U.S. Department of Education Reneges on Loan Forgiveness Promise
It is a borrower’s worst fear. They pursue a public service job, counting on public service loan forgiveness to cancel the remaining debt after ten years of service and sacrifice. Only, they are told in the last year that their service does not qualify for forgiveness. What’s worse, the U.S. Department of Education previously told them that their service was qualifying, but subsequently changed its mind.
To qualify for public service loan forgiveness, a borrower must work full-time in a public service job while making 120 monthly loan payments (10 years) in an income-driven or standard repayment plan in the Federal Direct Loan Program. The public service loan forgiveness program was enacted during the Bush administration as part of the College Cost Reduction and Access Act of 2007.
By backing out of its commitment, the U.S. Department of Education is not being fair to borrowers who made life-changing academic and career decisions based on the promise of future loan forgiveness. They sacrificed lucrative careers to serve the public interest. Now the U.S. Department of Education arbitrarily says “no” after the fact. How can anyone trust the U.S. Department of Education to not change the rules retroactively, leaving them in the lurch?
The U.S. Department of Education claims that the borrower’s service is not qualifying because they work for non-profit membership organizations, like the American Bar Association (ABA) and the American Civil Liberties Union (ACLU), which are tax exempt under section 501(c)(6) of the Internal Revenue Code of 1986 instead of section 501(c)(3).
But, the Higher Education Act of 1965 provides two ways for an attorney to pursue a career in public interest law. The definition of public service job includes anyone who works for a tax exempt 501(c)(3) organization, including an attorney. However, the definition of public service job also includes a specific carve-out for anyone providing public interest law services for a nonprofit organization.
Specifically, the statute at 20 USC 1087e(m)(3)(B) defines the term “public service job” as:
"a full-time job in ... public interest law services (including prosecution or public defense or legal advocacy on behalf of low-income communities at a nonprofit organization), ..., or at an organization that is described in section 501(c)(3) of title 26 and exempt from taxation under section 501(a) of such title."
The reference to “nonprofit organization” in the same paragraph as the reference to “section 501(c)(3)” is a clear indication that Congress did not want to restrict public interest law services to employers who are 501(c)(3) organizations. Otherwise, Congress would have used the same language in restricting the scope of public interest law services. In fact, the reference to “nonprofit organization” appears in only one of the three examples of public interest law services in the statute, so one could even argue that borrowers who provide public interest law services should not be limited to working for just nonprofit organizations.
The choice of words in the statute is intentional. The ABA was involved in the drafting of the legislation and advocacy for its passage because it has a long history of providing and promoting public interest law services.
The regulations at 34 CFR 685.219(b) reflect this distinction between 501(c)(3) organizations and nonprofit organizations.
"Public service organization means: ...
(3) A non-profit organization under section 501(c)(3) of the Internal Revenue Code that—
(i) Is exempt from taxation under section 501(a) of the Internal Revenue Code; and
(ii) Is not an organization engaged in religious activities, unless the qualifying activities are unrelated to religious instruction, worship services, or any form of proselytizing;
(5) A private organization that—
(i) Provides the following public services: ... public interest law services, ...; and
(ii) Is not a business organized for profit, a labor union, a partisan political organization, or an organization engaged in religious activities, unless the qualifying activities are unrelated to religious instruction, worship services, or any form of proselytizing."
There is no direct or indirect exclusion of 501(c)(6) organizations from paragraph (5). There is no requirement that the primary purpose of the employer be the provision of public interest law services, just that the borrower provides those services on a full-time basis. There is no requirement that the public interest law services be funded by a government entity.
Thus, the U.S. Department of Education’s argument is not consistent with the statute or regulations. The U.S. Department of Education is confined to operating within the scope of the statute and regulations and cannot arbitrarily and capriciously change the rules without public notice and an opportunity for public comment. It cannot create new rules that have no basis in the statute.
The U.S. Department of Education also previously issued a Dear Borrower Letter on January 30, 2012, which provided the following guidance to borrowers interested in public service loan forgiveness.
"What kinds of employment qualify? ...
A private non-profit employer that is not a tax-exempt organization under Section 501(c)(3) of the IRC may be a qualifying public service organization if it provides certain specified public services. These services include: ... public interest law services, .... The organization must not be a labor union or a partisan political organization."
Both the statute and regulations, as well as the U.S. Department of Education’s own previous guidance, are clear that borrowers who provide public interest law services while working for nonprofit organizations like the ABA and ACLU are providing a qualifying service.
The U.S. Department of Education has so far failed to recognize that its new requirements are inconsistent with the statute and regulations. In response, the ABA filed a lawsuit against the U.S. Department of Education on Tuesday, December 20, 2016, in the U.S. District Court for the District of Columbia.