[Editor’s Note: The following post originally published as one of my regular articles with Forbes where I gave this response to the negative news coming out about the future of PSLF. If you are reading this, you likely have a student loan burden that has you a little worried. I’ve recently compiled the information you need to manage student loans from undergraduate until payoff in our Ultimate Guide to Student Loan Debt Management for Doctors. It has everything about private & federal loans, IDR and forgiveness programs (PSLF, REPAYE, PAYE, IBR, ICR), refinancing, and how to pay off quickly. Hopefully, the information here on WCI can help you get relief from your student loan burden.]
The Public Service Loan Forgiveness (PSLF) program was established as part of the College Cost Reduction and Access Act of 2007 to encourage borrowers of direct federal student loans to work as employees of government and non-profit institutions. The rules of the program were not very well-understood or publicized for the first few years the program was in place. However, within 3-4 years, bloggers and journalists, along with their readers with direct federal student loans, began to recognize the substantial potential benefits of this program and made plans to take advantage.
The program allows any remaining direct federal loans to be forgiven once 120 qualifying on-time monthly payments have been made while directly employed by a qualifying employer. Direct federal loans include Stafford loans, PLUS loans, and direct consolidation loans. FFEL and Perkins loans do not qualify until they have been consolidated into a direct consolidation loan. Qualifying payments must be made under one of five programs:
- Income Contingent Repayment (ICR)
- Income Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Standard 10 Year Repayment Plan
The potential benefit is largest for those with the highest loan burden — indebted physicians and dentists. As tuition skyrockets and word of the program spreads throughout educational institutions, it is no surprise to see in a 2018 survey of medical school graduates that 45.7% of them plan to enter into a loan-forgiveness program. This is an increase from 39.7% in 2014 and just 11% in 2010. The key to having a large amount forgiven is to make as many relatively small payments as you can during that time period. For a typical physician, this means payments made during residency and fellowship. The earlier payments start being made, and the longer the training period, the more that will be left to forgive after 10 years.
Negative News About PSLF
However, a few events over the last few years have given students, residents, and even attending physicians pause about relying on this program. In its 2015 budget, the Obama Administration proposed limiting the amount forgiven to just $57,500. Also proposed was eliminating the cap on income-driven repayment program payments. Either of these changes alone would make the program dramatically less useful to high-income professional school borrowers.
The 2016 Republican budget proposed eliminating PSLF for all new borrowers.
In December 2016, it was reported that a number of attorneys who thought their jobs would qualify for PSLF found out that they would not. Four individual plaintiffs joined with the American Bar Association to sue the US Department of Education, arguing that the department retroactively changed its definition of qualifying employers. The litigation is ongoing at this time.
The Trump administration also proposed removing PSLF for new borrowers in its budget. The PROSPER Act, which stalled in a House committee, proposed the same.
More recently, it was widely reported that the Government Accountability Office to Congress found that less than one percent of those who had applied for PSLF so far had actually received forgiveness.
With each news item, those already enrolled in the program or planning to take advantage of it worry a little bit more. In fact, some doctors who would otherwise qualify for PSLF have decided it isn’t worth the worry and have essentially exited the program by refinancing their loans at a lower rate with a private lender. Opinions are mixed between PSLF being a simple “bait and switch by the government,” to “the government purposely making it difficult to receive forgiveness to save money,” to simple bureaucratic incompetence. Evidence in the Government Accountability Office report suggests one or both of the latter two theories is correct.
Why Most Borrowers Did Not Receive Forgiveness…Yet
Since the program began in October 2007 and 120 monthly payments are required for forgiveness, the first time one could theoretically receive forgiveness was in Fall 2017. The GAO report looked at the period preceding April 30, 2018. They reported the following numbers:
- 1,173,420 had applied to have their employer and loans certified as eligible
- 890,516 had certified their employer and their loans as eligible
- 520,267 had recorded at least one qualifying payment
- 19,321 had submitted an application for forgiveness
- 16,890 of those had actually been processed
- 8,458 had qualifying employment and loans
- 184 recorded 120 qualifying payments
- 55 were granted forgiveness
55/19,321 = 0.28%, which explains the popular headlines that >99% of those who applied actually received forgiveness. However, the truth is that according to the government only 184 of 16,890 (1.09%) actually qualified for PSLF. (Presumably, the other 129 of the 184 qualified borrowers were given forgiveness shortly after the period studied.)
But whether the number is 0.28% or 1.09%, there are only two explanations for this abysmal percentage. The first is that the borrowers are incompetent. They simply didn’t read the rules and follow them. There is some suggestion in the report that this is true. For example, over 40% of the processed applications revealed that the borrowers had not made 120 qualifying payments. Many applications were not even filled out completely and sometimes borrowers had filled out an application but didn’t even have qualifying loans. Anyone who has spoken with a reasonable number of borrowers is aware that many are simply ignorant of the requirements of the program.
However, one need not speak to very many borrowers before discovering that the process for tracking qualifying payments has gaping holes in it. A typical example is illustrated by an email to this writer from an academic surgeon, excerpts of which I will share below:
After committing to an academic job coming out of fellowship, I transferred all my loans to FedLoan and submitted all necessary paperwork and waited patiently. Fast forward over a year later, I have yet to get a single confirmed payment towards PSLF even though I’ve actually been using them now for that same period of time. I make monthly calls to them and the answers are always along the times of “We are still reviewing past payments”, “it’ll be another *** amount of time” (which varies from 2 weeks to 1 year), etc. They have confirmed that they definitely have the papers in order and I definitely have the correct payment plan and am in an eligible repayment plan…I have a friend in a very similar situation who did get their payment count back (after several months) but due to some technicality based on prior loan consolidations they said only half his loans were eligible. He then refinanced the loans that did not qualify only to hear back from FedLoan months later that “actually they had been eligible” they just weren’t done computing everything….This is a highly motivated and highly informed person and as far as we can tell was not based on miscommunication or ignorance but inaccurate information given out by FedLoan.
As the GAO report and plenty of anecdotal evidence attest, there are serious issues with BOTH borrower understanding of the program AND with administration of the program. Hopefully, as time goes on there will be an improvement on both sides. However, given the significant legislative risk (administrations from both major parties have now proposed severely limiting or eliminating the program), the program may not be around long enough to truly work out the kinks.
So what is a borrower to do? I have five recommendations.
# 1 Avoid Moral Hazard
A few people, upon learning of loan forgiveness programs like PSLF, consider borrowing even more money than they need. If the loans are going to be forgiven anyway, why not borrow as much as you can and pay as little toward it as possible? This is ill-advised for two reasons.
First, most medical and dental students are maxing out their direct federal loans anyway, so any extra loans they took out would not be eligible for PSLF anyway, they will be private loans.
Second, in the event that something happens to the PSLF program and the borrower is not grandfathered in, the borrower will end up paying all that principal and interest back. A professional student who wishes to become financially successful should live as frugally as possible, knowing that everything paid for with borrowed dollars may cost two or even three times as much due to the effects of compound interest by the time the debt is paid off years later.
# 2 Keep Careful Records of Every Payment
Since PSLF could be worth hundreds of thousands of dollars to a doctor and it appears that the loan servicing companies are having trouble keeping track of payments, it is critical to keep track of all of your payments yourself. Just like the attorneys suing the Department of Education, you may later be party to a lawsuit and you’ll want to make sure you have the evidence you need. Even if it doesn’t go that far, it will be a lot easier to prove you made your 120 payments if you actually have your own set of records of those payments.
# 3 Certify Early and Often
Although not required, the PSLF certification form should be filled out every time you change employers and at least once annually. Keep a copy. Technically, this form can be filled out retrospectively, but when so much money is on the line, it pays to be on top of all the details. Possession of years of forms certifying your participation in the program may also come in handy in the event the program changes and you wish to be grandfathered into the old terms.
# 4 Keep the Faith
Negative news about PSLF has caused many to abandon their course toward PSLF, essentially being scared out of the program. True pessimists might argue this is intentional on the part of the government to reduce costs, but either way, it has caused a lot of people to lose out on the promised benefits. It would be very unusual for a program change like this to occur that did not grandfather in those already enrolled in the program. In addition, PSLF is mentioned in the promissory notes — legal contracts between the borrower and the lender. Even if Congress or the Department of Education changes the program and does not make provisions to grandfather in current participants, those borrowers should have an excellent legal case that should at a minimum result in a significant settlement.
# 5 Save Up a PSLF Side Fund
The ultimate backstop, of course, is the ability to pay off your loans without the aid of the government. Most high-income professionals can, by living very frugally, pay off their student loans within 2-5 years of the completion of their training. Even those who are going for PSLF should still plan to do this. However, those payments should be made into their own investing accounts. This way, if PSLF is changed and they are not grandfathered in, or if they simply change their professional plans, they can move on with their lives with minimal financial consequences. The only cost in this situation is the difference between the interest rate they paid to the government and the interest rate they could have refinanced to with a private company.
It is fully understandable for a borrower planning on PSLF to be concerned, but it is not yet time to give up on the program. Instead, learn the rules, keep careful records and start saving up a PSLF side fund, just in case.