The ultimate student loan nightmare is becoming reality for a group of borrowers. They took jobs in public service. They submitted all the right paperwork to document their public service. They were told by the Department of Education that their jobs were eligible and that their payments would count towards public service loan forgiveness. After years of payments, they received a letter from the Department of Education. It informed them that their past work didn’t count. Payments were retroactively decertified. “We regret any confusion that may have been caused by our earlier opinion,” the letter said.
This is the reality for a group of lawyers according to a recent New York Times article. The only reason these events have become public is because the affected individuals are currently suing the Department of Education.
Why is this the Ultimate Student Loan Nightmare?
Public service student loan forgiveness was created so that individuals could serve the public good, despite the fact that these public service jobs often paid significantly less than similar private sector jobs.
Even with public service loan forgiveness, many loan borrowers still face challenges. The lower salaries of public interest jobs often mean that borrowers can only afford student loan payments based upon their salary. These income driven payments can be less than the interest that accrues each month on the student loans. As a result, the student loan balance grows each month.
With a growing student loan balance, the borrower must make a commitment to work at least ten years in public service to get the loan forgiven. Changing course midway through would be an incredibly expensive mistake.
The individuals in this case have had the rug pulled out from under them. They have forgone higher paying because they had a deal with the government. Per the Department of Education, their jobs were eligible for public service student loan forgiveness after ten years of work, and in return the loan balances would disappear at that time. Then the Department of Education changed its mind. These borrowers now have higher balances, but zero credit towards public service forgiveness and jobs that don’t count.
They aren’t starting over on their loan repayment. They are in a much worse position than they were the day repayment started.
Four individuals and the American Bar Association have sued the Department of Education as a result of their actions. According to their compliant, they are asking the federal judge to take several actions against the Department of Education.
First, they want the original interpretation of Public Service put back into place. They also want a number of procedural changes made, such as requiring public input before altering definitions of public service, and creating an appeals process for borrowers whose certification has been denied. Additionally, they want the Department of Education to be told that it can no longer issue retroactive denials of Public Service certifications.
Because this lawsuit is less than a week old, it will likely be many months or even years before it is resolved.
What does this mean for me?
If you are a borrower who is planning on any sort of student loan forgiveness, the issues of the lawsuit are critically important. The big principal at play here is whether or not the government is allowed to change its mind on student loans after the fact. If the government says something about student loans, and you make important financial, career, or life decisions based upon what you were told; is the government allowed to change its mind?
This fundamental concept applies to many different issues in the student loan world.
The Public Service Student Loan Forgiveness legislation was passed in 2007. Because the program is not yet ten years old, nobody has qualified for public service forgiveness. However, the cost of the legislation will soon start to be realized by the federal government. It could be very expensive and very unpopular as more loans are forgiven. Any limitations on the government changing their mind after the fact will be a huge win for all borrowers who depend upon consistency.