The government expanded access to student loan forgiveness—just read the fine print

Christina Dragonetti knows the application for student loan forgiveness she submitted on Wednesday amounts to a sort of Hail Mary.

“I fully expect for it to get rejected,” the 39-year-old said. Nonetheless, Dragonetti rushed to apply for Public Service Loan Forgiveness, a program that allows certain public servants to have their federal student loans forgiven after 120 monthly payments. She wanted a chance at qualifying for a temporary expansion of the initiative, known as TEPSLF.

On Wednesday, the Department made public the application process for TEPSLF — a $350 million fund set aside by Congress to help mitigate one of the challenges borrowers have faced in qualifying for student loan forgiveness: they used the wrong type of repayment program.

One of the requirements for accessing the funds, made available on a first-come, first-serve basis: Borrowers first need to go through the traditional PSLF application process and get rejected.

That’s what motivated Dragonetti, who is the membership and marketing manager at the California Association of Nonprofits in San Francisco. She said she spent about four years paying down her debt through a repayment program that doesn’t qualify for PSLF.

“If you haven’t actually applied for forgiveness and you haven’t gotten that rejection letter yet, then you can’t apply for this new chunk of money,” said Dragonetti.

The requirement “could be a little bit of a hurdle,” for some borrowers given that it’s a bit “counter intuitive”, said Isaac Bowers, the director of law school engagement and advocacy at Equal Justice Works, an organization that promotes public interest law.

The Department’s announcement could fuel a rush in applications from borrowers, like herself, hoping to get rejected so they can then apply for the temporary expansion of PSLF, Dragonetti said. That is, if they can figure it out.

Public Service Loan Forgiveness is confusing for borrowers

The expansion, which was authorized by Congress earlier this year, is the latest development in the controversy over PSLF. Signed into law by George W. Bush in 2007, the program’s requirements can be confusing for borrowers. In many cases, that’s only exacerbated by student loan companies and the government, who don’t always make the requirements clear to borrower, or even often provide them with wrong information, advocates say.

Compounding these challenges, Republican lawmakers have proposed eliminating PSLF, and administrations of both parties have proposed capping the forgiveness available under the program. “While this is a good temporary fix to ease some implementation problems,” Bowers said, “Nobody should mistake the existence of this PSLF fix to mean that PSLF itself is good to go in perpetuity.”

The temporary expansion was meant to help borrowers plagued by one of the major sources of confusion: repayment plans. To qualify for PSLF, all 120 payments need to be made using one of the government’s income-driven repayment programs. But through the fix-it fund, officials will consider forgiving the federal debt of qualified public servants who used certain other repayment programs.

Natalia Abrams, the executive director of Student Debt Crisis, said she’s encouraged to see lawmakers take a step towards helping public servants banking their financial future on PSLF. But she’s disappointed that it only addresses one source of confusion for borrowers.

Qualifying for loan forgiveness can be tricky

In addition to being in the right repayment program, borrowers have to be working in a qualified public service job and have the right type of federal student loan to be eligible for the program.

The last requirement can be particularly tricky, Abrams noted. When PSLF was first established, the bulk of federal student loan borrowers had Federal Family Education Loans, which don’t qualify for PSLF. In order for a borrower to be eligible for forgiveness, they need to have a federal Direct Loan.

Creating a program to help borrowers who didn’t realize they had the wrong type of loan “would have been a real fix,” Abrams said. “A majority of our calls are people that think that they’re going to get forgiveness in six months or a year and we have to break it to them that they’ve had wrong loan the whole time,” she said.

In many cases, these borrowers haven’t received any indication from their student loan company that they need to consolidate their loans into a Direct Loan to qualify for the program.

Even for borrowers who have repayment plan issues, there’s a risk that the funds will run out before they’re eligible to claim them said Betsy Mayotte, the president of the Institute for Student Loan Advisers. The speed with which the fund is depleted depends a lot on the accounting strategy the Department uses to calculate how much of a borrower’s forgiveness is actually taken from the fund, she said.

The list of requirements for the fund may also be difficult for borrowers to meet, said Adam Minsky, a Boston-based student loan attorney. Borrowers, for instance, will need to make at least 10 years of payments before even applying for the fund.The PSLF program “already has so many differing requirements and possible traps for borrowers and the expansion just adds more layers to that,” Minsky said.

The wrong type of loan for forgiveness

Dragonetti’s story is just one example of some of the challenges borrowers can face accessing the program. When she first started paying down her debt in 2007, she had the wrong type of loan and consolidated into a Direct Loan in 2009.

Although she was now in a qualifying loan, Dragonetti wasn’t using an eligible repayment plan because she went with the lowest monthly payment available. Finally by 2012, she had the right type of loan and was using an eligible repayment program.

Dragonetti is hoping that her application will be rejected because she was in the wrong type of repayment program — making her eligible for the fix-it fund. But she’s aware that she hasn’t made 120 payments towards the right type of loan. That means she may not be eligible for the fix-it fund for a couple more years and by that time the money might be gone.

The loan payments she’s making in the meantime don’t completely cover the interest on her debt. So she’s counting on her loans ultimately being wiped away even if it takes a few more years than she’d like.

“If Public Service Loan Forgiveness doesn’t come through for me at all, I’m going to end up owing more than I borrowed,” she said.