In the new $1.3 trillion spending bill, Congress authorized $350 million to fund an expansion to the Public Service Loan Forgiveness (PSLF) program. Before creation of this $350 million fund, many borrowers who pursued jobs in public service were ineligible for loan forgiveness under the PSLF program because of a perceived technicality: they chose the wrong repayment plan.
Many borrowers rely on being eligible for PSLF and make financial sacrifices in order to qualify: they pursue public service jobs (at potentially lower salaries than in the private sector) and stay in government repayment plans (not refinancing loans with private lenders at potentially lower interest rates). In recent years, news reports have revealed that many PSLF hopefuls failed to qualify because they selected one of the wrong repayment plans — even though they were working in public service and paying under a government repayment plan. Of the eight repayment plans available to borrowers only four of them are generally eligible for PSLF, and many debtors picked a non-qualifying plan (sometimes because they received bad advice from a loan servicer). After years of timely payments, debtors found out that their prior payments would not qualify, and there was no way to go back and retroactively fix the error. In one prominent case, a teacher in Eugene, Oregon found out that after paying $70,000 back to the government under the wrong repayment plan, he would have to switch plans and start over if he wants to get his loans forgiven.
Congress will now use this $350 million fund to give those affected the chance to have their loans forgiven after 10 years of public service — even if they initially picked the wrong repayment plan. Senator Tim Kaine, one of the fund’s proponents, said in a statement: “Americans who honorably serve our communities have earned much-deserved relief… But unfortunately because of confusion around a provision in the program, we were at risk of breaking that promise to … teachers, social workers, nurses and military service members.”
Even after the bill's passage, one great unknown remains: Is $350 million enough to fix this problem?
There is some reason to be skeptical. The $350 million fund is only available to borrowers on a “first-come, first-serve basis.” In essence, the fund is limited in amount and, perhaps, will only be available for a limited time (until it runs out).
Could this much money really run out? The PSLF program is already estimated to cost approximately $24 billion over the next 10 years. For all borrowers pursuing public service, the Department of Education has created a certification form allowing borrowers to submit their employer and payment plan information to check whether they are on-track for loan forgiveness under PSLF after 10 years. Over 33% of borrowers have been told that they do not qualify. While the Department of Education’s data does not reveal the reasons for each PSLF denial, we can assume that some meaningful portion were denied because of this repayment plan snafu that Congress has now set out to fix. An analysis by Credible.com estimated that there may be millions of potential PSLF applicants who were in the wrong repayment plans. It would only take a 1.5% increase in PSLF claims (from the prior $24 billion estimate) to run through the entire $350 million fund created in the new bill.
How many borrowers can potentially qualify for this expansion of PSLF before it dries up? A bit of simple math reveals that it may be surprisingly few. Take a hypothetical student who borrows $50,000 for their degree and pursues public service. Because many borrowers opt for smaller initial payments and 20-30 year repayment timeframes that allow more interest to accrue, a borrower may still have nearly $50,000 left after making 10 years of timely payments. Thus, if they become eligible for PSLF after 10 years, the government may end up forgiving as much debt (including interest) as was originally lent. If we assume $50 thousand in loan forgiveness per student, this new $350 million PSLF fund would be completely depleted after just the first 7,000 students. Even at half that amount of average forgiveness, the fund would be gone after the first 14,000 claims. Considering that there are potentially millions of newly-eligible debtors, this “first-come, first-served” fund may not last long at all.
In the 2,232-page Congressional spending bill, it is a nice surprise to find something good for student debtors stuffed within. Some students will finally get relief for what seems like an unfair glitch in the system. But, the new $350 million fund — and how small it can quickly seem in context — highlights just how big the student debt epidemic has become.
