When Education Dept. Said Your Student Loan Would Be Forgiven, It May Not Have Meant It

One way to erase federal student loan debt is to work for the government or at a non-profit for 10 years. However, thousands of people who received notices from the Department of Education that their federal student loans were going to be forgiven through this program may still be on the hook for this debt, as the Department now says these notices are not binding.

The revelation was made in a filing [PDF] by the Dept. of Education last week in response to a lawsuit that accused the agency of failing to keep its promise to forgive the education debts of public servants after 10 years.

For those unfamiliar, in 2007 the government began offering a public service loan-forgiveness program that will forgive certain federal student loans for borrowers who work for government organizations and non-profit groups for 10 years and make 120 on-time monthly payments on their loans.

While it’s fairly simple to determine what a government agency is, finding a qualified non-profit is more difficult. For that reason, the Dept. allowed prospective program participants to fill out an Employment Certification for Public Service Loan Forgiveness form.

The forms, which the Department encourages participants to fill out each year, are reviewed by FedLoan Servicing.

But at some point in the last several years, FedLoan began telling people who had previously been qualified for the forgiveness program that they were no longer eligible to have their loans forgiven. What’s more, the decision was retroactive, meaning none of the time they’d spent working toward the forgiveness goal would be counted.

After receiving such letters, four previously qualified participants and the American Bar Association sued the Department of Education to find out why the changes were being made.

The lawsuit [PDF] alleges that the Department acted “arbitrarily and capriciously” when it changed its interpretation eligibility requirements without explanation.

“When an agency changes its position on its interpretation of a rule, it must – at a minimum – acknowledge that it is changing its position and provide an explanation for the new policy,” the lawsuit states.

The plaintiffs say this didn’t happen with regard to the Dept. of Education’s decisions. Instead, they received notices from FedLoan that they no longer qualified for forgiveness, and those notices didn’t provide an actual explanation.

“This new interpretation seriously harms borrowers who have made career, financial, and life choices – many of them irrevocable – in reliance on the availability of loan forgiveness and the Department’s prior certifications of eligibility,” the lawsuit states.

The Dept. of Education replied to the lawsuit last week, noting in a filing that the FedLoan approval letter was never a reflection of a “final agency action on the borrower’s qualifications” for the program.

The agency may be trying to distance itself from these letters, but the Department of Education name and logo are used on the notices:

In the filing, the Dept. denies that its acts were arbitrary or that the plaintiffs are required to any relief as a result of being deemed ineligible for the forgiveness program.

The New York Times reports that if this is indeed the case, that notification of qualification by FedLoan Servicing isn’t accurate or that it can change, thousands of borrowers could find out in October that their 10 years of public service were for naught when it comes to their federal student loans.

October marks the official tenth anniversary of the program’s creation and the first batch of borrowers who should receive forgiveness.

In all, the Times reports, more than 550,000 borrowers have signed up for the program, but, as the lawsuit claims, their eligibility isn’t a foregone conclusion.