“Don’t count on loan forgiveness – it doesn’t work!”
“It doesn’t sound like loan forgiveness is a thing. Didn’t you see that 99% of people get rejected?”
There is a ton of negativity around Public Service Loan Forgiveness. Many are telling people there is no way they will get loan forgiveness.
But in reality, most of the people commenting on it, including big names like Dave Ramsey, are sharing misinformation and scaring borrowers away from the program who could benefit greatly from the program.
You may be thinking, “but what about the 99% rejection rate? You can’t deny that!”
The initial rejection rate was high, but it will only increase over time. There are a variety of reasons for the high initial rejection rate, which ironically serve as support for why the acceptance rate will increase year after year from here on out.
I’ll walk through these reasons, which show why fears about student loan forgiveness are overblown, and that people should at least consider whether PSLF is something that would benefit them. Writing off PSLF without understanding it could be a huge mistake for some borrowers. Whenever I give presentations on student loans, I show how some borrowers may be sacrificing a six figure swing in net worth by not pursuing PSLF.
Read How Public Service Loan Forgiveness (PSLF) Works for some background on the program, as well as an example that illustrates why it is such a huge benefit for certain borrowers.
It’s worthwhile to set a few facts that give you a feel for the timeline of PSLF:
- 2007: PSLF established under the College Cost Reduction and Access Act
- 2012: Federal Student Aid introduced the Employment Certification Form (ECF), which borrowers can submit to verify that their employment qualifies for the PSLF Program.
- 2017 (Fall): Federal Student Aid began accepting and reviewing applications from borrowers seeking loan forgiveness under the PSLF Program
With that in mind, let’s look at some of the reasons why the acceptance rate is so low for PSLF, and why those very reasons are why acceptance rates will increase over time.
The Loan Requirements
Until 2010, the primary program for student loans was the Federal Family Education Loan (FFEL) Program.
But FFEL loans are ineligible for PSLF. Only Direct loans are eligible. You must consolidate your FFEL loans into a Direct Consolidation loan for it to be eligible for PSLF.
According to the Federal Student Loan Portfolio database, approximately $100B out of $500B of the Federal student loan portfolio was direct loans when PSLF was established in 2007. This, combined with borrowers not realizing FFEL loans are ineligible unless consolidated into a Direct Consolidation loan, is a big reason we are seeing so many applications for PSLF being rejected.
Many borrowers found this out too late. Some found it out way too late, after they applied for PSLF in the initial round of applicants, which contributed to the rejection rate. Others may have caught it at some point in the process, but they may have already made years of payments on their FFEL loans, falsely thinking they were on the path to PSLF. Unfortunately because loan consolidation creates a brand new loan, these borrowers have to start over on their 120 required qualified monthly payments towards PSLF.
Since the FFEL Program was ended in 2010, everyone has been borrowing through the Federal Direct Loan program. That means that, unlike those earlier borrowers, newer borrowers will by default have Direct loans. This alone virtually guarantees that the acceptance rate will increase over time.
The Repayment Plan Requirements
Only payments made while on qualified repayment plans count towards PSLF. They include the standard ten-year repayment plan and any of the four income-driven repayment plans. Any payments made on extended or graduated repayment plans do not count towards PSLF.
The problem is that not all the income-driven repayment plans were available when PSLF was established in 2007. The only plan available was Income-Contingent Repayment (ICR). ICR is much less favorable than the other three repayment plans, but even more important is the fact that only Direct Loans are eligible for ICR. And as I mentioned earlier, only about 20% of the total Federal student loan portfolio was Direct loans in 2007.
Over the years three additional income-driven repayment programs became available:
- 2009: Income-Based Repayment (IBR)
- 2012: Pay As You Earn (PAYE)
- 2015: Revised Pay As You Earn (REPAYE) Plan
Variety of income-driven repayment programs available (and more favorable terms that came with them relative to ICR), combined with a shift towards Direct loans making up a larger percentage of the student loan portfolio, and in general an easier application and re-certification process, supports the belief that acceptance rate of PSLF will increase over time.
Widespread Lack of Information around the Program
While I can’t go back in time and see what content was available on PSLF in 2007 when it was first introduced, it’s clear that there is much more content and information available on PSLF than there was a decade ago. And that’s saying something, because there is still a huge amount of misinformation and confusion on student loans today. Nevertheless, it’s more realistic today to find information to navigate the program than in the past.
Now that PSLF has been granted for hundreds, and rejected for thousands, there is more interest in PSLF. What we are seeing is tons of claims that student loan servicers gave false and misleading information about PSLF over the years, costing some borrowers tens of thousands of dollars and years of payments that could have been applied towards their 120 qualified monthly payments. There are claims that servicers told borrowers they were on the path to PSLF when they had loans that did not qualify or were on a repayment plan that was ineligible. Today there are more sources of information (like this website and my book Student Loan Solution) that give borrowers a separate source of information that doesn’t rely on call center employees whose job doesn’t hinge on giving the correct information to borrowers.
A key change happened in 2012, when the Employee Certification Form was released. Borrowers are not required to submit this while working towards PSLF, but today I tell people to submit every six-to-twelve months so that payments can be tagged as “qualified” over time and there is less risk and confusion later on in the process. But this form came out five years after PSLF was introduced. For the first batch of borrowers applying for PSLF in 2017 and 2018, many likely waited until they thought they were close to achieving the 120 qualified payments before they dealt with certifying their employer.
Can you imagine going back and trying to get an employer from a decade ago to sign a form that you worked there? And think about the difficulty and delays that happen when a nonprofit closed down seven years ago and your employment wasn’t certified.
Now that the Employment Certification Form is available and better guidance is given to borrowers pursuing PSLF, namely to submit this form at least every six to twelve months, there will be less ambiguity and confusion for borrowers as they approach the 120 qualified payments. Instead of trying to certify employment for years of payment, they will consistently have their qualified payment count updated 6-12 months at a time.
Fears that PSLF will go away are unfounded
One thing I’ve seen more and more recently is a belief that student loan forgiveness will go away. Someone may agree that PSLF can work, but they believe that student loan forgiveness will all of a sudden be taken away.
These fears are unfounded. But first let’s throw them a bone: for a few years in a row now, the Trump administration has proposed eliminating PSLF. They aren’t proposing completely eliminating student loan forgiveness, though, and actually propose expanding it. In their plan PSLF would go away and be replaced by student loan forgiveness after fifteen years for undergraduate student loans, and thirty years if any graduate student loans are being repaid.
This post has focused on PSLF but there is income-driven loan forgiveness as well, which forgives loans after twenty or twenty-five years of repayment. This is less preferable than PSLF, though, for the obvious reason that PSLF takes only ten years of repayment, but also for the less obvious reason that PSLF does not tax the amount forgiven. Income-driven loan forgiveness does tax the amount forgiven (called the “tax bomb” by those in student loan circles). If you have $200k forgiven through income-driven loan forgiveness, you will need to report that as ordinary income on your tax return the year the loans are forgiven, resulting in a hefty (and likely unexpected) tax bill.
Even in the rare and seemingly impossible scenario that PSLF was eliminated in favor for a proposal of expanded income-driven loan forgiveness, it almost certainly will be forward-looking. Meaning anyone who has taken out loans already will still have access to PSLF as it exists today.
A final point that if we take a look at the political climate today, it’s clear that student loan forgiveness is here to stay. The Democrats are looking to, at a very minimum, sustain the status quo – including PSLF. But there is a growing sentiment in favor of more drastic measures, such as forgiving all outstanding student loan debt, or something slightly less drastic like expanding PSLF. I fully expect the Republicans to move to the left on this issue, similar to how they moved to the left on health care. A decade ago you never heard Republicans touting their support of making sure those with pre-existing conditions never get denied coverage. Today it’s rare to hear any politician make statements that give the perception that they do not support providing insurance to those with pre-existing conditions.
Tips for those Pursuing Student Loan Forgiveness
When you look at all the aspects of PSLF, and even more broadly student loan forgiveness, it’s clear that student loan forgiveness isn’t going anywhere. There may be changes, but those changes are likely either going to make it easier for those with existing loans to access loan forgiveness, or the changes will be forward-looking and have no impact on those who already took out loans.
If you are pursuing PSLF, I recommend learning as much as you can about the program. I also recommend taking a strategic approach to the program to maximize the amount forgiven. I wrote this post to lay out tips on what you should be doing if you are pursuing PSLF.
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