Will the Public Service Loan Forgiveness Program Ever Forgive Any Loans?
87 Pages Posted: 1 Jun 2017 Last revised: 8 Aug 2017
Date Written: July 29, 2017
There is a sharp tension between the expectations that hundreds of thousands to millions of persons have regarding their right to eventually have their student loan debts forgiven under the Public Service Loan Forgiveness program, starting this fall, and the legitimate public concerns regarding the large future costs and regressive incidence of the PSLF program’s benefits. The Trump Administration has recently proposed prospectively abolishing the PSLF program for future Direct Loans. Whether or not this proposal is adopted, given the large costs of the program (which I estimate will eventually rise to $12 billion/year or more as an estimated 200,000 people/year or more will eventually seek debt forgiveness), and given the skewed incidence of its benefits in favor of mid-career doctors and lawyers, I think that there will eventually be a more aggressive push by the Administration or members of Congress for retroactive elimination of the program, or at least for a retroactive tax law amendment to include this forgiven debt as taxable income under IRS Code Section 108 as is now done for debts forgiven under the other income-based loan forgiveness plans.
As a matter of positive law this article considers several contractual arguments as well as a couple of Constitutional arguments that opponents of such retroactive statutes could offer. The contractual arguments include an express loan terms argument, an implied covenant of good faith and fair dealing-based argument, a promissory estoppel argument, and an unconscionability argument. Some of these arguments against retroactive PSLF program repeal have considerable merit, at least for some Direct Loan borrowers who can make certain fact-specific showings. The Constitutional arguments include the substantive due process issue that would presented by a tax law change that would have retroactive impacts extending back a decade or more. Opponents of such tax legislation might be able to get some traction on the substantive due process issue under Bowen v. POSSE (1986). They also can offer a plausible Takings Clause argument against a tax law change if the courts take the (unlikely) step of regarding the PSLF program’s tax exemption for forgiven debt as a contractual commitment, rather than as only a revocable privilege.
Apart from this legal analysis the article does not take a strong normative position on these issues. I do, however, suggest that as a matter of policy a compromise that would arguably fairly balance the interests at issue here may be to continue the PSLF program, but also to retroactively repeal the tax exemption for forgiven debt so as to recapture approximately one-quarter to one-third of the benefits of debt forgiveness, and do so in a modestly progressive manner. Such a compromise should probably also include some provision for spreading the payment of those taxes over at least several years in order to avoid unduly burdening these persons with a “tax bomb” effect.
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