiveness benefit.
Under the rules of the PSLF program, borrowers must have 120 full, on-time monthly payments under an Income-Based Repayment Plan, like the Pay As You Earn Plan, or the REPAYE Repayment Plan, in order to qualify for their forgiveness benefit.
And they must complete a certification process annually to prove that they’re not lying about their income, or their payments.
FedLoan, according to the lawsuit, not only screwed up this certification process by significantly under-counting many borrower’s eligible payments, but compounded the problem by placing the loans of any borrowers disputing their counts into Forbearance.
Which is like a pause on required payments, but which extends the amount of time that borrowers will have to wait to earn their eventual forgiveness, and which also gives more time for interest to accumulate on their loans, increasing the total amount due.
Why This PSLF Lawsuit Probably Doesn’t Affect You In Anyway
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 lawsuit.
Yes you probably can’t trust FedLoan servicing, but if you’ve interacted with student loan servicers much you probably already knew that.
If You’re at a Government or 501c3 Employer with Direct Loans You’re Good
So right now, if you are depending on PSLF, check your employer’s tax status. Ask HR for their financial docs and look and see if they’re a 501(c)(3). All I did to find out the ABA was a 501(c)(6) and the VVA was a 501(c)(19) is google their tax status.
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 type employers. That’s a clue they’re not eligible for PSLF.
What If PSLF Goes Wrong?
The first step is to independently check whether your employer really is eligible. If you are curious, inquire in the comments below. Maybe we can spring it up crowd.
First, if they might be forgiven, don’t pay extra to your loans. Alternatively, open a Vanguard account if you do not need advice, or Betterment. Pay what you’d used to pay extra on your student debt instead.
Eventually, invest as much as you can in your pension plans (currently a limit of $19,000 in 2019 for employer plans or $6,000 for Traditional IRAs).
Make Sure Your Finances Can Withstand PSLF Going Away Just in Case
Plan on PSLF, prepare just in case for it to be repealed. Anyone who has PSLF on the promissory note is likely to qualify. Nonetheless, the principal challenge to PSLF could be a means test levied by the president or Congress.
President Obama has already proposed that, though it was shot down by members of his own party.
The Republican Congress has tried to abolish PSLF entirely, but only for new borrowers. That means that grandfathering will very likely occur in the long term for PSLF borrowers.
I think there’s more than 90% chance that current borrowers will be able to take advantage of PSLF in its current form, so you shouldn’t be too worried about it.
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Save much. Making a plan. Independently check whether you believe you are eligible for PSLF. Fortunately you do not have to be concerned by the PSLF case.
If you have six figures in student loans, don’t trust a student loan servicer in your financial future. To me, that’s the big takeaway from the PSLF case. Maybe you’ve read all of this and wondered how to get professional help with your student loans.
I offer student loan support for a flat fee and I have worked on hundreds of millions in student debt for clients. To get in touch with me simply click on the button above.
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