Shah: The Art of Forgiveness

Making a difference and a dollar.

by Rachna Shah | 5/15/18 2:00am

For students considering pursuing a career in either the government or nonprofit sectors, the Public Service Loan Forgiveness Program may seem ideal. For example, the average medical student’s debt is $190,000. But as over 75 percent of hospitals are public or nonprofit, 95 percent of these loans are eligible for forgiveness under the Public Service Loan Forgiveness Program. Teachers, Peace Corps workers and many other professionals are also eligible.

Federal Student Aid, an office in the U.S. Department of Education, is the nation’s “largest source of student financial aid.” The main types of aid students can receive are grants, loans and work-study aid. The Public Service Loan Forgiveness Program, created in 2007, is less well-known. The bipartisan program provides loan forgiveness to individuals employed by a government or non-profit organization in a federal direct loan income-based repayment plan. An income-driven plan caps the payment amount at a certain percentage of one’s discretionary income, generally 10 percent. If that individual’s financial situation or family size changes, the income they pay will change accordingly.

One must make 120 monthly payments while working full-time — though they do not need to be consecutive — before applying for forgiveness. Upon receiving forgiveness, one does not have to pay taxes on the loans. Graduates may view public sector jobs as less remunerative, so forgiving debt for students who choose to work in the public sector as compared to the private sector may persuade many students to make the switch. Public sector workers are almost twice as likely to have a college degree than private sector workers.

PSLF is not the only student loan forgiveness program. However, under alternative programs, such as Pay as You Earn Repayment, one may be making payments for 20 or 25 years before the remaining loan balance can be forgiven. Because payments are spread out over a long period of time, individuals will pay more interest on payments and the process may take longer than one would like. However, the average student takes 21 years to pay off loans.

While the Prosper Act, introduced in December 2017 and currently under consideration in the House, seeks “to support students in completing an affordable postsecondary education,” it would eliminate public service loan forgiveness starting in July 2019. According to an estimate by the Congressional Budget Office, the PSLF will cost $24 billion over the next decade. However, it is claimed to play a key role in the recruitment and retention of public service workers, particularly for the U.S. Department of Veterans Affairs when competing against private employers. Terminating the program will not only impact prospective public-service workers but also the people they serve.

As of Feb. 2018, around 7,500 individuals applied for loan forgiveness under the program. Fewer than 1,000 are expected to qualify. This is largely because of miscommunication between loan servicers — contracted private companies — and borrowers. Borrowers have claimed that loan servicers misinformed them. For instance, FedLoan Servicing, a contracted private company, approved monthly payments for years for individuals who actually weren’t eligible. They were incorrectly informed that their employer and job qualified. For instance, Vietnam Veterans for America, a 501(c)19, was not considered as a public service organization. Additionally, loan forgiveness approval letters are not binding. According to FedLoan Servicing, “[they] can be rescinded at any time.” To fix these errors, the program was most recently granted $350 million first-come, first-serve basis.

This grant has been critiqued as not nearly enough. Senate Democrats such as Senator Elizabeth Warren have called for higher levels of funding. Other advocacy groups argue that the money should be allocated toward Pell Grants or a matching grant program to institutions. However, there are several ways that Congress can improve the program rather than dismantle it, especially given that it is such a new program. One way is by more clearly defining what employers are qualifying as compared to a more vague ‘public service.’ Another recommendation is improving and expanding program outreach, such as providing program materials to qualifying employers to share with their employees. Over half a million individuals have registered for PSLF. But around one fourth of the U.S. workforce may qualify.