A Technicality Is Holding up Student Loan Forgiveness for More Than 67,000 Borrowers

More than 67,000 public servants are facing what could be years-long delays in getting the student debt relief promised to them through the Public Service Loan Forgiveness program. The cause boils down to what's essentially the fine print on the program requirements.

Roughly 135,500 borrowers who’ve submitted applications to have their loans forgiven via Public Service Loan Forgiveness do not qualify because they haven’t made the required 10 years of eligible payments yet, according to data the Education Department released Monday. An Education Department spokesperson later confirmed that half of those borrowers, about 67,750, have already worked in public service for at least 10 years, but some of their payments were made on an ineligible federal loan. So, despite paying for the required amount of time, they have to keep making more payments in order to get forgiveness.

Public Service Loan Forgiveness, often called PSLF, was created in 2007 to offer loan relief for borrowers who have high debt and work in often low-paying government or non-profit jobs for at least a decade. Yet nearly four years after the first group of borrowers would have been eligible for forgiveness, the program is notorious for its low rate of approved applications.

The new data from the Education Department show that the overall rate of borrowers approved for forgiveness still remains below 2%. But this is the first time the department has highlighted the number of borrowers affected by the issue of making payments on ineligible loans. In a press release, the department called it a “notable problem” that “merits further consideration.”

Seth Frotman, executive director of the Student Borrower Protection Center, says the new data show what borrowers and advocates have been stressing for years: this system wasn’t designed for borrowers to succeed.

For years, advocates have "been talking about how the broken student loan system has left borrowers struggling to meet the requirements under this program," he says.

Why public servants are facing delays in having their loans forgiven

The pitch of Public Service Loan Forgiveness is simple enough: Work for in a public sector or non-profit job and make 120 monthly payments on your debt. At the end of that time period, anything outstanding is forgiven.

Yet actually qualifying for forgiveness requires meeting more precise eligibility, per the law that Congress passed. Borrowers need to have the right type of loan (a federal Direct Loan), be enrolled in the right type of repayment plan (any income-driven plan), make the right number of payments, and work in an eligible job — all for 120 months.

The problem is that before 2010, some federal loans were issued under a different program, called the Federal Family Education Loan (FFEL) program. Those loans don't qualify, so in order to get forgiveness, borrowers with those types of loans have to first consolidate them into a new Direct Loan.

But when borrowers consolidate, the clock starts over on their progress toward forgiveness. So, for example, if a borrower had made four years’ worth of payments on loans that included FFEL loans before learning they needed to consolidate, they’d have to start over at zero on the road to 10 years’ worth of payments.

The number of borrowers affected by the issue could continue to grow, as more public servants hit the 10-year service mark and apply for loan forgiveness.

In some cases, borrowers may not find out they have the wrong loan until after making 10 years of payments. That happened recently with a borrower who reached out to Betsy Mayotte, who runs the free counseling website The Institute of Student Loan Advisors. For that borrower in particular, she’d have to start over and make another 120 payments in order to get her loans forgiven. (This is one of the reasons experts stress borrowers should fill out the PSLF certification form every year, so that issues like this one can be caught earlier.)

The government is expecting consumers to know that these are two different loan programs, when most borrowers just see them all as federal loans. It doesn't help that both Direct Loans and FFEL loans are sometimes referred to as Stafford loans.

"Whether the borrower has FFEL loans or Direct Loans, what does it matter? They're still in the same position," she says.

Calls to fix public service loan forgiveness continue

In April, 98 organizations, sent a letter to the Education Department highlighting this issue and urging the department to cancel the debt of all borrowers who’ve worked in public service for 10 years and made 120 payments, regardless of whether they had the specific type of loan or repayment plan required.

“Ten years is 10 years,” Frotman, with the Student Borrower Protection Center, says. “The idea that the system is just going to work itself out is not born out in the data and doesn’t reflect the experiences of borrowers on the ground.”

In many cases, borrower advocates have laid the blame for these issues with loan servicers, who advocates say haven’t properly educated borrowers about the requirements of the program. Anecdotally, borrowers say their servicers did not make it clear that FFEL loans are ineligible or that consolidating their loans would restart the clock for forgiveness.

Mayotte says she blames the industry has a whole — the Education Department, servicers, advocate organizations and even eligible employers all could have done more back in the early years of the program to educate borrowers on the requirements. There are now a lot more resources available to borrowers trying to navigate the system.

The 67,750 figure may sound like a relatively small number, considering the millions of people who work in federal, state and local government or at non-profit jobs. Yet only 5,500 borrowers have actually gotten forgiveness via PSLF. Another 3,000 have had their loans forgiven through a temporary program Congress passed in 2018 to fix some of the problems of low approval in PSLF.

But that program, officially called Temporary Expanded Public Service Loan Forgiveness, addresses a different problem — borrowers who would qualify but had been in the wrong repayment plan. There is no such existing relief for the tens of thousands of borrowers who, for at least some part of their 10 years of repayments, had the wrong type of loan.

President Joe Biden campaigned on promises to fix a variety of student loan issues, including Public Service Loan Forgiveness, something advocates said the administration hasn't make any progress on in its first six months. The administration has, though, started to make progress in clearing out the backlog of borrowers who are eligible to have their loans forgiven under a different program, called borrower defense to repayment. On Wednesday, the department announced roughly $500,000 of debt cancellation for 18,000 students who attended the now defunct for-profit chain ITT Technical Institute. That brings the total student debt cancelled via borrower defense under the Biden administration to $1.5 billion from some 90,000 students who were defrauded or misled by their colleges.

More from Money:

Public Service Loan Forgiveness: 3 Recent Changes That Make It Easier for Borrowers

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Should Biden Cancel Student Debt? The Loan Forgiveness Debate, Explained