An explosive new report released today by the Student Borrower Protection Center and the American Federation of Teachers sheds new light on the U.S. Department of Education’s role in mismanaging the troubled Public Service Loan Forgiveness program.
The Public Service Loan Forgiveness (PSLF) program has been beset by problems for years. When student loan borrowers were first eligible to to apply for forgiveness under the program in late 2017, PSLF had an abysmal initial approval rate of only 1% — meaning 99% of borrowers who applied for student loan forgiveness were rejected. The Department of Education’s newer statistics indicate only marginal improvement, with a current approval rate of just over 2%. Still, this means that roughly 98 out of every 100 applicants for PSLF are denied loan forgiveness.
And the new report issued today helps explain why.
Public Service Loan Forgiveness Background
The Public Service Loan Forgiveness (PSLF) program is a critical program that allows certain federal student loan borrowers to get their loans forgiven after several years of working in the public service field. Although the program is often described as a 10-year program, PSLF technically requires 120 “qualifying” monthly payments (if those payments are made consecutively, this is equivalent to 10 years, although the program does not require consecutive payments).
While the PSLF program may appear fairly straightforward, its requirements are complicated. A payment that qualifies for PSLF must meet three main criteria:
- Payments must be made on a Direct federal student loan. Not all federal student loans are issued under the Direct lending program. Other types of federal loans, including federal Perkins loans and commercially-issued, federally guaranteed student loans loans — also known as “Family Federal Education Loan Program” loans, or “FFEL” loans for short — do not qualify. This can, in certain cases, be corrected by consolidating non-qualifying federal loans into a federal Direct consolidation loan, although consolidating sometimes has downsides, such as restarting the borrower’s repayment term and capitalizing all accrued interest.
- Payments must be made under an income-driven repayment plan such as IBR, PAYE, or REPAYE. Payments made under the 10-year Standard plan also qualify, although this would repay the underlying federal loan in full within 10 years. Other repayment plans — such as Extended plans and Graduated plans — do not qualify.
- The borrower must make on-time payments while employed full-time for a domestic public or government organization, or a 501(c)(3) nonprofit organization. Other nonprofits that are not 501(c)(3)s could qualify in certain limited circumstances, although the Dept. of Education makes case-by-case determinations.
More concisely, to be making qualifying PSLF payments a borrower must have the correct type of federal loan in repayment under the correct type of repayment plan, while working in full-time qualifying PSLF employment. Missing any one of these elements can result in a borrower being denied relief under the program.
Borrowers have encountered major issues with all three of the PSLF program’s main requirements. But the first element — the requirement that only Direct loans qualify, and the exclusion of FFEL loans — has been a particularly notable issue, given the U.S. Department of Education’s role in administering the program and overseeing loan servicers. The Department’s most recent statistics suggest that at least one in seven recent PSLF applications were rejected due to loan ineligibility.
The Report’s Findings
The new report by the Student Borrower Protection Center and the American Federation of Teachers found that “FFEL borrowers have been routinely misinformed about their right to PSLF and the steps necessary to qualify for relief,” such as the requirement that FFEL loans be consolidated via the Direct consolidation program. In reviewing substantial documents and records obtained through nearly two dozen Freedom of Information Act (FOIA) requests and state open records requests to the U.S. Department of Education and state-backed student loan companies, FFEL guarantors, and servicers, the report’s authors made astonishing findings:
- In the 13 years since the creation of PSLF — and in particular, in the three years since borrowers have been in repayment long enough to obtain eligibility for loan forgiveness — the U.S. Department of Education has not provided any guidance to FFEL-program lenders, servicers, and guarantors about communicating with borrowers regarding the requirements of the PSLF program. The Department publishes key data showing that a substantial portion of PSLF applications are being rejected due to loan ineligibility, but it has never established a directive or created an affirmative duty for servicers to inform borrowers with FFEL-program loans about the availability of PSLF, or the steps necessary to qualify for the program, such as Direct loan consolidation.
- In the absence of clear guidance from the Department, and without any real consequences, FFEL program lenders and servicers engaged in a “years-long pattern of abuse” towards public service borrowers who were repaying FFEL loans. The report alleges that this misconduct has included affirmatively misrepresenting borrowers’ eligibility for PSLF, even though FFEL loans do not qualify; withholding information about the existence of PSLF altogether; and interfering with the consolidation process for borrowers looking to convert their FFEL loans into a Direct loan to qualify for loan forgiveness. The report’s investigators reviewed complaints submitted by student loan borrowers via the Consumer Financial Protection Bureau (CFPB), as well as lawsuits brought by borrowers and by state and federal law enforcement agencies, to corroborate widespread patterns of malfeasance.
- The lack of guidance and formal consequences may have incentivized FFEL-program lenders and servicers to act against borrowers’ interests. The report notes that when these lenders and servicers lose a FFEL-program loan to a Direct consolidation, they lose out on the future revenue associated with continuing to service that loan. Thus, in the absence of any other incentive, these servicers may have reasons to mislead student loan borrowers about their rights and options regarding the PSLF program.
In one complaint to the CFPB cited in the report, a borrower wrote, “”I, like many other consumers, recently was informed my Federal Family Education Loans . . . do not qualify for the Public Service Loan Forgiveness program. I have consistently been making monthly payments on my . . . loans for 11 years, during which time I have worked only for non profit employers. My loan has been serviced by a number of companies. . . . Throughout the course of paying back my loans, I would call from time to time to inquire about repayment options and to ensure I was utilizing the best option for my income and financial situation. I was told, on more than one occasion, by more than one of the loan servicing companies, that my loan would qualify me for the PSLF.”
Another borrower complained, “I had some loans [that were] consolidated into FFEL loans . . . . When PSLF came around, I was told I was on the right plan. I really wasn’t told anything except to pay 120 payments and work for public service. . . . I have paid 120 payments. I have worked as a [public servant] for all these years as well. I applied for PSLF and received a letter stating none of my payments count. . . . I feel like they are cheating many of us out of something we have been working towards.”
Following the issuance of a similar report critical of federal student loan servicing in August, a U.S. Department of Education spokesperson had declined to address specific allegations, but pointed to efforts the Department has made to improve the PSLF program, including the creation of the PSLF Help Tool and outreach efforts to borrowers regarding eligibility.
What Can Be Done?
Congress has taken steps to address at least one of the major problems with PSLF through the creation of the Temporary Expanded Public Service Loan Forgiveness (TEPSLF). TEPSLF allows borrowers who made payments on the right type of federal student loans, but under the wrong type of repayment plan, to potentially get those payments counted towards the 120 required PSLF payments. Even TEPSLF suffers from extremely low approval rates in the low single digits, according to the Dept. of Education’s data.
But TEPSLF does nothing to address the problems with FFEL-program borrowers. Democrats in Congress have introduced legislation that would allow payments made on FFEL loans to qualify for PSLF, provided borrowers still ultimately consolidate their FFEL loans via the Direct consolidation program. However, while a variant of the bill — called the “What You Can Do For Your Country Act” — passed the Democratic-controlled House earlier this year, that legislation has so far failed to gain sufficient Republican support to pass the Senate.
The report makes additional recommendations, including allowing the U.S. Department of Education to exercise broad administrative discretion to count payments made on FFEL loans towards PSLF in cases where borrowers were misled by their prior FFEL servicers, particularly when there is evidence of widespread servicer malfeasance. The report also calls for greater oversight and enforcement against FFEL-program lenders and servicers to hold them accountable and prevent further misrepresentations.
“This devastating investigation reveals — once again— the callousness of loan servicers,” said Randi Weingarten, president of the American Federation of Teachers. “While the damage is widespread and for some, permanent, it’s not too late to fix PSLF— and we look forward to working with the Biden Administration to reclaim the promise of loan forgiveness for those who devote their lives to the public good.”
Some student loan borrowers have also resorted to direct legal action. In Hyland v. Navient