The blog of the Urban Institute
November 12, 2021

Opening the Floodgates in the Public Service Loan Forgiveness Program

November 12, 2021

In response to the COVID-19 pandemic, the Biden administration recently announced that it is waiving a number of rules in the Public Service Loan Forgiveness (PSLF) program that have frustrated applicants. Government and nonprofit employees whose loan forgiveness applications have been denied in recent years because of what the administration describes as “complicated eligibility rules, servicing errors or other technicalities” can now have their past payments counted toward the required 120 total payments, or 10 years’ worth of payments, to qualify for loan forgiveness. 

But the waiver goes much further than correcting paperwork errors. It forgives significantly more debt than the program Congress originally enacted and expands eligibility to new classes of borrowers who have higher incomes or low debt burdens.

PSLF’s income test

Before the waiver, borrowers in government or nonprofit jobs were eligible for PSLF after making 10 years’ worth of payments under an income-driven repayment (IDR) plan. IDR allows borrowers to pay a share of their income toward their loans rather than a flat monthly payment based on how much they borrowed. For borrowers in higher-paying jobs or those whose debts are affordable relative to their income, IDR requires that they make higher monthly payments compared with other repayment options, such as those that require fixed payments over extended terms as long as 30 years.

Congress made long-term fixed payment plans ineligible for PSLF because they would allow high-income borrowers and those with affordable debts to have loans forgiven under PSLF. Requiring enrollment in IDR therefore established a link between a borrower’s income and how much debt they would have to repay and how much they would have forgiven. 

The Biden administration is removing that link by waiving the IDR requirement retroactively for all payments made from September 2007 through October 2022. This means borrowers who were not using IDR but were working for an eligible employer (any government or nonprofit) will have their payments counted toward the 10 years of payments to qualify for PSLF.  

Waiving the income test

Removing the IDR requirement radically changes the number and type of borrower that qualifies and how much debt—both individually and collectively—would be forgiven.

Consider a borrower working in an eligible job who earns $80,000 with $30,000 in debt (4.5 percent interest rate). This borrower would not be eligible for IDR—and therefore PSLF—because his debt is already considered affordable relative to his income.

But the borrower is eligible to use a 20-year, fixed payment plan, which is available on loans with larger balances, in which case his monthly payment would be $190. Normally, the borrower would not qualify for PSLF because he is not using IDR, but under the Biden administration’s waiver, he suddenly qualifies because any past payment in any plan counts toward the 120 required payments.

On the 20-year plan, this borrower is guaranteed to have a balance left after 10 years, and he can now have that balance (about $18,000) forgiven under the waiver. Congress sought to avoid exactly such an outcome when it required borrowers to repay through IDR to qualify for PSLF.

Now consider a doctor who works at a nonprofit hospital and earns $200,000 a year—the national average for physicians—and has $175,000 in debt—the median (PDF) for recent graduates—with a 6 percent interest rate. If she made payments under the most generous IDR plan for 10 years, her monthly payments would start at about $1,500 and would likely increase to about $1,900 as her income grows. That would largely pay off her debt within 10 years, leaving her with about $36,000 forgiven under PSLF. 

But if she opted instead to use a 30-year, fixed payment plan available in the federal loan program, her monthly payments would be about $500 to $900 lower than under IDR. By design, she does not qualify for PSLF if she uses the fixed payment plan because her payments are lower than what IDR says is affordable. As a result, more of her debt is outstanding after 10 years, $146,000 in total.  

Yet, under the Biden administration’s waiver, past payments in long-term, fixed payment plans count toward PSLF, and the borrower in this example would have $146,000 forgiven, not the $36,000 Congress originally allowed before the waiver. 

Where the waiver makes sense

Borrowers for whom a long-term fixed payment plan doesn’t result in lower payments and more forgiveness are those with low incomes or those with much higher debt-to-income ratios than in the examples outlined here. If the doctor and teacher each had twice as much debt ($350,000 and $100,000, respectively), there is no advantage to the fixed payment plan; payments are substantially lower in IDR.  

Of course, borrowers working in PSLF-eligible jobs who have very low incomes or very high debts relative to their incomes should have initially opted for the IDR plan because it offers loan forgiveness and the lowest payments.

That’s where the Biden administration’s waiver makes sense. It provides loan forgiveness to borrowers who should have been in IDR all along. IDR was the optimal choice, but because of a misunderstanding, paperwork error, or a negligent loan servicing company, they ended up on a fixed payment plan, making them ineligible for PSLF. 

But in attempting to make these borrowers whole, the administration is providing other borrowers with more loan forgiveness than the program Congress originally enacted. And it will provide loan forgiveness to borrowers who never would have been eligible for PSLF in the first place, particularly those with high incomes. 

Unfortunately, there aren’t sufficient data to estimate how large those effects might be. But we know that 2.1 million borrowers (PDF) are currently repaying nearly $100 billion on longer, fixed payment plans and about 8.3 million are enrolled in IDR plans. 

As an alternative, the Biden administration could have chosen to develop a process to provide the waiver only to borrowers who were denied benefits because of technicalities and servicer error and then forgive the amount of debt they would have received under the program as legislated, based on their past incomes. But such a process likely would have added to, rather than decreased, the paperwork burden. 

Though some lawmakers want to make the waiver permanent (PDF), the windfall benefits the waiver will provide can remind policymakers that the IDR requirement in PSLF serves an important purpose. It establishes a measure of fairness by linking the amount of forgiven debt to a borrower’s ability to repay. Without it, any high-income borrower in a government or nonprofit job can have most of their debt forgiven, and other borrowers in these eligible jobs who earn enough to afford their loans will have them forgiven anyway. 

Policymakers can help borrowers working toward PSLF get informed about and enrolled in IDR, otherwise, they risk another round of confusion, costly waivers, and windfall benefits.


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Boston, MA - May 24: A graduate walks during the Boston College 144th commencement exercises in Alumni Stadium in Chestnut Hill, Boston, MA on May 24, 2021. (Photo by Pat Greenhouse/The Boston Globe via Getty Images)

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