Is Public Service Loan Forgiveness For Real?

Probably the biggest concern any borrower has with Public Service Loan Forgiveness (PSLF) is whether or not the program will exist in 10 years and in what form.  It is a generous benefit to individuals that borrow large sums of money, such as graduate or professional degree students, and it forces individuals to make serious career decisions that may limit their employment options in the future.  Just recently President Obama proposed capping PSLF to $57,500 for all borrowers after July 1, 2015.  It is just a proposal and not a change in law.  But if President Obama (a Democrat who usually protects borrower benefit programs) is willing to put limitations on PSLF on the table, this certainly is an indication that the program could change and certainly at least for future borrowers.

That being said, the Public Service Loan Forgiveness Program is probably here to stay–at least for current borrowers.  The reasons for this range from legal to historical and are as follows:

  1. Historically Congress usually chooses to grandfather in current borrowers/beneficiaries;
  2. PSLF is a Federal Statute and Congress must pass new legislation to modify the program; and
  3. Current borrowers have legal rights to PSLF from the Deparment of Education


1) Historical Precedent:

Congress has repeatedly changed the terms and conditions of federal student loans over the years but they have almost unilaterally created grandfather provisions to protect the benefits or terms of current borrowers.  After a quick glance at the statutes dictating federal loan interest rates, one immediately notices that there are different rates for different disbursement periods.  20 U.S.C. 1087e.  Further, when the ED switched all student loans to the Direct Loan Program it retained all the terms and conditions of existing FFEL loans.  20 U.S.C. 1087e(a)1). Much like the potential “opt in” provision for the new buget proposal, ED offered borrowers to the ability to consolidate FFEL loans to gain access to repayment terms and benefits only offered to Direct Loan Programs such as Pay As You Earn, Income-Based Repayment, or Public Service Loan Forgiveness.  Also, remember, only the politicians, who are voted into office by you, can change the PSLF and IBR programs because they are federal laws (see below).  Therefore, they rationally may be hesitant to retroactively change the program terms and be exposed to public criticism.

Probably the largest change to occur with a retroactive impact was the change in the Bankruptcy Code to bar borrowers from discharging student loan debt in bankruptcy (except for under rare and strict circumstances).  This impacted current borrowers and future borrowers and there was no grandfather provision for legacy loans.  So, some law have been retroactive in the past, but it is unlikely.


2) Federal Law and Regulations:

The program is a is a federal law ( 20 U.S.C. § 1087e(m)) and only Congress could change it through new legislation.  More explicitly, PSLF is listed as one of the TERMS AND CONDITIONS for Direct Student Loans. See generally 20 U.S.C. § 1087e.  This makes the program set in stone because ED is very limited in how it can modify the program without contradicting federal law.  The program has mandatory budget authority, which means that ED must fund it (or cover its costs) whether it can afford to pay for it or not. Additionally, it is a separate program completely from the Pay As You Earn program and President Obama has only proposed changing the PAYE program.  Thus, if Congress or ED changes the law or regulations on PAYE, they have not changed, in any way, the public service loan forgiveness program. 

ED has also created regulations through negotiated rulemaking about the Public Service Loan Forgiveness and Pay As You Earn Program in 2012.  See 34 C.F.R. § 685.209 and 77 FR 66087, November 1, 2012. The law that created the authority for these rules was enacted in 2010 so any additional  changes will take time. Public Law 111 – 152, Section 2213.  It would implausible (but unfortunately possible) for ED to spend two years on regulations and documentation to completely change the programs for the same current borrowers.


3) Legal Arguments

There are two ways (at least) to look at the PSLF program and the underlying Direct Loan Program administered by ED. First, the PSLF appears to be contract which could trigger legal enforceable rights.  Second, PSFL is an existing benefit program similar to welfare or social security.  Both trigger protections and rights for borrowers and obligations for the Department of Education.

A) PSLF Is a Binding Contract with ED

There is an old contract case from 1891 where an uncle promises to pay his nephew $5,000 if the nephew abstains from drinking, swearing, using tobacco, or playing billiards until the age of 21. See Hamer v. Sidway, 124 N.Y. 538, 27 N.E. 256 (N.Y. 1891) for those interested. The nephew agreed to abstain and on his 21st birthday asked for the money.  The uncle died without paying him and the trustee didn’t want to pay the money, arguing there wasn’t *really* a contract because there was no consideration.  The New York court ruled if there is a forbearance of legal rights (such as legally drinking or swearing) in exchange for a promise, then there is a legally binding contract.

It is eerie how this fact pattern fits into the PSLF program, even if the definitions of contract formation have changed over time.  Borrowers currently working in public service have a strong argument that they have formed a contract with the Department of Education to make PSLF an enforceable contract term. Additionally, the Department of Education, and the Secretary of Education, can be sued for contractual violations related to the Master Promissory Note.  See 20 U.S.C. 1082(a)(2) “sue and be sued language”; 20 U.S.C. 1082(m)(D) “Master Promissory Note”. 

PSLF is either a term or condition of the Master Promissory Note or it is a secondary contract in which the commitment to work in public service for 10 years is detrimental reliance in exchange for a contractual promise to forgive debt.

(A)(i):  Master Promissory Note

The master promissory note includes language about the Public Service Loan Forgiveness program as part of its terms and conditions. The master promissory note explicitly states that PSLF forgiveness is an option for borrowers.  Here the language from the MPN(s) in its entirety:

A public service loan forgiveness program is also available. Under this program, the remaining balance due on your eligible Direct Loan Program loans may be cancelled after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed in certain public service jobs.

The Act may provide for certain loan forgiveness or repayment benefits on your loans in addition to the benefits described above. If other forgiveness or repayment options become available, your servicer will provide information about these benefits.

To request a loan discharge based on one of the conditions described above (except for discharges due to death or bankruptcy), you must complete an application that you may obtain from your servicer.

Any observer will immediately lock onto the “may be” language in the master promissory note as evidence that the PSFL program is not part of the terms and conditions of the MPN.  I believe, based on the use of the term “conditions” below and the relevant statutory language (requiring PSLF to be part of the terms and conditions of Direct Loans), that PSLF is clearly part of the terms and conditions of the MPN. 

This does not, however, mean that PSLF is contractually guaranteed in its current form.  A crucial but often overlooked aspect of the MPN is that the terms and conditions of a Master Promissory Note can change if Federal Law and Regulations Change.  As an example, the actual interest rate on the student loan(s) is not listed in the Master Promissory Note; this is dictated by federal statute. This is different from normal contract interpretation.  Normally, only the law that existed at the time of the contract formation can impact the terms and conditions of the contract in order to create clarity for the contract terms and conditions when the contract is formed. Below is the modifying language, listed at the beginning of the MPN:

The terms of this Master Promissory Note (MPN) will be interpreted in accordance with the Higher Education Act of 1965, as amended (20 U.S.C. 1070 et seq.), the U.S. Department of Education’s (ED’s) regulations, as they may be amended in accordance with their effective date, and other applicable federal laws and regulations (collectively referred to as “the Act”). Applicable state law, except as preempted by federal law, may provide for certain borrower rights, remedies, and defenses in addition to those stated in this MPN.

[UPDATED 06/11/14] To add a further cavat, ED explicitly stated in its 2008 negotiated rulemaking on PSLF and the Direct Loan Consolidation application process that it believes references to PSLF in the MPN are not contractually binding. Here is ED's comments, in its entirety (Hat Tip to Unemplyed_Northeastern for pointing this out):

With regard to incorporating a description of the public service loan forgiveness benefit in the MPN, the Department is already taking steps to refer to the program in the MPN and other program documents. 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.



(A)(ii): Employment Certification Form – Proving Consideration

Alternatively, the Employment Certification Form could allow borrowers to argue that PSLF is a separate contract outside the Master Promissory Note based on detrimental reliance (consideration) of ED’s PSLF program.  This detriemental reliance can be considered a contract or promissory estoppel (not a contract, see below)

At the beginning of the PSLF program there was no way to prove someone’s tolling of benefits and reliance on the program.  To alleviate concerns by borrowers and to assist in the 10 years of recordkeeping required, ED created a form Employment Certification Form for borrowers planning to use PSLF.  In this form, the borrower must confirm their work history for a period of time (usually annually), agree to the terms and conditions of PSLF, and swear the statements are correct under penalty of perjury.  The form actually lists all of the terms and conditions for PSLF, does not reference the Master Promissory Note, and is a stand alone document.

The filing of this form demonstrates the intentions of borrower to utilize the PSLF program.  The abstaining of looking for work in the private sector is restriction on the legal rights of the borrower and the debt forgiveness is the benefit.  What would be more compelling is if an actual contract form was used where the borrower promises to only work in public service for 10 years in exchange for PSLF debt forgiveness.  But the Employment Certification Form certainly would help this argument.

B) PSLF Is A Benefit Program, Not A Contract

If the PSLF program is considered a benefit program, which is not a legally enforceable contract, then there are still borrower rights and ED obligations under Administrative Law, the due process clause of the U.S. Constitution, and statutory provided rights.


(B)(i): Promissory Estoppel (Reliance) Usually Is Not Enough

It usually isn’t enough for an individual to claim that they relied on the government’s advice or comments and then were negatively impacted; there must be something akin to a breach of contract claim.  Claims against the federal government for mere promissory estoppel have not been successful in the past.  Promisory Estoppel is when a person relies, to his or her detriement, on a promise made by another but there is no contract formation.  It is oft cited as the “Its Not Fair!” argument.  Promissory estoppels claims for PSLF will probably not be successful.

In Office of Personnel Management v. Richmond, 496 U.S. 414 (1990), a former federal employee, being paid disability, was offered a new job.  After asking if the new job would impact his disability benefits, he was verbally told it would not by the federal agency and given a brochure confirming these statements.  The law changed four years later and he lost his disability benefits.  The Supreme Court ruled that no equitable estoppel claim existed because funds “are limited to those authorized by statute”.

Heckler v. Community Health Services 467 U.S. 51 (1984) provided certain factors that could possibly allow an estoppels claim.  The estoppels claim is better (but not conclusive) if there are the follow factors:

  1. Written Advice (in the case of PSLF, the promissory note and the Employment Certification Form);
  2. Advice/Statements Must Be From the Government Itself, not Intermediaries (So only statements from ED and Obama Administration); and/or
  3. Individual Must Show Detrimental Reliance (Loss of Legal Right)

All of these factors would be present if ED changes the PSLF program for current borrowers.


(B)(ii): Federal Statutes Trigger A Right to a Hearing

As part of the general powers conferred to the Secretary of Education, ED has the power to modify all the contract terms for student loan insurance programs (a reference to FFEL programs) and repayment terms if “if the Secretary finds that the modification is necessary to protect the United States from the risk of unreasonable loss”. 20 U.S.C. § 1082(a)(3). Impacted individuals must have "notice and opportunity for a hearing" if the Secretary of Education makes such a modification. Direct Loan Programs have all the same terms and conditions as FFEL loans, including rights for insurance programs and repayment terms. 20 U.S.C. 1087e(a)(1).  While this langauge appears to provide rights to loan insurers, it arguably also extends to borrowers if the terms and conditions of the loans are modified.

The Department of Education can bypass this hearing requirement by conducting negotiated rulemaking on PSLF but it would be forced publicly propose its changes with explanations.  It also could not modify the regulations so much as to contradict federal law. Such changes are subject to open public comment which ED must summarize and respond with explanations.  While not a hearing, it delays and publicizes the decisionmaking process, which allows time to borrowers to react.  This means that ED cannot unilaterally make changes to PSLF overnight.  There will be plenty of opportunity for comment and action before there are any modifications to PSLF unless changes are made by Congress.  If ED classifies this as a benefit program, then the requirements for negotiated rulemaking does not apply.  5 U.S.C. 553(a)(2).

(B)(iii): Changes To PSLF Could Trigger Constitutional Right to Hearing (Probably Not)

Changes to the Public Service Loan Forgiveness program could trigger constitutional Due Process rights. Under the 5th Amendment, individuals are given the right to due process (right to hearing and formalized decisionmaking process) if the government takes away life, liberty, or property (contratual rights or welfare benefits can be considered property rights).  Here, the program would probably be considered a benefit program that confers a property right through federal law (much like welfare benefits or social security). Applicants, who are subsequently denied, usually have limited constitional rights to due process.  Recipents of benefit programs have more rights.  The question becomes whether applying for PSLF after 10 years is an "application" for benefits or if it is the final step in a formalized process for PSLF recipents after 10 years of participation. Under the Roth test, it would be clear that borrowers expected and relied on the PSLF benefit to trigger a right to a hearing.  This of course, assumes that ED makes changes unilaterally and without explicit or implicit permission from Congress. If Congress changes the law, then there isn't much of a due process claim. Honestly, this is one of the more complicated, and weaker, arguements.

As a side note, ED probably should form some sort of formalized process to deal with PSLF denials after 2017, such as a policy/process guidebook and a neutral decision making committee. Those denials will definitely trigger potential lawsuits in the future, much like other denials of federal benefits.


What Does This All Mean?

What should be immediately clear is PSLF is not automatic and there are risks caused by the vagueness of the federal program.  The more the program is "tweaked" over time, the more it will make current and future borrowers more weary of promised benefits. Borrowers will not even be eligible for PSLF until 2017 so a lot of things can change before the majority of borrowers will be able to apply for PSLF.  The crux of the issue is whether Congress, not ED, will change the federal statute and this should be the focus of any advocacy.  Without Congress, most reforms by ED would be severely restricted because PSLF is a federal statute.

PSLF is a real program and everything that the Obama Administration, Congress and ED have stated lends one to believe that PSLF is “For Real” in some form.  This is even truer for current borrowers under current programs.  The administrative, political, and legislative hurdles required to retroactively limit or take away PSLF for current borrowers make it extremely unlikely that the program will disappear retroactively.  Or even for future borrowers (subject to the new proposed limitations, of course).


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