Lawsuit by American Bar Association Demonstrates Mess to Come with Public Service Loan Forgiveness for Student Loans

The Public Service Loan Forgiveness (PSLF) program was designed to give people working for public service, military, and non-profits a route to have their loans forgiven. This coming year, 2017, marks the first time people will be eligible to have their federal student loans forgiven under the program.

The program started in 2007 and required 120 conforming payments to be eligible for forgiveness. And just earlier today I was saying that I thought the PSLF program would start to unravel soon because the first wave of people eligible for forgiveness was nearly upon us. Then this happened.

Today the American Bar Association filed a suit that clearly points out how severe the problems can be for those counting on PSLF forgiveness. This is especially true for people who opted to repay their federal loans via income driven repayment programs to get the lowest monthly payments. Under that program, debtors are repaying their debt based on income and those monthly payments are inflating balances owed. When the time comes to have the loans forgiven and the rules have changed, the debtor will have huge balances and no shot at relief.

The complaint filed says:

“1. This lawsuit seeks to hold the Department of Education accountable for promises it made to individuals who have dedicated their lives to public service. Having entered their professions with six figures of educational debt, these individuals chose not to pursue high paying jobs and to instead serve the public, relying on the Department’s promise: Make payments on your federal loans while working in your public service jobs and, after ten years, the Public Service Loan Forgiveness (“PSLF”) program will forgive your remaining debt. The Department led these individuals and their employers to believe that they were working in qualifying jobs, on track for loan forgiveness.

2. With no warning and no coherent explanation, the Department then changed its mind. As a result, these individuals were told that their years of public service counted for naught, their debt loads continued to mount, and their hopes of future financial security were suddenly dashed. Many nonprofit organizations, the ABA among them, will now struggle to attract and retain the talented, committed professionals that the organizations need to address critical unmet public needs. The Department’s actions violate law and are contrary to basic principles of fairness and deeply damaging to the critical public service missions of these plaintiffs and the ABA.

3. Congress enacted the PSLF program in 2007. The next year, the Department adopted a regulation implementing the program, which is administered by the Secretary of Education. The program provides incentives for graduates to pursue full-time public service careers by providing that a borrower-graduate’s student loan debt balance will be forgiven if the borrower complies with rigorous requirements. Specifically, a borrower’s loans will be forgiven only after she makes timely loan payments for ten years while working full-time in a public service job.

4. The PSLF program broadly offers loan forgiveness to many public service employees, including those providing “public interest law services,” “public education,” “public service for individuals with disabilities,” and “public service for the elderly,” among a variety of other categories.

5. Given that some borrowers began making PSLF-eligible payments in October 2007 – the earliest date permitted under the Act – and continued making eligible monthly payments, the first group of student loans will be eligible for forgiveness in October 2017.

6. For many years, the Department informed public service employees – including those employed by the ABA and other nonprofit organizations – that they qualified for loan forgiveness under the PSLF program. It appears that the Department began issuing denials of eligibility a few years ago – in advance of the date that the first set of loans would be forgiven – reversing prior eligibility determinations without any prior notice.

7. On information and belief, Plaintiff ABA is only one of many nonprofit organizations impacted by the Department’s reversal of prior eligibility determinations. The ABA devotes substantial resources to its public service mission and champions public education and the provision of public interest law services.

8. Each of the Individual Plaintiffs in this lawsuit graduated from law school with six figures in student loan debt. All of the Individual Plaintiffs then decided to pursue careers serving the public. Jamie Rudert served disabled and aging Vietnam-era veterans and their families. Michelle Quintero-Millan provided legal services to unaccompanied immigrant minors on the U.S.-Mexico border. Geoffrey Burkhart works to improve public defender systems in the United States. Kate Voigt educates the public about crucial issues facing immigrants in this country. The annual salaries for these jobs are low – just a fraction of the Individual Plaintiffs’ outstanding student debt at the time they began their public service.

9. Despite their financial sacrifices, the promise of loan forgiveness under the PSLF program allowed the Individual Plaintiffs to plan for a career in public service with some promise of future financial stability. All of the Individual Plaintiffs asked whether working for their respective organizations rendered them eligible for the PSLF program. They made their decisions to accept their positions, and/or stay in their positions, based largely on the understanding that their employment would qualify for the program.

10. The Department confirmed with three of the Individual Plaintiffs that their employment would allow them to qualify for loan forgiveness if they continued to make loan payments while in those positions. These Plaintiffs were provided confirmation that they had already made several months – or, in one case, several years – of past qualifying loan payments under the program. The remaining Individual Plaintiff believed she would qualify for loan forgiveness because of the public service nature of her work and the fact that her employer was a nonprofit organization whose eligibility as a qualifying employer had already been certified by the Department.

11. Safe in the knowledge that they were on track for loan forgiveness, the Individual Plaintiffs continued in their public service jobs. Given their low annual salaries, the Individual Plaintiffs took steps to ensure they could make their loan payments for ten years while also covering their living expenses. The Individual Plaintiffs entered into income-driven repayment plans. This approach allowed them to meet their month-to-month expenses, but it meant that their payments struggled to cover even just the interest on the loans, leaving the bulk of the principal intact. In some cases, the Individual Plaintiffs’ loan balances continued to grow dramatically while they worked in their public service jobs.

12. Years after some of the Individual Plaintiffs had committed to public service jobs, the Department changed its interpretation of the PSLF provisions – without notice or explanation. As a result, the Individual Plaintiffs were told that their employment no longer qualified for loan forgiveness.

13. Those Individual Plaintiffs who had previously received confirmation of their eligibility were also informed that the change of interpretation would apply retroactively. These Plaintiffs were informed that their prior public service would no longer be considered eligible and their prior payments would no longer count toward loan forgiveness under the PSLF program.

14. This new interpretation seriously harms borrowers who have made career, financial, and life choices – many of them irrevocable – in reliance on the availability of loan forgiveness and the Department’s prior certifications of eligibility.

15. The new interpretation also inhibits the public service mission of the ABA with respect to its ability to attract and retain high-caliber employees. At least one employee has already left the ABA upon hearing of the Department’s recent decisions disqualifying ABA employment from PSLF eligibility. Other employees have indicated that they will struggle to continue working for the ABA if their work for the ABA does not make them eligible for the program. Thus, the ABA faces the prospect of losing more employees as a result of the Department’s actions. In recruiting, the ABA has found eligibility for the PSLF program to be a determinative factor in prospective employees’ decisions on where to work.

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16. The Department’s change of interpretation violates the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 701-06, for at least three reasons.

17. First, the Department’s interpretation of the PSLF eligibility criteria is incompatible with the enabling statute and the relevant regulation. No reasonable reading of the Act and regulation could exclude the work performed by the Individual Plaintiffs, and work performed for the ABA, from the scope of the “public service jobs” that qualify for loan forgiveness.

18. Second, even if the Department could permissibly have adopted such an interpretation, the Department did not follow an adequate or appropriate process for changing its interpretation. The Department failed to provide any explanation for its complete turnaround, let alone give reasons that would justify sweeping aside the Individual Plaintiffs’ settled reliance interests. Nor did the Department provide any prior notice that it had changed its interpretation.

19. Third, the Department lacked statutory authorization to apply its new interpretation retroactively. Even a legitimate new interpretation achieved through an adequate process would not have allowed the Department to simply ignore its prior eligibility certifications and purge borrowers’ past years of qualifying public service.

20. The Department’s actions are arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law. This Court should declare that they violate the APA and constitute a violation of due process, and it should order the Department to strictly comply with the Act and remedy the harm to graduates in public service, their employers, and the communities they serve. – Source