Could the Benefits of the Public Service Loan Forgiveness Program Be Retroactively Curtailed?

Abstract

There is a sharp tension between the expectations that hundreds of thousands to millions of persons have or will have regarding their right to have their federal student loan debts forgiven under the Public Service Loan Forgiveness (“PSLF”) program and the legitimate public concerns regarding the large costs and regressive incidence of the PSLF program’s benefits. In 2017, the Trump Administration proposed abolishing the PSLF program for future federal Direct Loans, but this proposal was not adopted. A similar proposal was made in 2019 as part of the Administration’s fiscal 2020 budget proposal, with little chance of adoption. But given the large costs of the program, which I estimate will eventually rise to $12 billion per year or more as an estimated 200,000 people per year who currently have outstanding federal Direct Loans will eventually seek debt forgiveness, and given the regressively skewed incidence of its benefits in favor of relatively affluent mid-career doctors and lawyers, I think that there will be further legislative curtailment efforts made in 2020 or later by the Trump Administration or by members of Congress, this time perhaps a more aggressive proposal for retroactive elimination of the program, or at least a push for a tax law amendment to include this forgiven debt as taxable income as is now done for debts forgiven under the other federal income-based loan forgiveness plans.

This Article considers several contractual arguments as well as Constitutional arguments that opponents of such proposed statutes could offer. The contractual arguments against retroactive elimination of the PSLF program include arguments based on: the express loan terms; the implied contractual covenant of good faith and fair dealing; promissory estoppel; and unconscionability. Some of these arguments have considerable merit, at least for those Direct Loan borrowers who can make certain fact-specific showings. Opponents of such legislation might also be able to invoke constitutional substantive due process concerns under the authority of the 1986 Supreme Court case of Bowen v. POSSE. They also could offer a plausible Takings Clause argument against a tax law change if the courts choose to regard the PSLF program’s tax exemption for forgiven debt as a contractual commitment rather than as only a revocable privilege.

This Article does not take a strong normative position on these potential legal issues. It does, however, suggest a compromise that might fairly balance the interests at issue: continue the PSLF program in its current form, but repeal the tax exemption for forgiven debt so as to recapture for the Treasury in a modestly progressive manner approximately one-quarter to one-third of the benefits of the debt forgiveness. Such a compromise should probably also include a provision for spreading the payment of those taxes over at least several years after debt forgiveness to avoid unduly burdening these persons with a sudden, large tax liability that is not accompanied by the receipt of funds to pay those taxes.