3 Borrowers Win Case on Eligibility for Public Service Loan Forgiveness

Three student loan borrowers scored a major victory against the Department of Education on Friday, when a federal judge laid the groundwork for a reversal of the department’s determination that their employers were not eligible for the government’s public service loan forgiveness program.

In doing so, Judge Timothy J. Kelly, of the Federal District Court for the District of Columbia, declared one of the department’s main legal arguments to be “nonsense.”

Borrowers seeking to get their loans forgiven under the public service loan forgiveness program must have the right type of federal loan, make 120 on-time payments, enroll in the correct category of repayment plans and work for an eligible public-service employer.

The legal dispute, which involved four public-interest lawyers who themselves filed suit, was over what kind of employer is eligible.

Because about 25 percent of all federal student-loan borrowers end up working in public service, some cases were bound to emerge in the wake of the 2007 law that created the loan-forgiveness program. Several years after the law passed, the Education Department created employment certification forms that borrowers could use throughout their 120 months of repayment to try to head off any confusion about eligibility.

In the case of the borrowers who filed suit, the department had indicated in a variety of ways (including through letters approving the borrowers’ forms) that the plaintiffs were working for eligible employers. Then, however, the department changed its mind and made its decision retroactive, rendering years of payments ineligible toward the 120-month count.

When that happened, it threw the plaintiffs’ personal finances into chaos. Often, people who qualify for entry into the 120-month loan forgiveness pipeline are in income-based repayment plans that don’t even cover all the interest that accrues each month. As a result, their balances grow over time instead of shrink. Borrowers, though, tend to put their heads down and live with it, knowing that loan forgiveness (which does not come with any income tax liability in this instance) is on the horizon.

In defending itself, the Education Department had argued that a letter stating that an employer was eligible, in response to the submission of an individual’s certification form, “does not reflect a final agency action on the borrower’s qualifications” for loan forgiveness.

In practice, teachers, police officers and other government workers and employees of nonprofit 501(c)3 organizations did not have to worry, since their eligibility was clear in the law. But employees of other types of nonprofit groups were not always certain about the status of their employers.

In this case, the judge began by plainly stating his disagreement with the department’s assertion that the certification response letters to borrowers were not definitive. “The language of the denial letters demonstrates that they marked the department’s final determination,” he wrote, pointing to “definitive” and “unambiguous” language.

The judge also ruled that when it came to the three lawyers who prevailed in this case — Geoffrey Burkhart, Michelle Quintero-Millan and Kate Voigt — the department had changed two of its policies without properly informing borrowers or considering the impact on the borrowers who were relying on its original guidance. One policy determines whether public service is an organization’s “primary purpose,” and the other relates to whether educational services are provided in a “school-like setting.”

“Defendants argue that the denial letters did not have ‘an immediate or significant practical effect’ on the individual plaintiffs because their ‘eligibility for P.S.L.F. had not yet been finally determined,’” the judge wrote. The judge said this was “nonsense,” since the borrowers’ loan balances were spiraling upward and they might have needed to change jobs if their current employment was not eligible for loan forgiveness.

As a result of the ruling, the three borrowers who won the case and all others like them now have grounds to petition the Education Department to have their eligibility reinstated. The department’s press office did not immediately respond to a request for comment.

There was a fourth plaintiff, Jamie Rudert, and he did not get a favorable ruling. His issue involved a different standard: whether his work for paralyzed veterans was at an organization that provides services “outright” and whether that ought to matter. The judge ruled that the “outright standard” was an appropriate reading of the program’s rules and that its use in this instance had not represented any actual policy change.

Chong Park, a lawyer at Ropes & Gray who represented the plaintiffs, said in an interview that he did not agree with the judge’s ruling in the fourth case. He and that client would consider their next steps in the coming days.