September 2017

Department of Education Revokes Previous Approvals for Public Service Loan Forgiveness

By Mike Finstad

Attorney at Law

It looks like “public service” just isn’t what it used to be at the Department of Education.

In answering a complaint filed last December by the American Bar Association, the Department took a major step towards limiting the eligibility of certain employers to participate in a program known as Public Service Loan Forgiveness (PSLF). In the process, the Department also confirmed that it will not honor many certifications of eligibility that were previously issued to borrowers who believed in the promise of loan forgiveness.

The outcome of ABA v. U.S. Dept. of Education could have huge implications for private employers who do not have §501(c)(3) tax-exempt status under the Internal Revenue Code (IRC), including their ability to compete for the talent of recently-graduated law students with mortgage-sized student loan debt.

Public Service Loan Forgiveness

Congress created the Public Service Loan Forgiveness (PSLF) program in 2007 as part of the College Cost Reduction and Access Act (the “Act”).1 The final bill passed with wide bipartisan majorities before being signed into law by President George W. Bush.

A basic statement of the program’s requirements can be found on the Department of Education website: “The Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.”

In making PSLF available to the 40 million Americans with student loan debt, Congress felt the program would encourage those with higher educations to realize that they could afford pursuing a career in public service.

Since public service jobs typically come with lower annual compensation, PSLF can yield significant financial benefits for new lawyers. According to U.S. News & World Report, 90% of 2016 graduates at Thomas Jefferson Law School incurred an average law school debt of more than $180,000.

Many of these loans are Direct PLUS loans, also called “Grad” PLUS loans because they are only available to students pursing graduate or professional degrees. Interest on Grad PLUS loans begins to accrue immediately after the loan is disbursed, which means Thomas Jefferson graduates may leave law school with student loan debt that exceeds $200,000.

Most of these graduates will eventually enroll in some form of an Income-Driven Repayment (IDR) plan, which generally caps monthly loan payments to 15-20% of monthly income. The issue for those in low‑paying public service positions, however, is that these monthly payments may not sufficiently cover the interest on a $200,000 debt, leaving the borrower with a growing debt over time. For those law students who make a 10 year commitment to public service, however, the entire amount they borrowed to finance law school could be forgiven.

There are also significant tax advantages built into PSLF. Under IRC §108(f), when a student loan is forgiven pursuant to a provision that requires the borrower to work “for a certain period of time in certain professions for any of a broad class of employers” the amount forgiven is not considered income.2 Because PSLF regulations require an individual to work at least 10 years in a public service job, loans forgiven under PSLF are not subject to federal taxation. As a result, 2016 graduates of Thomas Jefferson School of Law can yield an additional $20,000 in annualized, tax-free income by working in public service until 2026.

While PSLF can provide enormous financial benefits to borrowers, it is not a windfall that is easily obtained.

To qualify, borrowers must meet all criteria set forth under the Act, which includes regulations promulgated by the Secretary of Education. But current regulations do not provide an enrollment process for borrowers and employers, so borrowers cannot be sure the Department will consider them eligible to apply for PSLF until after they have made 120 monthly payments, or at least 10 years from the time they began working in public service. Thus, the earliest date any borrower can apply for PSLF is October 1, 2017, but the Department has not yet released the application.

The uncertainty regarding eligibility gives the Department extraordinary discretion over borrowers who believe they are complying with current regulations. ABA President Linda A. Klein believes the Department’s discretion puts borrowers in a precarious circumstance. “It puts lawyers working in public service jobs in the untenable position of being forced to wait 10 years to find out whether their jobs qualify them for loan forgiveness,” said Klein.

The Department recently exercised this discretion when it retroactively disqualified many public service employers who use PSLF to recruit talent, including the ABA, and Klein believes the Department’s recent actions will have serious consequences. “This has put young lawyers’ financial futures at risk. These dedicated public servants have followed the rules set forth by the government and are now having the rug pulled out from under them. It’s unfair and unfathomable.”

Current regulations do not allow employers to be proactive in determining their eligibility as a “qualified” employer for PSLF. Instead, the only way employers can find out they are qualified is by having an employee submit an Employment Certification Form (ECF) to FedLoan Servicing. FedLoan Servicing is the Department’s designated servicer for PSLF, and after submitting the ECF borrowers receive letters that confirm whether they (and their employer) are meeting the program’s requirements.

Borrowers who track their progress through the ECF, like plaintiff Geoffrey Burkhart, rely on it to make career decisions.

According to the ABA’s complaint, Mr. Burkhart graduated from DePaul University College of Law in 2008 with student loan debt totaling over $150,000. A year after passing the bar, Mr. Burkhart carefully chose employers that provided a public service, including serving as a public defender in Chicago. He later took a position with the ABA, which is a private organization with IRC §501(c)(6) rather than §501(c)(3) tax-exempt status. Before he accepted the position, Mr. Burkhart sought assurances from both the ABA and FedLoan Servicing that his employment would qualify for PSLF. He received approval from both and spent more than two years making regular payments on his student loans.

In October 2016, however, Mr. Burkhart received a letter informing him that “after consulting with the Department,” FedLoan Servicing was reversing their previous approval because it had been determined that the ABA “do[es] not provide a qualifying service.” The letter also stated that the redetermination would be applied retroactively, effectively wiping out more than two years of progress towards his 120-month requirement.

All of the individual plaintiffs in the ABA’s lawsuit had similar experiences, and yet none were given an explanation about the basis of the Department’s sudden reversal.

“It’s been really perplexing,” plaintiff Jamie Rudert told the New York Times. “I’ve never gotten a straight answer or an explanation from FedLoan about what happened, and the Department of Education isn’t willing to provide any information.”

After learning they were not considered a qualified public service employer, ABA President Linda A. Klein and Executive Director Jack Rives spent months educating Department officials about the myriad public services provided by the ABA, including programs that provide access to the legal system for those without means, their administration of legal education classes to lawyers and the general public, and establishing model ethics codes for the legal profession.

According to the ABA’s complaint, the Department disqualified the ABA because it could not show that a given public service was the organization’s “primary purpose”. In other words, the Department took the position that because the ABA’s primary purpose is not to provide public interest law services, for example, they did not qualify as a public service organization.

ABA v. U.S. Dept. of Education3 – “Primary Purpose”

Ropes & Gray LLP, a Washington D.C. law firm known for its commitment to public service, represents the ABA pro bono. Lead counsel on the case is partner Chong Park, who understands a thing or two about public service. A few years after graduating from Stanford Law School, Mr. Park accepted his first public service post with the Deputy City Attorney’s office in San Francisco, and spent three years handling large caseloads on a shoestring budget. He later spent five years at the Federal Trade Commission, where he served as co-lead trial counsel on the landmark case, In re Union Oil Company (“Unocal”). Mr. Park now handles high-stakes antitrust matters for Ropes & Gray, but he understands the sacrifice young lawyers make when they accept positions in public service.

“This is not an easy road to take for young lawyers,” said Park. “It’s not a decision to be taken lightly. It requires full-time public service for 10 years, which is a significant commitment before loan forgiveness. And a lot of times the pay isn’t that great.”

Mr. Park and his team of associates drafted the complaint on behalf of four individual plaintiffs and the ABA, which seeks declaratory and injunctive relief on several counts that arise under the Administrative Procedure Act (APA).

The ABA alleges that the Department’s adoption of a “primary purpose” test is arbitrary and capricious under §706(2) of the APA, as the legislation and underlying regulations do not require “primary purpose” as a condition for eligibility. Including such a requirement, the ABA argues, would be inconsistent with both Congressional intent and the Department’s implementing regulations, which establish broad categories of eligibility. The complaint also alleges that Department violated Fifth Amendment due process when it retroactively deprived the ABA and the individual plaintiffs of certain property interests without notice or an opportunity to be heard.

“This is an unexplained and unsupported change of course from the Department,” said Park. “The ‘primary purpose’ requirement doesn’t appear in the regulations or the statute, and they haven’t provided an adequate explanation for their interpretation.”

The Department defended their “primary purpose” rationale in its answer filed last March. The answer asserts that the Department never gave final approval to the borrowers who submitted ECFs and believed they were on track for PSLF, and that FedLoan’s original determinations regarding employers were made “in error.” Because these employers were not qualified public service organizations, the Department argues, none of the payments borrowers made constitute qualifying payments for the purposes of PSLF.

“In its answers, the Department of Education refuses to accept any responsibility for its failures and the failures of its contractor, FedLoan Servicing, in administering the program,” said ABA President Klein. The ABA considers the case to be a top priority, as the outcome could adversely affect their ability to attract new talent and retain current employees. But the outcome could also negatively impact many other nonprofit organizations who, like the ABA, offer myriad public services but do not have IRC §501(c)(3) tax-exempt status.

The case has been assigned to Judge Randolph D. Moss in the U.S. District Court for the District of Columbia, who is set to hear oral argument on cross-motions for summary judgment on October 6. Judge Moss will decide whether private organizations like the ABA need to have a “primary purpose” as a condition of eligibility to provide public service jobs.

“The issue in this case is what constitutes ‘public service,’” said Park. “Individuals must be able to rely on a full and fair shake by the government, and the Department’s actions are jeopardizing the public service mission.”

For some new lawyers, pursuing a career in public service is what called them to law school. But for those leaving law school with six-figure student loan debt and enticing offers from Big Law, the outcome of ABA v. U.S. Dept. of Education could force these well-meaning attorneys to face the reality of making their first business decision.

When asked to provide comment for this article, a spokesman for the Department wrote via email, “The Department has no comment at this time.”

1 20 U.S.C. §1087e(m).
2 IRC §108(f)(1)‑(2).

3 Case No. 1:16-cv-02476.

**Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA.**