New 2019 Senate PSLF Bill Would Expand Program

Sens. Tim Kaine, D-Va., and Kirsten Gillibrand, D-N.Y., proposed the What You Can Do For Your Country Act on Thursday, April 11, 2019. This new Public Service Loan Forgiveness (PSLF) bill would dramatically expand options available under the program. The total group of cosponsors numbered 13 Democratic Senators. The bill will not pass in its current form unless a Democrat wins the White House in 2020 and the Democrats keep the House and retake the Senate. That said, it shows the position of Senate Democrats towards the PSLF program. This reality makes the bill highly relevant going into the uncertainty of Higher Education Act re-authorization and the 2020 presidential election.

Main goals of the What You Can Do for Your Country Act

Here’s what the new PSLF bill would do:

• Allow payments made in “paid ahead status” to count towards PSLF. This would be very helpful as borrowers trying to do the right thing frequently make mistakes and pay more than they have to, only to be punished with fewer PSLF-qualifying payments.
• Gives 50% forgiveness at five years. This would be a massive change. Right now, you have to work for 10 years to get all of your debt discharged. This bill would wipe away half of your debt after five years of service.
• Allow all federal loans to qualify for PSLF. This part is a bit unclear because there are at least 17 different kinds of federal loans that could be consolidated and made eligible for PSLF. The bill does mention component parts of a Direct Consolidation Loan qualifying. But that could be maddeningly complex. The authors clearly want Federal Family Education Loans (FFEL) to be PSLF-qualifying. However, how would they treat loans like Health Professions Student Loans that are run through the Department of Health and Human Services? The Department of Education does not have purview of all loans that could be PSLF-qualifying, which would be a big problem if this bill passes. To get PSLF on a non-Direct Loan, you would have to first consolidate your loans into Direct status. But the payments made before would count toward forgiveness. This would be an enormously helpful change for borrowers who took out loans before 2010.
• Requires improvement of online PSLF certification process and better upfront information for borrowers. This seems to be a shot across the bow at the Department of Education and FedLoan Servicing, which gets PSLF certifications wrong more than they get them right. It would establish a database of all employers the Department of Education deemed eligible for PSLF. Borrowers could then search to see if their employer would be eligible. That’s a good idea, but it would be very difficult to put in place.
• Would allow for self-certification for employers refusing to cooperate. I’ve had several readers reach out to me in distress because their HR reps decided they wouldn’t sign their certification forms for PSLF. If that happened (or any other extenuating circumstance, like an employer going out of existence), the borrower could self-certify their employment history. This is helpful but also could be prone to abuse by dishonest borrowers.
• Broader definition of nonprofit employers and employment status. There would be no question that the American Bar Association (ABA) and other institutions would qualify, since this PSLF bill would add a section on non-501(c)(3) nonprofit employers that would qualify for PSLF. Right now, there’s confusion around what counts as full time for PSLF. The What You Can Do For Your Country Act would specify that means working at one or more qualifying organizations for at least 30 hours per week. The employer’s definition of full time becomes irrelevant.
• All payment plans would qualify. You would no longer need to certify your income because any of the federal repayment programs would count.

Why the new PSLF bill by Kaine and Gillibrand is important

We’ve seen what House Democrats want to do with student loans under the Aim Higher Act. They would expand qualifying employers to include hospital systems like Kaiser Permanente, which employs physicians through for-profit groups.

The Senate Democrats have a similar viewpoint. They want to expand access to PSLF by loosening up definitions and make it easier for more folks to qualify. The PSLF program would result in more forgiveness if the Department of Education did a better job informing borrowers of their options. If they did too good a job, perhaps Student Loan Planner wouldn’t exist! Unfortunately for borrowers, Congress will likely continue making student loans clear as mud.

This bill would need to appropriate billions of dollars for improved student loan servicing and better reps at the Department of Education call centers to fix the problem.

Labor market distortions that would occur under the new PSLF bill in 2019

As I was thinking through the implications of a 50% forgiveness program for five years of qualifying service, my mind immediately went to medicine. Imagine if an OB-GYN resident Christine went into private practice after her four years of residency training. She had to refinance her $400,000 of student debt since her attending physician salary of $250,000 would result in little to no loan forgiveness under a 20-year Pay As You Earn (PAYE) plan.

Now compare her to her friend Marjorie, who is a urology resident. Marjorie finishes her program in five years instead of four, since urology programs are five years long. Because she served for five years at a PSLF-eligible employer as a resident at a nonprofit hospital, she would have half of her $400,000 loans forgiven. Now she only needs to refinance $200,000 instead of $400,000 like her OB-GYN friend Christine.

Of course, urologists make more money than OB-GYNs on average. So Marjorie might earn $350,000 while getting $200,000 of tax-free loan forgiveness. Meanwhile Christine earns $250,000 and gets $0 of loan forgiveness.

Sadly, this would discourage private practice primary care providers even more, as many primary care residencies are only three years long. Hence, long fellowship programs would be highly subsidized through loan forgiveness, which could now extend to future private practice specialists with training periods five years and longer.

That might be a good thing — we need more brain surgeons. That said, we also need more primary care providers. If something like this bill did become law, hopefully Congress will think through this provision of the bill a lot more carefully because it could cause a lot of unintended consequences and labor market distortions.

New bill would eliminate income-based plans as a PSLF requirement

Under the Senate Democrats’ PSLF bill, any federal repayment plan would count towards PSLF. Again, tons of opportunities for gaming the system here. For example, if I had a client who was an attending surgeon earning $400,000 with $200,000 of student loans, I’d hope they would have consolidated while in residency. The reason is that you can use a 30-year graduated plan for Direct Consolidation Loans. Imagine being able to pay $300 a month while in residency and then switch to paying a fixed payment of less than $1,000 a month as an attending without having to certify your income anymore.

This would also help low-income borrowers who ‘only’ have $20,000 or $30,000 of debt. Right now, income-driven payments might be the same as Standard 10-year payments on a low balance. Most teachers, firefighters and other public servants tend to have balances below $50,000. That means PSLF is often not a viable option for them.

They could consolidate as well and get their payments on a graduated or extended repayment plan. For example, a teacher with $20,000 of loans might be able to pay $125 a month and get roughly 40% to 50% of her debt forgiven. This instead of getting almost nothing forgiven today because her debt-to-income ratio is well below 1.

If you’re a public servant, be careful about refinancing until after the 2020 election

What this new PSLF bill shows me is that public servants need to be careful about taking an irreversible path like refinancing until after the 2020 election. Imagine being a Kaiser doctor in California who refinances with First Republic Bank only to find out two years later her loans could’ve been completely forgiven tax-free.

Pretend you have a bunch of FFEL loans and want to pay those off in a lump sum. In this political climate, if you owe six figures of FFEL debt, you might consider waiting a couple of years before paying off the loans just to see if Congress might take action that would result in forgiveness of your debt.

What’s interesting to me is the requirement to consolidate first into a Direct loan before getting forgiveness. That’s because of lot of FFEL debt pays interest to banks and can’t be forgiven directly by the government. That’s why the bill’s authors set up this “consolidate first” mechanism to get past payments to count, I think.

It’s almost certain the government would not pay off a private lender you refinanced with. So, tread with caution if you plan to refinance and you’re working at a 501(c)(3), government or other nonprofit employer. And since you’re a citizen, be sure to contact your elected representatives in Washington to make sure they hear your opinion. This bill’s cosponsors included most of the Democratic Senators running for president in 2020. This bill shows student debt will be a major election issue.