The Ten-Year Public Service Loan Forgiveness Program Is Abusive And Should Be Eliminated

Something is seriously wrong when people are choosing their careers based on the amount of loan forgiveness.

stop signPresident Donald Trump’s recently released budget proposal includes ending the Public Service Loan Forgiveness (PSLF) program. I predicted that something like this would happen in a previous column.

For those who don’t know about PSLF, it allows people working for qualified organizations to pay their federal student loans based on a portion of their monthly income. After making 120 monthly payments, the remaining federal student loans are forgiven, with no cancellation-of-debt income tax consequences. Private loans are not eligible for PSLF.

But thankfully to those already in the program, any loans taken before July 1, 2018 will still be eligible for forgivness.

PSLF was enacted in 2007 with the intent of minimizing student loan burdens to those who wanted to pursue a career in public service. At the time, the U.S. economy was at its zenith. As most people preferred to work and live in the city, it became harder to recruit people to work in rural areas. The pay is generally lower, practicing farm law doesn’t sound too appealing, and there’s not a lot of local pickings on eHarmony and Tinder.

But when the Great Recession came in 2008 and the lucrative jobs dried up, it sparked interest in government and public service work.

There are stories of how PSLF is being abused by graduate students. They have mostly focused on the “Doctor’s Loophole.” This is where new physicians – particularly the surgical specialists – can potentially have hundreds of thousands of dollars of student loans forgiven. They do this by completing their seven- to eight-year, low-paid residencies, then practicing for two years at a 501(c)(3) hospital. I’m sure this has created a lot of work for lawyers who specialize in deferred compensation contracts.

A comparable “Lawyer’s Loophole” might work like this: a newly admitted lawyer can work for the government or legal aid. After working for 10 years, they can lateral to a highly paid position at a brand-name law firm. However, I think only a very small number of lawyers can take advantage of this.

Sponsored

There have been proposals to modify PSLF. President Obama proposed capping loan forgiveness at $57,000. However, for the reasons below, I think the time has come to end PSLF and replace it with something different.

First of all, it seems almost too easy to qualify for PSLF. To be eligible for PSLF, applicants must work full-time for an approved 501(c)(3) organization. But as I noted in my previous column, getting 501(c)(3) status does not seem that hard with the right plan and preparation. As it currently stands, so long as the non-profit law firm provides public interest legal services, the IRS cannot revoke 501(c)(3) status just because the lawyers are mainly motivated by loan forgiveness.

Another way to qualify for PSLF is to work for the government. But not all government jobs are created equal, especially when comparing salaries in urban areas versus rural ones. Over the years, I noticed that the pay gap between government and private practice jobs in certain cities has been narrowing. And some prestigious government jobs open doors to lucrative positions in private practice. Is it fair to give these people PSLF benefits? I get that the public sector benefits by employing the best and the brightest. But some of these positions – particularly assistant U.S. attorneys in places like the S.D.N.Y. – will always attract these type of people.

I have also read about various incidents where complying with PSLF requirements has been confusing. Some were unaware that they had to sign up for an income-based repayment program to qualify for PSLF treatment. And failing to take the proper steps will disqualify your payments from forgiveness even if you worked for a qualifying organization. It’s almost as though the government wants people to screw this up.

More schools are starting to abuse PSLF. It incentivizes them to increase tuition and discourage in-school discounts. Students are under the impression that borrowing to pay full tuition does not matter because the loans will be forgiven so long as they meet the PSLF requirements. Ending PSLF will hopefully force prospective students to think at least twice before paying full tuition.

Sponsored

Another problem I have with PSLF is that it promotes labor inefficiency. Let’s keep it real – many law students thought of government and public service work as fourth-tier safety picks in case they struck out at Biglaw OCI. Something is seriously wrong when people are choosing their careers based on the amount of loan forgiveness when they should instead be choosing careers that will help them pay those loans off.

Finally, PSLF has not solved the rural lawyer problem. There continues to be constant coverage of lawyer shortages in rural areas. Instead of PSLF, there should be a more generous income-based repayment program for solo practitioners and small-firm lawyers who practice in rural areas. I propose forgiveness after 12 years with no cancellation-of-debt income.

I have my fair share of disagreements with President Trump, but I am in favor of his proposal to end PSLF. In its current form, it is not increasing the number of lawyers in rural areas, and it is being abused by both schools and borrowers, and for the most part subsidizing the Privileged Pierces of this world.

I get that ending PSLF will result in butthurt backlash. But I am hoping that such backlash will be the impetus to replace PSLF with a system with stricter oversight that will not incentive schools to increase tuition.

But if you are still on the fence about PSLF, apply for it now while supplies last.

Earlier: The Nonprofit Law Firm: Providing Access To Justice For The Poor And Early Student Loan Forgiveness For Indebted Lawyers


Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at sachimalbe@excite.com and via Twitter: @ShanonAchimalbe.