The Nonprofit Law Firm: Providing Access To Justice For The Poor And Early Student Loan Forgiveness For Indebted Lawyers
A way to help those in need, earn a modest living, and take advantage of generous student loan payment provisions.
There is a paradox in the legal profession. On the one hand, many lawyers are having trouble finding jobs in both the private and public sector. And those with their own practices are having difficulty finding clients. But on the other hand, there are not enough lawyers to serve those who cannot afford to pay someone several thousand dollars up front.
Most young lawyers who didn’t make it to Biglaw will likely end up paying their federal student loans through an income-based repayment plan for up to 20 to 25 years. Not only that, they will have to pay income taxes on any loan amounts forgiven unless they have no assets or are able to shift their assets before the forgiveness date.
A more generous plan known as the Public Service Loan Forgiveness (PSLF) program allows federal student loans to be forgiven after only 120 monthly payments based on income. Not only that, there are no income tax consequences once the loans are forgiven. But in order to qualify for PSLF, you have to work for qualified organizations. This includes the government, schools, and charitable organizations. Most of these organizations have tax-exempt status and are known as 501(c)(3) entities.
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Because of the generous student loan payment provisions of PSLF, many government and public interest jobs have become extremely competitive in recent years. Unfortunately, this meant that many who genuinely went to law school to help the needy are unable to secure public interest jobs because they went to other candidates who have better academic credentials but may have went to law school mainly for financial gain.
So those lawyers who are interested in helping the poor or are willing to accept pro bono or reduced fee work in exchange for PSLF treatment of their student loans should look into starting a 501(c)(3) non-profit law firm. While I will go into some of the basics, I highly recommend speaking with a nonprofit specialist if anything here interests you.
In order to start a 501(c)(3) law firm, you will have to get approval from the IRS. To be considered, you must complete and submit an application known as a Form 1023. This form is very long, with very intrusive and detailed questions about the organization’s officers and planned activities. But a few years ago, the IRS issued a simplified version of the application called the Form 1023-EZ.
Also, the entity must have an exempt purpose. This generally means relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. According to the PSLF FAQ (here), offering public interest law services qualifies as an exempt purpose for 501(c)(3) purposes.
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The two major benefits to operating a 501(c)(3) entity are eligibility for PSLF status for federal (but not private) student loans and the ability to attract donations from the public that may be tax-deductible to the donor.
But there are several drawbacks to operating a 501(c)(3) as well. One is that the entity’s financial reports become public information. This can also include compensation of officers and key employees. Another is that operations may be subject to strict government oversight and restrictions depending on the state. Also, the entity cannot engage in political activities nor influence legislation.
Finally, compensation from the 501(c)(3) entity may be subject to IRS scrutiny. The IRS prohibits tax-exempt entities from being used to benefit a private person. However, they do allow its employees to receive reasonable compensation. If the IRS finds that an employee’s compensation is excessive, it can lead to revocation of tax-exempt status and even monetary sanctions. What reasonable compensation is depends on the facts and circumstances, which is always an awkward and contentious discussion during an audit.
So if this sounds interesting, you should consult with an attorney who is familiar with 501(c)(3) entities as soon as possible. You see, PSLF started in October 2007. This means that loan forgiveness will begin on October 2017, which is when the government will start looking at whether PSLF is working as it should. There have already been calls to reform the PSLF forgiveness provisions because of the potential for massive losses to the government in light of increasing tuition and student housing costs. There have also been accusations that PSLF is being abused not so much by the borrowers but by schools that use it to recruit students and convince them to pay full tuition.
What this means is that the Department of Education and Congress may one day decide to stop PSLF altogether, lengthen loan payment terms, limit how much of the debt can be forgiven, or some combination. So if you apply now, you may not be subject to any changes in the rules which seem inevitable. These days, it seems like the American public takes something seriously only if there is a threat that something might be taken away from them. Look at guns and the McRib sandwich.
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I should acknowledge that some will set up the 501(c)(3) nonprofit law firm solely to minimize their student loan obligation. And this would be unfair to those who didn’t think of doing it earlier. But so long as they provide legal service to low-income families and the underprivileged to maintain nonexempt status, does it matter? After all, isn’t this what they want? The politicians that complain about greedy lawyers when talking about tort reform. Or those in the upper echelons in the profession that talk a big game about our moral duty to give our services to the poor but don’t do much else.
A 501(c)(3) nonprofit law firm can be a way for attorneys to help those in need, earn a modest living, and take advantage of the generous student loan payment provisions of PSLF. But strict rules must be followed, your compensation may be limited, and you have to commit to this endeavor for 10 years before your outstanding federal loans will be forgiven. And there is the possibility that PSLF can be altered or repealed in the meantime.
Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at sachimalbe@excite.com and via Twitter: @ShanonAchimalbe.
