Avoiding the PSLFiasco: Part One

In 2007, Congress passed a law--the College Cost Reduction and Access Act (CCRAA)--that included a provision providing student loan forgiveness for borrowers who fulfilled 10 years of public service while paying off their loans under a qualifying repayment plan. In the years since, the Department of Education established rules detailing how the forgiveness would be provided, and created a form that borrowers can use to certify employment as they go. Over 600,000 borrowers have had at least one of those forms approved, suggesting they plan to take advantage of the program. And the Department published an application form so borrowers have a way to submit their request for loan forgiveness when they’ve met the 10-year--or 120-payment--requirement.

But with the first borrowers set to be eligible for forgiveness this fall, it’s not clear the Department is truly ready for the implementation challenges ahead. The categories of qualifying employers are far from clear-cut--in addition to nonprofit and government employers, they include vaguer categories like “public interest law,” for public service employers that provide legal services and receive at least some government funding. Already, the Department has faced a lawsuit on this point from employees of the American Bar Association (magnanimously represented pro bono by one of the largest law firms in the country), because it overturned a prior approval of the ABA’s qualifying status. And those determinations are only going to get stickier as the Department sees an influx of applicants, since borrowers are only encouraged, but not required, to submit employment certifications.

Moreover, plenty of concerns have been raised about student loan servicing errors, payments made under the wrong plan, and missed months of payments while borrowers try to sort themselves into the correct income-driven repayment plans--sure to raise the ire of public service employees who believe they made qualifying payments when the records show otherwise. Just last week, Massachusetts Attorney General Maura Healey filed a lawsuit against the Department’s designated loan servicer for public service, the Pennsylvania Higher Education Assistance Agency (PHEAA), for misapplied payments that will ultimately cause borrowers in the state to lose or delay their eligibility for loan forgiveness.

In short, the Department is going to need to prepare before October 2017, when the first borrowers become eligible for Public Service Loan Forgiveness, or eligible borrowers could face significant delays in receiving the forgiveness Congress granted them. These recommendations relate to how the Department can ensure its forgiveness rules and procedures are up to snuff.

Recommendation #1: The Department of Education needs to provide clear guidance to the PSLF servicer to ensure employment determinations made moving forward are accurate, fair, and consistent.

The Department needs to make sure it continues to use a defined list of qualifying employers wherever it can. The IRS publishes an annual list of charities that the Department should continue to use moving forward to identify qualifying 501(c)(3) organizations, and it knows who federal government employers are. In addition, it should partner with states to identify the state and local employer information it needs to determine when a borrower is working for a qualifying government agency. While these won’t cover every single qualifying employer (for instance, public interest law likely falls outside these categories--sorry, ABA), it should streamline and better align the process for every employer it can to make sure nothing slips through the cracks. And once a determination is made about an employer for the year, the servicer should make absolutely certain that decision is carried through to all applicants of the same employer.

Recommendation #2: The Department should develop a clear appeals process for when a borrower believes the servicer has made an incorrect employment or payment determination.

The Department should also work with PHEAA to establish an appeals process--one that’s clear on the information borrowers need to provide, transparent on the approximate timeline by which borrowers can expect a determination, and that provides for a decision independent from the original decision-maker. We suggest that, for denials of employers, the following documentation should be sufficient in most cases:

• For 501(c)(3) employers from the year for which the borrower is trying to receive certification: Form 990s that show 501(c)(3) status; a certificate of tax-exempt status; articles of organization or incorporation or bylaws that demonstrate the organization’s not-for-profit status.

• For government employers from the year for which the borrower is trying to receive certification: A letter from the head of the branch of government in question. For instance, the governor’s office could send a letter certifying the organization is considered a part of the state government.

• For special cases, like public interest law, the documentation won’t be so clear-cut. But it could include documentation of the organization’s mission and work, as well as a notarized document from an organizational leader attesting that it meets the conditions of PSLF. In these cases, borrowers will need to be flexible and work with the servicer closely to identify the necessary documentation; and the servicer should ensure it works closely with the Department in making any determination.

If the borrower believes his qualifying payments have been miscounted or miscalculated, the Department should accept documentation showing, for instance, that the loan’s payment history didn’t transfer correctly. Such documentation could include records from another servicer’s documentations, evidence of payments made, or other billing records, depending on the precise nature of the issue.

Unfortunately, with more common issues--like when a servicer takes longer than expected to process paperwork for an IDR plan and the borrower loses a month of qualifying payments due to a forbearance status, or when a borrower ends up in the wrong payment plan--we doubt the Department can do much about it because it falls outside the rules of the road for PSLF. See our subsequent post on recommendations for borrowers to learn more about how to avoid that situation.

Recommendation #3: The Department should require more information than just an Employment Certification Form, especially at the time of forgiveness, moving forward.

This recommendation may seem counterintuitive, since we’re suggesting increasing, rather than reducing, the amount of paperwork required. But it seems clear that with the potential for full loan cancellation as many as twenty years before a usual payment plan would run out, billions of dollars are on the line with the PSLF program. To ensure it remains available for the borrowers it’s intended to help and to safeguard the program in the long run, the Department needs to be cautious that the program’s benefits are carefully and responsibly utilized by borrowers.

This could be accomplished by requiring new information when the borrower applies for forgiveness to verify employment. For instance, the Department could ask for W2s, year-end pay stubs, IRS tax transcripts, notarized Employment Certification Forms, or an Obamacare form (1095-B or C) indicating health insurance coverage--all options to verify the borrower really worked where he said he did, when he said he did.

Or, an even better option to reduce the burden on the borrower and the servicer would be to validate employment as a look-back: The Department could automatically match W-2s for the borrower after the end of each year to verify the borrower worked for the employer he said he did--and necessitate more documentation if the match didn’t pan out. This would require establishing a data match with another agency that holds tax data--a difficult but not impossible task. For instance, the Department already matches data with the Social Security Administration to identify borrowers eligible for a Total and Permanent Disability discharge of their loans.

Recommendation #4: The Department should consider opportunities to ease the burden on borrowers and potentially allow for proactive determinations of eligibility.

A flaw of any benefit program that requires application is that many who may be eligible might not know about it. And those most likely to be informed about the program are the most sophisticated borrowers, meaning the benefit is unlikely to be well targeted to the neediest borrowers. To ensure all eligible borrowers know about the program and can take advantage of it, the Department should work to make it easier for them to apply.

For instance, the Department should establish a data-sharing agreement with the Office of Personnel Management. OPM has records on all federal employees, representing a sizable share of PSLF-eligible borrowers. The two agencies could coordinate to identify and conduct outreach to eligible employees, and potentially even automatically certify their employment. Ultimately, it could expand those data matches to another agency with employment records, to identify other borrowers who work for qualifying employers.

And the Department should make it easier for borrowers to meet the requirements of the PSLF program. It should build a secure portal on studentloans.gov to allow for digital signatures and electronic submissions of Employment Certification Forms, as well as accompanying documentation. This would streamline the process for the servicer, make it easier for borrowers and their employers alike, and keep everything in one place.

Stay tuned for our next post where we provide recommendations for outreach, including some important tips for borrowers.