Law Schools

Obtaining Student Loan Discharges Under The Public Service Loan Forgiveness Program Could Be Harder For Attorneys

Expect a big inquisition from the Department of Education since they are potentially discharging hundreds of thousands of dollars.

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The Public Service Loan Forgiveness (PSLF) program began in 2007 with the intent of providing a financial cushion for those who chose to work in public service. You make 120 months of income-based payments while working for a qualified organization (such as the government or a 501(c)(3) entity). Upon completion, the remaining balance of your federal loans are forgiven without having to pay income tax on the debt cancellation.

In recent years, PSLF has been attacked as a poorly designed law that incentivizes moral hazard because schools and students have no incentive to minimize borrowing. Politicians from both major parties have proposed to amend or end PSLF. This made those already on the program wonder as to whether the government would honor the loan forgiveness or put up all kinds of obstacles to frustrate their attempts.

The good news is that forgiveness has begun.

Someone on Reddit recently announced that he received full forgiveness of his federal student loans through PSLF. While the poster did not state his job, he mentioned that $185,000 was forgiven.

He worked for only one 501(c)(3) organization for the entire period, which made his application fairly straightforward. He diligently completed the annual employment certification forms and the IRS authorization forms in order to continually qualify for IBR and PSLF status. Once he made all 120 payments, he applied for loan forgiveness. FedLoan provisionally approved the request and it was sent to the Department of Education for a final review. A few months later, the Department approved the loan forgiveness.

While it is good that the Department of Education will honor PSLF loan forgiveness, I do not expect it will be easy for lawyers and doctors. There have been many criticisms of the “doctor’s loophole,” where a spine surgeon’s seven-year residency training would count towards PSLF. The remaining three years would be spent at a non-profit hospital with some kind of deferred compensation arrangement where the doctor gets a reduced salary. Once the loans are forgiven, she will be paid her full salary and back pay in the form of bonuses.

The Department is concerned that some lawyers who can pay back their student loans in full will use a similar “lawyer’s loophole” to legally avoid doing so. Some lawyers will jump ship to a lucrative job in the private sector after doing their 10-year tour of duty with a prestigious government agency.

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I would expect that the Department will conduct a very thorough review of every lawyer applying for PSLF loan forgiveness. The department will look at the applicant’s academic credentials, job and salary history, where they live and work (and the need for attorneys in their area), their future career plans, and their likelihood of obtaining a high-paying job that can pay the debt in full. They may also look at the 501(c)(3) entity to make sure it is operating for a legitimate public purpose and not a sham entity set up for PSLF purposes.

The Department may take other steps limit the application of PSLF to lawyers. They’ll try to disregard certain public entities from PSLF consideration. Last year, the department tried to revoke the ABA as a qualified employer for PSLF purposes, and the ABA filed a lawsuit in response.

Presently, there are probably not a lot of PSLF forgiveness requests because not many people took advantage of it when it started in 2007. But over the next few years, there will likely be more PSLF forgiveness applications, as more people took public service jobs in the late 2000s because of the Great Recession. Only then will the federal government know whether the program is financially viable. And as the forgiveness amounts increase, so is the likelihood that the Department of Education will closely scrutinize loan forgiveness requests.

But the Department’s attempt to move the goal posts now would be unfair to the people who have invested many years relying on PSLF and would put them in a severe financial hardship. The Department could have issued regulations to close the loopholes they should have known about years ago. The best step is to acknowledge that PSLF is unsustainable because of the potential for abuse, repeal it for new borrowers, and pass a replacement that eliminates the moral hazard described above.

If you are currently on PSLF and are in your final years of repayment, my advice to you is to keep your mouth and keyboard shut. When your loans are forgiven, don’t announce it on social media along with your detailed plans to lateral as a partner at O’Melveny. Your “IBR for life” law school classmates will be happy for you for a while. But that “like” you get on Facebook will soon turn into a green emoji of jealously as they wonder, “Why not me?” Also, it’s funny how your supposedly private social media humblebrags somehow make it into a congressman’s office or as fodder for BuzzFeed’s latest headline: “24 Billion Reasons To Repeal PSLF.” So celebrate the big day quietly with close friends and family and get back to work.

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I think most lawyers in the PSLF program will have their loans discharged if they meet the 120-month payment plan. But expect a big inquisition from the Department of Education since they are potentially discharging hundreds of thousands of dollars.

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.

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