New Program Paves Way for Public Service Jobs

Posted September 19, 2008 at 2:33pm

Becca Eden always knew she wanted to go into public service. But as a second-year law student who had already taken out $120,000 in loans, she also knew it would be an uphill battle to pay back her six-figure debt on a modest public servant’s salary.

“At a certain point you do have to step back and say, ‘Oh my God — I am going to have $150,000 in debt hanging over me,’” Eden said. “Corporations pay $115,000 and you’ll be making half of that in public service.”

Lucky for Eden, a new law granting loan forgiveness for graduates who go into public service should ensure that she never has to join the corporate world just because she’s saddled with student debt.

Signed by President Bush on Sept. 27, 2007, the College Cost Reduction and Access Act will allow more graduates to pursue careers in public service without worrying about debt. The act introduces an income-based repayment plan to lower monthly student loan payments and cancels any remaining debt after 10 years for those who work in public service.

“This is the most significant of breakthroughs for public service in a generation,” said Heather Jarvis, an expert on employment debt for Equal Justice Works, an organization that provides support for lawyers interested in pursuing public service. “We have many other smaller-scale loan repayment assistance options, but this is the first federal solution on such a grand scale.”

For Eden, the existence of the program makes public service feasible. “If I want to get married or have a family, I need some sort of stability rather than eating ramen noodles for the rest of my life,” she said.

And for Mike Siudzinski, who graduated from Fordham Law School last spring with $170,000 in debt, the law allowed him to accept a position with the New York State Attorney General’s Office with fewer reservations.

“For me the law was sort of a godsend because I was going to do [public service] anyway,” Siudzinski said. “It will be helpful for those who are really committed, like myself.”

Although the law is especially beneficial for students pursuing public service, graduates in other fields are not completely excluded.

The income-based repayment plan that goes in effect July 1, 2009, can benefit any student who graduates with debt but does not earn a high salary, regardless of career.

To qualify for the income-based repayment program, an individual’s annual student loan payments (under a 10-year standard repayment plan) must be greater than 15 percent of the amount by which his adjusted gross income exceeds 150 percent of poverty. For example, if an individual earns $115,000 per year and has $108,276 or more in qualifying student debt, he is likely to qualify for IBR under normal conditions. This is called a “partial financial hardship.”

“In other words, Congress has capped the amount of money that a person has to pay on a monthly basis,” Jarvis said. “IBR bases student loan payments on income rather than on the amount of debt.”

If an individual owes $100,000 in qualifying debt at 6.8 percent interest and takes a job that pays $40,000, for example, then that student will pay $309 per month under IBR instead of $1,151 under a standard, 10-year repayment plan. This example is based on the 2007 Federal Poverty Guideline for a one-person household of $10,210.

Only federal direct loans and federally guaranteed loans are eligible for IBR. Commercial or alternative private student loans do not qualify.

In addition, IBR offers its own version of loan forgiveness. If an individual still has student debt after 25 years of IBR, the federal government will cancel whatever remains.

But for public servants like Eden and Siudzinski, the government will cancel student debt after only 10 years, as long as they meet certain requirements. This is called public service loan forgiveness.

To be eligible, a person must make 120 qualifying payments on a federal direct loan while working full time in a public service position for 10 years.

Qualifying loan payments are restricted to those made using an income-contingent repayment plan (which is available now and similar to IBR, but uses higher monthly payments), an IBR plan or a plan where payments are not less than the amount required under a standard repayment plan based on a 10-year repayment schedule.

“Most people ought to chose IBR,” Jarvis said.

In addition, while both federal direct loans and federally guaranteed loans are eligible for IBR, only federal direct loans are eligible for public service loan forgiveness. Graduates will need to consolidate their federally guaranteed loans into the federal direct program in order to qualify.

Finally, Eden and Siudzinski must make sure their employer qualifies as a public service employer. Eligible careers include local, state, federal and tribal governments and 501(c)(3) nonprofit organizations, plus certain other employers. Time employed after Oct. 1, 2007, is eligible to count toward forgiveness.

“It does not matter what you are doing for them, but you must be working full time,” Jarvis said.

If an individual takes a full-time, $40,000 public service job with 5 percent annual salary increases and has $100,000 in qualifying debt at 6.8 percent interest, he will pay $49,132 over 10 years under IBR. At the end of his 10 years in public service, the government will cancel about $118,860 in principal and interest.

Despite the benefits, Siudzinski thinks the 10-year requirement may discourage recent graduates from taking advantage of the new law.

“It is a tough decision to make when you haven’t even started working yet,” Siudzinski said. “Ten years is a large commitment — maybe you have a kid or something.”

Because of stringent requirements, Jarvis says public education is crucial for the law’s success.

“It is a little bit complicated because you have to do things to qualify,” Jarvis said. “You have to take action.”

How the Department of Education decides to implement the law when final regulations are released on Nov. 1 will also be critical.

For one thing, the Department of Education proposed a verification procedure that has individuals submit their documents proving their public service after they have already completed their 10 years. Jarvis says the act will encourage public service more effectively if participants can verify their public service as they go.

Another issue is whether debt canceled by the government after 10 years of public service is taxable income. This is an open question of law that tax attorneys have requested for consideration before the Department of Treasury.

“It is important that the government formally recognize that the benefits under this program should not be taxed,” Jarvis said.

An additional hurdle is the “marriage penalty” that forces married couples to file separate federal income tax returns to have the amount of their IBR calculated solely on their debt and income, and not the combined income of the couple. This “penalty” forces couples to calculate whether filing joint tax returns or separate tax returns to qualify for IBR would be more beneficial for themselves financially. Jarvis thinks that couples should not have to choose and that the penalty should be interpreted so they can file jointly.

Despite the obstacles, Jarvis thinks the act will help retain qualified public servants and attract new ones.

“Before CCRAA, many public service workers had difficulty buying a house, saving for retirement, and were forced to tightly limit spending and even their basic necessities,” Jarvis said. “The act will make it possible for grads to choose public service.”

“It’s a big deal for a lot of people who come from lower socioeconomic statuses,” Eden said. “The program is a huge incentive to go into public service.”

For more information about the College Cost Reduction and Access Act and for a copy of the Loan Forgiveness for Public Service Employment Checklist, visit equaljusticeworks.org/resource/ccraa.