Creating A Public Service Loan Forgiveness Program With Impact (Updated)

After spending a good part of yesterday afternoon figuring out the ins and outs of the Income-Based Repayment program and the Public Service Loan Forgiveness Program, I got to thinking that there must be a simpler way. 

Today, I will tackle the Public Service Loan Forgiveness Program.  I had this thought of simplification in mind as I read this article from the New America Foundation "Fixes Needed for Federal Program Promoting Public Service."  The article focuses its attention on the fact that students would not know if the public service jobs they have will qualify them to have their loans forgiven until the end of the 10 year period:

"Under regulations the Department issued in October, student loan borrowers will not know whether they qualify for the loan forgiveness until after they have made all 120 required payments."

And this is supposed to create an incentive to take a public service job?  The article goes on to recommend that this issue be included as a topic for negotiated rulemaking this fall.  It might be useful to revisit some suggestions listed in the Federal Register from October 2008 :

• Annual certification of borrower-employees:  "The commenters recommended that the Department create an on-line, password-protected system through which qualifying employers could annually certify the employment of borrower-employees, or otherwise provide a reliable system for borrowers to document, confirm, and track job eligibility."
• Employer pre-certification:  "...establish a program of employer pre-certification under which the Department would maintain an ongoing list of certified eligible employers for borrower reference."
  • SLA note:  With this pre-certification, companies can feel comfortable that they can advertise this as a benefit to prospective employees.  This would be tremendous exposure for the program and and help to increase awareness of it. 
• Put the loan forgiveness terms in the DL MPN:  "Many commenters urged the Department to incorporate the public service loan forgiveness program as a term and condition in the Department’s Direct Loan master promissory note (MPN)."
  • Department's response to comments about the MPN:  "However, the MPN will continue to state, as it currently does, that the terms and conditions of the loans are subject to the HEA as it is amended in accordance with the effective date of those amendments. Although there is no history in the program of Congress eliminating or reducing a borrower benefit, the Department does not believe that a reference to the public service loan forgiveness program in the MPN would provide the borrower with a contractual right to the benefit should Congress take action to eliminate that benefit from the HEA as of a particular effective date."
    • For a cautionary tale about the tenuous nature of some loan forgiveness programs, click here.  I would argue in this environment, it would behoove regulators to provide greater protections and assurances to borrowers above and beyond "...no history in the program of Congress eliminating or reducing a borrower benefit."

As for the Department's solution to these suggestions (hint:  when in doubt, suggest a form): 

"The Department will develop a form for borrowers to use to apply for the public service loan forgiveness when the borrower believes he or she qualifies...The borrower will be able to use this form to collect a certification from his or her employer either annually or at the
close of the 120-payment qualifying period...The Department expects the borrower to collect and retain the necessary records that support the borrower’s eligibility for this benefit."

As for when the employee can apply, as the article alludes to it is:

"After making the 120 monthly qualifying payments on the eligible loans for which loan forgiveness is requested, a borrower may request loan forgiveness on a form provided by  the Secretary."

For those wondering about taxability of loan forgiveness, here is what the Dept. had to say:

"Section 108(f) of the Internal Revenue Code provides that amounts discharged on loans made by a governmental entity can be excluded from the borrower’s income if the discharge was for work ‘‘in certain professions for any broad range of employers.’’ 26 U.S.C. 108(f)."

So, let me close with this question, "When is a benefit not really a benefit?"

Answer:  When it has this many strings attached that only a very few will benefit from it.  If you review all that is required to earn this loan forgiveness, one would certainly get the impression that the focus is on minimizing cost rather than providing an incentive for students to choose public service.     

So, what exactly does an aspiring public servant need to do to earn this "benefit":

• Not be in default on their loan
• Must have a Direct Loan
  
  • If FFEL borrower, you can consolidate into a Direct Consolidation Loan
• Work full-time at public service organization (or Peace Corps or Americorps)
  • Service does NOT need to be continuous over a 10 year period
  • Public service organization is broadly defined to include any public employer (federal, state, local, tribal), any tax-exempt 501(c)(3) non-profit and includes public K-12, hospitals and universities
• Make 120 qualifying and on-time payments (within 15 days of the due date)
  • Note that these payments do NOT need to be consecutively on-time as my earlier post had indicated
• Set up on income-based repayment plan

And once you have done all of that...then you get to apply for forgiveness...and find out if your 10 years of labor for the public good will lead to absolution (I mean loan forgiveness).  If the intent of the forgiveness program is to minimize the cost to the federal government and to impact as few borrowers as possible, this design is a winner.  

If they really want to create a program with impact, two suggestions would help:

• Provide a directory of companies that are eligible employers for this program.  As stated earlier, this would have the added benefit of having thousands of employers advertising the program thereby increasing awareness and participation levels.  As for the "complexity of this task", setting up this list upfront saves time on the back-end that the Department will be spending verifying employer eligibility.  
• Establish a vesting schedule so that the loan forgiveness occurs gradually over time rather than just after 10 years. 

There is a better way...How about introducing the concept of a vesting schedule (sorry my compensation background is showing through)?  It might look something like this:

	Percentage
Years of Service	Loan Forgiven
1	0%
2	0%
3	20%
4	0%
5	20%
6	10%
7	10%
8	10%
9	10%
10	20%

I don't know if this is exactly the right structure but it would seem to me that we benefit as a nation when more talented people have an incentive to choose a public service job, even if it is for just a few years (e.g., Teach for America).  Why not provide a program that might actually provide some incentive for young people to take public service jobs since that seems to fit Obama's desire to engage young people in the process? 

If legislators are looking for models for an effective loan forgiveness program, they do not need to look very far.  As the WSJ reported recently in "Scrutiny Grows as U.S. Pays Staffer's Student Loans," Congress seems to have developed quite a popular program for their own staffers based on its recent growth:

"The House and Senate will spend $18 million this year repaying staffers' student loans. Last year, while criticizing corporations that pay lavish benefits during hard times, House lawmakers nearly doubled what the government can pay for their staffers' college bills. The yearly maximum repayment is $10,000 in fiscal 2009, which ends Sept. 30, up from $6,000 in fiscal 2008, with a lifetime maximum of $60,000, the same as in the executive branch. The House appropriated $13 million in 2009 for the program; as of last month, more than 2,200 House employees were getting the money."

Why impose a draconian 10-year cliff vesting schedule and then not let borrowers know if their employer qualifies for the program until AFTER they have made their 120 payments?  Not only will the program not provide much of an incentive, it will surely lead to disappointment for those who find their applications turned down after their decade of service.

Legislators, its not too late.  With student loan reform now being considered, make two simple changes to the loan forgiveness programs while you are at it: 

• Mandate a pre-qualified list of employers and change the vesting schedule.  Heck, I will even agree to manage the list of employers for the Department if they don't want to handle the "administrative" burden.  There are public databases available that collect this information already today. 
• Change the vesting schedule so borrowers who serve for as little as three years in the public service would receive some portion of loan forgiveness.  

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Updated (7/5/2009):  Thanks to Laura Asher at TICAS for clarifying that the public service loan forgiveness program does NOT require 120 consecutively on-time payments nor does it require 10 years of uninterrupted service at a public service company.  I think she summarized the program succintly by noting "You have to make the right kind of payment, on the right kind of loan, while in the right kind of job 120 times.  She also provided additional details regarding what constitutes a public service company, which I have incorporated in this post.  For more information about this program and income-based repayment, check out their site at IBRinfo.org

Comments

[Daniel Burr]

Having wrestled with the task of explaining the Public Service Loan Forgiveness Program to graduating medical students this past spring, I think you have hit on the major flaws in the program and made some interesting suggestions to fix them. It is my understanding the program was designed by lawyers for law school graduates interested in public interest law. It does not seem a good fit for any other group of borrowers. In fact, I think you are correct when you suggest this program is just lip service by politicians to the concept of public service. They certainly played it for more than it is worth. That is a sad statement.

[Marcey Mihalo]

I still cannot find out HOW TO APPLY for a public service loan forgiveness program. Any ideas? hawkeye@swva.net 540-250-1698
Marcey Mihalo