February, 2018
Washington -- In 2007, Congress established the Public Service Loan Forgiveness program for student loan borrowers who took public service jobs in government – teachers, nurses, first responders, for example – or in recognized charities. The deal was this: pay for ten years on your loan at a rate commensurate with your income, which is often low in such jobs; any loan balance remaining will be cancelled if you complied with your work and payment obligations.
In 2017, about 7,500 borrowers began to file for their part of the bargain. What they found, however, is botched paperwork by the contractor handling the PSLF program and a Department of Education unable to straighten things out, apparently neither capable nor willing to stand behind the program.
This is only the tip of the iceberg. The take-up rate of participation in the program was slow. As word gradually spread, many more thousands of borrowers signed up.
The great majority of them may be in for a rude awakening, as they find out the contractor put them in the wrong program, gave them erroneous advice on qualifying charities, or forced them out of the program by interrupting their payments while trying to handle its own sign-up backlogs.
How did this happen?
Student loan servicers often have conflicts of interest between doing what is right for the borrower and what is best for their own bottom lines.
For example, if a borrower is in default on a bank-based (FFEL) federally guaranteed loan and wants to get out of default, he or she can either rehabilitate the existing loan or consolidate it into a new government-issued Direct Loan (DL). The servicer may steer the borrower into rehabilitation, because the servicer might also be the actual loan holder on which the government is paying a subsidy and, as lender, it does not want to lose the loan to consolidation elsewhere. However, if the borrower wants not only to get out of default but also into the PSLF program to take advantage of eventual loan cancellation, that can be done only through DL consolidation.
Initial reports from borrowers suggest it was not made clear that only DL and not FFEL loans are eligible for PSLF. This is just one problem borrowers are reporting. If and when an investigation is done, I suspect many other such conflicts between borrowers' interests and servicers' bottom lines will come to light.
Now is a good time to recall a similar loan cancellation promise gone awry about the same time PSLF was initiated. The Kentucky Higher Education Student Loan Corporation established a loan forgiveness program for teachers, but when its funding source dried up, the teachers were left with nothing but an empty promise.
The KHESLC program was operated under the jurisdiction of the U.S. Department of Education, but the Department made no effort to help borrowers. Nor did any Kentucky members of Congress or senators, despite pleas from their wronged constituents.*
That is a bad omen for the PSLF program. Both the Department of Education and the Congress have a record of walking away from borrowers in loan forgiveness programs. Lenders and servicers have powerful lobbys; borrowers don't. Even when borrowers have the law on their side, they have had trouble getting their claims before the courts.
One ray of hope: several state attorneys general have now taken an interest in student loan borrowers. Suggestion to borrowers: take your case to the consumer protection division of your state attorney general's office.
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* Kentucky update: Borrowers left in the lurch under the KHESLC "Best in Class" loan forgiveness program were told to participate in federal Department of Education's loan forgiveness programs. But according to actual Kentucky teachers, because of problems in the federal programs, "many were duped by both promises."
