The Future of Public Service Loan Forgiveness

Public Service Loan Forgiveness (PSLF) provides borrowers an opportunity to get unlimited amounts of federal student loans forgiven tax-free.

The danger with pursuing PSLF is that it takes at least ten years, and borrowers could be at risk of the program being canceled, rules changing, and rejection. Planning ahead requires asking an important question: what are the odds that Public Service Loan forgiveness is eliminated or changed?

The chances of Public Service Loan Forgiveness being eliminated are very low for current borrowers. Protections exist, both political and contractual, that would make it very hard for the government to cancel the program.

Unfortunately, it is impossible to say for sure. Even if the program does stick around, rules could be changed. Existing proposals to tweak the PSLF could help borrowers while others would be a step backward.

Is it safe to rely on Public Service Loan Forgiveness?

Public Service Loan Forgiveness is perhaps the most generous student loan forgiveness program. Eliminating PSLF is unlikely to upset the wealthy donors who fund many campaigns, and canceling the program could provide a huge boost to the federal budget.

The good news for people counting on PSLF is that there are two major protections in place that will make it very hard to get rid of Public Service Loan Forgiveness.

Eliminating PSLF Requires an Act of Congress – Public Service Loan Forgiveness was signed into law in 2007 by President George W. Bush. A President hostile to student loan borrowers could not eliminate the program alone. A new law would have to pass in both the House and the Senate before PSLF could be removed from the books. In the current political climate, such a new law being created seems unlikely.

Borrowers Have a Contract with the Government – All federal student loan borrowers are required to sign a document called the Master Promissory Note (MPN). The MPN is the contract between student loan borrowers and their lender, the federal government. The terms of the MPN include the Public Service Loan Forgiveness program. If the government eliminated PSLF, it would be breaking many contracts. The MPN is part of the reason that proposals to modify the PSLF program almost always apply only to future borrowers. Current borrowers should be grandfathered in if any changes are made to PSLF.

These two factors provide a great deal of protection for borrowers planning for Public Service Loan Forgiveness. The continued existence of PSLF isn’t a certainty, but borrowers have reason to be confident moving forward.

How hard is it to get approved for PSLF?

Significant media coverage has been focused upon the reported 99% rejection rate for Public Service Loan Forgiveness applications. Even if the risk of rejection is a bit exaggerated by the media reports, the possibility of rejection should be carefully considered by all borrowers planning on PSLF.

This site has argued that qualifying for PSLF is not as hard as the reports make it sound. A shift to direct lending for newer borrowers, a better understanding of the rules by servicers, and more educated borrowers are all factors that should increase future approval rates.

Even with optimism for more approvals in the future, borrowers still need to make certain that they are taking all appropriate steps to get approved. The federal government has created a PSLF eligibility tool to help borrowers verify eligibility. The PSLF help tool will help borrowers verify that their loans are eligible and generate a partially complete employer certification form for their employer to sign.

Completing the employer certification form yearly is not required under the law, but it should be considered essential by borrowers. Submitting an Employer Certification Form (ECF) will trigger a servicer review of loan eligibility, employer eligibility, and repayment plan eligibility. At the end of the process, the borrower also will receive an updated tally of the number of certified payments towards the 120 required for loan forgiveness. The ECF is the most reliable tool for borrowers to ensure that they are meeting the requirements for PSLF.

Ultimately, the difficulty in getting approved for PSLF will depend upon the steps taken by borrowers. Those that certify their employment each year should have a very high probability of success. Those who assume things are in order will find an approval to be much more difficult.

Caps or limits on total forgiveness under PSLF

At present, borrowers can have all of their federal loans forgiven under Public Service Loan Forgiveness. Because there are no limits on graduate school borrowing, borrowers can have $200,000 or more forgiven. Even if the original balance grew due to the accumulation of interest, the full balance could still be discharged.

This aspect of Public Service Loan Forgiveness may change in the future. Barack Obama and Donald Trump have very little in common, but both have floated the idea of limiting how much can be forgiven under PSLF. Then-President Obama proposed limiting PSLF forgiveness to $57,500 while President Trump has proposed eliminating the program.

The good news for people already in repayment is that these proposals would only apply to future borrowers. The Master Promissory Note (MPN) should provide borrowers some protection as there is no mention of forgiveness limits. The MPN is likely a significant reason that the proposed changes would only apply to future students.

Students who expect to continue borrowing federal loans for many years into the future should consider the possibility that PSLF limits might be imposed on future loans.

The borrowers currently in repayment, or about to begin repayment, are likely safe from any caps or limits on the amount forgiven.

Could Public Service Loan Forgiveness ever be taxed?

Part of the 2007 law that created Public Service Loan Forgiveness specified that it would be done tax-free.

Like the other possible changes to PSLF, a change in taxation is unlikely.

Additionally, the momentum on the tax front seems to be headed in a direction very favorable to borrowers. Presently, borrowers who have their loans forgiven after 20 to 25 years of Income-Driven Repayment face a very large tax bill. There is a strong push to eliminate taxation on any form of federal loan forgiveness.

Recent changes to student loan law removed the tax bill for loans that were forgiven due to the death or disability of the borrower. The trend seems to be less taxation on student loan forgiveness.

In short, on the tax front, any changes to the current rules are likely to be for the better.

How else might PSLF be changed?

Looking forward, there are a couple of significant alterations to Public Service Loan Forgiveness that could realistically happen.

Tweaking the ten-year rule – PSLF is an all-or-nothing rule. Either borrowers get all of their debt forgiven, or none of the debt is forgiven. Recent proposed legislation would create a halfway point. Borrowers who complete five years of public service would get half of their federal debt forgiven. After the next five years, the remaining half could be forgiven.

Making all federal loans eligible for PSLF – Loans made under the FFEL program are not technically eligible for PSLF. However, these loans can go through federal direct consolidation to become eligible. There is support for making this change as Congressional Democrats have proposed a bill that would make all federal loans and all federal repayment plans eligible for PSLF.

While these potential changes have gained some support in Congress, they are unlikely to become a reality under President Donald Trump, who wants to eliminate the PSLF program.

Could the President eliminate Public Service Loan Forgiveness?

Presidents can make significant changes to student loans via executive orders. Borrowers may recall that President Obama created the REPAYE plan using an executive order.

Public Service Loan Forgiveness is the current law, which means that no president can change the law without first getting a bill through Congress.

The worst that a president could do on their own would be to make it very difficult to apply for PSLF and create a system that processes applications very slowly. However, even if a president set out to essentially eliminate PSLF by making it impossible to get approved, there would likely be several lawsuits and judges ordering the system be fixed.

Ultimately, even if a president wanted to get rid of PSLF, one person lacks the power to make the change.