Excellent post from my internet friend Dr. Sotirios Keros over at Doctored Money (a great non-profit non-conflicted site on physician finance and student loans), “Your Federal Student Loan Interest Rate May Be Lower Than You Think”:

Federal students loans are unlike other types of debt in that the interest is not capitalized except in certain circumstances. This means that your unpaid interest is not costing you anything. You still owe it, of course, but it represents “interest-free” debt. For example, consider an initial balance of $200,000 at 5%, which now has accumulated unpaid interest of $30,000. Although you owe a total of $230,000, interest only accumulates at $10,000/year. That’s an effective rate of 4.3% (e.g. $10,000/$230,000).

Seriously, check out the post.

Misunderstanding how federal student loan interest works is something I see wrong all the time, especially on the rare occasions I log into any of the physician finance-type Facebook groups. Accrued interest doesn’t hurt you in the short term unless it capitalizes. For example, rushing to make a token interest-only payment does nothing to change the natural history of your loans. That money can be leveraged—for example even just earning trivial interest in an online savings account—before being deployed more effectively.

The common advice from sites that make lots of money from student loan refinancing is that all graduating residents not doing PSLF should refinance. This seems logical because the private company sticker rates are nearly always less than the federal rates. But that’s not necessarily functionally true, because a resident whose loans spent years negatively amortizing likely has a big chunk of uncapitalized interest that’s doing nothing while in the federal program but will capitalize and earn its own interest after refinancing.

It may still be the right choice, but except in certain situations, you can’t just compare rates apples to apples and know you’re saving money.

You have to compare the effective rates!

When the Department of Education started reversing FedLoan’s employment certification form (ECF) decisions about qualifying employment, people were rightfully troubled. The American Bar Association (and four individuals) sued.

The case is over, and three out of the four won. That’s nice, but the fourth would have made all the difference.

The memorandum opinion from Justice Timothy J. Kelly filed on February 22 is helpful in understanding why. In summary, Kelly calls out the Department of Education for being both terrible and unconvincing:

The Court concludes that Defendants acted arbitrarily and capriciously when the Department changed its interpretation of the PSLF regulation in two ways without displaying awareness of its changed position, providing a reasoned explanation for that decision, and taking into account the serious reliance interests affected.

The Suit

PSLF-qualifying employment is straightforward in cases of government or 501(c)(3) work. The lawsuit, which concerns shifting definitions of non-501(c)(3) nonprofit eligibility, hinges on this part of the PSLF law (emphasis mine):

[A] borrower’s eligibility for the PSLF Program is not determined by her job responsibilities, but rather by whether her employer qualifies as a “public service organization.” Under the regulation, “public service organization” includes any government organization, not-for-profit organization classified under Section 501(c)(3) of the Internal Revenue Code, or not-for-profit private organization that is not classified under Section 501(c)(3) so long as it “provides [qualifying] public services” and does not engage in certain disqualifying activities. […] The qualifying “public services” include, among many others, “public interest law services,” “public education,” and “public service for individuals with disabilities and the elderly.”

The lawsuit alleged that the DoE changed the roles by adopting three new standards: the “Primary Purpose” standard, the “School-like Setting” standard, and the “Outright Provision of Services” standard.

These were essentially changed to limit the number of qualifying non501(c)(3) organizations by saying that an organization needs to not just supply public interest law services but to have that be its primary purpose; that an organization cannot just provide public education but most do so in a school-like setting; that it must provide “public service for individuals with disabilities and the elderly” directly and not just facilitate the provision by others.

The court agreed that the “primary purpose” and “school-like setting” rules were changed after the fact illegally. The court didn’t agree about the “outright provision” standard.

The American Bar Association (ABA) was the lead plaintiff. It initially qualified as a PSLF-employer because it provides public interest law services. Later on, this decision was reversed because the Department of Education decided that providing public interest law services was not its primary purpose. As we’ll see, the Department of Education changed the rules and pretended it didn’t. Not Kosher.

In the claim that lost, The Vietnam Veterans of American (VVA) was the employer. Although it “provides advocacy and support services to Vietnam veterans,” it does so by helping Veterans apply for and receive support services–but does not provide them directly. For totally obvious reasons, helping veterans in this capacity is meritless and should earn no governmental support.

As the law says, it’s not the work that matters, it’s the employer. Unfortunately, the direct provision requirement was felt by the court to be a valid reading of the initial law, and there was no written evidence/proof that the Department’s interpretation of this component changed over time.

What does this all mean, and how did we get here?

In 2016, the Department of Education basically said that FedLoan’s employer certification form (ECF) approvals don’t really count and could be reversed at any time including when applying for PSLF itself after 10 years. The Court shot them down pretty robustly: The DoE can’t just change the interpretation of the law in order to maliciously reduce the number of people who qualify for forgiveness. This is extremely reassuring. If your job should qualify and you get the go-ahead, a reversal is unlikely to hold up in court. More or less.

There’s a big exception, which has to do with the failed fourth plaintiff.

The court pulled back from holding the DoE accountable to uphold FedLoans’ “mistakes” by reaffirming that the details really matter. The DoE can reverse FedLoan’s ECF approvals if it can justify the mistake as a “contractor error,” even if fixing that “mistake” would be devastating to the borrower.

Unlike the other cases where internal Department and FedLoan communications made clear that the Department was changing the rules after the fact, there is no clear evidence that the “outright provision” standard had changed over time. Remember: it doesn’t really matter what you do, it matters who you did them for.

The bottom line: if you have some approved ECFs for a non-501(c)(3) organization that does something similar (i.e. something good but not direct), your PSLF-eligibility is not safe.

The Victors

The DoE basically tried to get off on a technicality, arguing that its capricious denial letters were not “final agency actions” (which is required for judgment in cases like this). They argued that nothing is “final” until the formal PSLF application is reviewed:

The Department does not make a final determination on eligibility
for PSLF until the borrower files her application . . . after making 120 qualifying payments.

The Court didn’t bite and pointed out that, more or less, it would take a special kind of idiot to be denied but keep working in a job that would doom them financially and then apply anyway years later in the vain hope that the government would throw them a bone.

[T]he mere possibility that an agency might reconsider in light of ‘informal discussion’ and invited contentions of inaccuracy does not suffice to make an otherwise final agency action nonfinal.

[..]

[The] Court concludes that the Department changed the standards by which it assessed whether non-501(c)(3) not-for-profit organizations qualified as public service organizations under the PSLF Program. Moreover, these changes were arbitrary and capricious because, in adopting the new standards, the Department failed to display awareness of its changed position, provide a reasoned analysis for that decision, and take into account the serious reliance interests affected.

[..]

Defendants argue that the denial letters did not have “an immediate or significant practical effect” on the Individual Plaintiffs because their “eligibility for PSLF had not yet been finally determined.” […] This is nonsense. In the face of growing debt burdens, the Individual Plaintiffs structured their careers and long-term financial plans around their eligibility for the PSLF Program. The Department’s determinations quite obviously had an “immediate” and “significant” impact on their ability to plan their careers and finances, despite the fact that they have not had (and may never have) the opportunity to submit an application for loan forgiveness.

Hear, hear!

Organizational Losers

The Court wasn’t interested in forcing the DoE to entertain requests to change its mind about qualifying organization-status:

As an employer, the ABA has no such rights or obligations, since it has no possible claim to loan forgiveness. And indeed, there is no procedure set out in [the PSLF law] or the Department’s guidance by which an employer can seek to validate whether it meets the definition of a “public service organization” in a manner similar to the process available for borrowers to track the number of eligible payments they have completed.

The flaw in appellants’ [finality] argument is that the ‘consequences’ to which they allude are practical, not legal.

So while the court can see how important it is for a non-profit to qualify for PSLF in order to attract and retain talent, this is not a legal consequence. Because, unless we’re talking about Citizens United and its toxic effect on campaign finance, organizations are not people, have no property rights, and thus no claim to PSLF.

There is no formal or legal appeals process for an organization to win back its status or appeal a rejection.

The non-501(c)(3) takeaway

Where you work can make all the difference. Again, government or 501(c)(3) work is a non-issue.

For those working at non-501(c)(3) organizations, when you worked matters, a lot. Because the rules changed.

If you started working in 2016 or later (or 2014 for public educational services), you probably were always under the new tighter definition. In this case, hopefully your job actually meets the requirements above. If it didn’t, you were probably denied already (“appropriately”). If you have an approved ECF, and your job doesn’t line up, this may have been a FedLoan contractor error and could be reversed. If you worked earlier and were rejected, like the plaintiffs in the case, then the DoE may have changed the rules on you and cheated.

Otherwise, look at your job and see if it passes the sniff test. Don’t ask yourself if you’re doing a public good–that’ how people got in trouble in the first place. It doesn’t matter what you do. Ask yourself if your job checks the right boxes.

Hasan Minhaj, discussing student loans on his Netflix show Patriot Act.

You can’t call loan servicers financial terrorists. Terrorists take responsibility for their actions.

Full clip:

Minhaj spends a lot of time slamming Navient, which makes sense because Navient is terrible.

It’s a solid episode that also spends a nice amount of time lambasting Betsy DeVos (please see her 60 Minutes interview with Colbert commentary), the completely unqualified Trump appointee for Secretary of Education, whose main claim to fame in her current role is being wrong in everything she does and generally being an embarrassment. She was apparently picked because she is rich; she has no qualms practicing petty cronyism; and she believes in charter schools, defunding struggling public schools, and especially loves voucher programs that allow people to siphon money out of cash-strapped school districts to help them pay for private school.

But perhaps the best part is at the 17-minute mark, when Patriot Act inadvertently demonstrates the often-confusing and needless complexity of federal student loans by including a news clip that incorrectly describes the requirements for PSLF!

The expository clip states that both Direct and FFEL loans qualify for PSLF. FFEL loans don’t! The FFEL loan problem is one of the most common disqualifying reasons unsavvy borrowers get nailed for when applying for PSLF, and it has not and likely will never be addressed by Congress.

The clip also says you need to work at any non-profit organization. But that’s also wrong! In addition to government work, PSLF is specifically for 501(c)3 organizations or other orgs that provide certain qualifying services approved on a case by case basis.

Even a 27-minute segment on a well-produced show has a hard time getting it right.

I somehow missed this back in 2016, but it’s still an excellent discussion of financial advisors and management fees:

So good!

Qualifying employment is a critical component to the PSLF formula:

Eligible Loans
+ Qualifying Payments
+ Qualifying Work
x 120 months (10 years)
= Public Service Loan Forgiveness

But most folks haven’t considered a nuance in the PSLF law that currently applies to very few people but could easily apply to more. Part-time work counts, so long as you have enough of it to make a “full-time” equivalent.

From the official PSLF FAQ:

I’m working for more than one employer during the same period of time, but I’m not employed by either on a full-time basis. Will my combined employment be considered full-time for PSLF?

Yes, as long as the combined number of hours you work for each employer equals at least 30 hours per week. Each employer must be a qualifying employer for the employment to be included in determining whether you are employed on a full-time basis. For example, if you worked for one qualifying employer for 10 hours per week and you concurrently worked for a second qualifying employer for 20 hours per week, this would meet the 30 hours per week requirement.

That combined 30-hour threshold is a key facet. Because normally (emphasis mine):

For PSLF, you are generally considered to work full-time if you meet your employer’s definition of full-time or work at least 30 hours per week, whichever is greater.

If you are employed in more than one qualifying part-time job at the same time, you may meet the full-time employment requirement if you work a combined average of at least 30 hours per week with your employers.

There are plenty of folks working 30 hours or more per week but who are still considered “part-time” by their employer. An 8 or 9-hour workday with a 5-day work week is 40 or 45 hours respectively. A part-time employee working 80% at four days a week might work a 32 or 36 hour week: already enough hours to theoretically qualify for PSLF.

This suggests that a lot of people working part-time for a nonprofit employer may still qualify for PSLF if they can find a small amount of additional part-time work to get themselves over the 30 hours per week hump.

Put another way, not everyone who needs to or wants to work part-time needs to abandon PSLF.

And, not everyone needs to work “full-time” in order to achieve loan forgiveness.

Token efforts

To double down, if a person’s main “part-time” work is already 30 hours per week, then literally any paid employed qualifying position should automatically make the person qualified because they already have the raw hours they need.

Of critical importance, there are no specific compensation stipulations regarding what constitutes qualifying part-time employment. It is the number of hours worked in a paid position that matters, not how well (or poorly) paid you are.

At this point, the gears may be turning in your head, and it’s worth noting: this is not actually a loophole. But it is a potential gamechanger for how people look at both their main job and evaluate potential additional opportunities.

On a related note, there is also no rule in the PSLF law that states that you can’t also have a for-profit job. What you need is to have enough qualifying nonprofit work. These are not mutually exclusive.

There’s also no rule that both positions have to be related in any way. You could be a doctor and also work at a food bank.

You need either a full-time qualifying job or any combination of 2 or more jobs that hit 30 hours/week worked.

Too much money?

Ultimately, the more money you make, the more money you pay toward your loans within an income-driven repayment plan and thus the less money you will have forgiven after your 120 payments. If you’re constantly in a negative amortization scenario, then it probably won’t matter, but if IDR repayments were already making good progress in paying down your loans, then sometimes extra work can change the calculus.

Double employment is a great way to pursue an unsatisfied passion while essentially having the government pay your salary indirectly through loan forgiveness. But if you are fortunate enough to work at a well-funded non-profit and earn too much money with your second endeavor, it may make loan forgiveness more expensive than just paying off the loans yourself.

Start your own non-profit

You could (theoretically) even create your own qualifying nonprofit organization and work for it part-time to get over the hump (you could also theoretically do that full-time too obviously). Surprisingly, the barriers to creating your own 501(c)(3) organization are actually not that cumbersome, and the PSLF rules even say that it is OK to certify your own employment eligibility if you’re the only person who can do so.

Again, from the FAQ:

I’m the only official who can certify my employment. Can I certify my own qualifying employment?

Yes, you may certify your own employment if you are the only employee of the organization who can do so. However, we will request additional documentation concerning your employment, such as earnings statements, IRS W-2 forms, your application for tax-exempt status, or any other documentation required to be filed with the IRS on a periodic basis regarding the activities of the organization.

Note that if one were to try this potentially super shady solution, it would be highly prudent to also keep extensive records including a detailed time log to document your work hours and output. People absolutely should not be trying to convert their for-profit personal businesses into fake non-profits, but it does mean that you can be rewarded for making the world a better place.

Nonetheless, while there are clearly honest and legitimate ways to do this and achieve PSLF; it’s undoubtedly ripe for abuse. I think it’s safe to say that anyone who plans on certifying their own qualifying employment–even in conjunction with a more traditional job–is setting themselves up for a lot of questions and some serious bureaucratic hassle. Annual certification forms would be an absolute must. Running a real non-profit is a must. And frankly, given the number of people who are likely to be caught with fake paper-only nonprofits created for personal gain, it’s probably not a great idea.

A hypothetical example

I work as a neuroradiologist full-time for a non-qualifying employer, but for purposes of discussion, let’s say I worked 80% at a qualifying academic institution. In this scenario, I would easily surpass the 30 hours/week needed for PSLF, but since I’m part time, my main job won’t qualify on it own.

Conveniently, since 2009, I’ve been quietly editing and publishing the longest-running exclusively Twitter-based publication for fiction in the world. It’s called Nanoism, and it’s a literary magazine that even pays “professional“ rates to authors. This effort costs money and time and doesn’t earn me a penny. It’s already functionally non-profit in the sense that the only time money changes hands is when I pay writers or run contests to benefit charities (which I admit I haven’t done in a while).

Literary organizations like this are perfectly suited for 501(c)(3) nonprofit status and there are tons and tons out there, and though it would take some nontrivial hassle to file for this, I could do so. With official nonprofit status, suddenly the spare time I’ve been spending running a strange little Twitter-based literary venue would actually go toward loan forgiveness, which could help me redouble my efforts, expand the organization, plan more educational outreach, run more charity fundraising events, finally publish the anthology I’ve been promising for the past decade, etc. It would go from an unusual hobby to an unusual hobby that indirectly secures my financial future.

Since (in this example) I work enough part-time hours already anyway, a massive additional time commitment is unnecessary. Just enough that my organization is a real, functioning non-profit (which–let’s face it–would probably still end up a massive additional time commitment, but you see what I’m getting at here). Making a legit would also probably entail bringing in more people and growing the organization. A one-member non-profit might look mighty suspicious to the government with hundreds of thousands of bucks on the line.

If you have a skill or a craft and are on the cusp of a qualifying gig for PSLF, I’m not necessarily suggesting that starting your own non-profit is the way to go, because it’s not. For most people, really, it’s almost certainly not. But I am suggesting that you look for ways to use your skills for deserving organizations if it might make all the difference. You don’t need a big salary; you just need to be a paid employee.

Take home

A non-profit side-hustle could be more profitable than you’d think.

For people working full-time just for PSLF, keep in mind that you may not be quite as tied down as you might think.