This is our sixth article in a series covering student loans. Our goal in this series is to equip you with the knowledge necessary to make efficient and informed decisions regarding your student loans. This post will discuss the specific steps and requirements necessary to qualify for and maximize Public Service Loan Forgiveness (PSLF). If you missed any of the prior posts, go back and check them out before reading on so that you have the necessary foundation built (Part 1, Part 2, Part 3, Part 4, Part 5).
Public Service Loan Forgiveness “PSLF”
Pay attention if you have student loans and work for a not-for-profit or government employer! The PSLF program is a heck of a deal for certain qualified borrowers. You would be surprised how many people actually qualify and are unknowingly missing out on the opportunity. Others realize they qualify for PSLF but aren’t maximizing the benefit. Today we will dig into how PSLF works and help you avoid missing opportunity.
As a quick recap from part five in the series, the PSLF program allows certain borrowers loan forgiveness after making 120 qualified payments. In short, it’s a big deal (if you qualify).
It’s all about the qualifiers:
- Employment
- Loan Type
- Payments
Qualifying Employment
You must work full-time for one of the following employers to qualify for PSLF:
- Government organizations at any level
- Not-for-profit 501(c)(3) organizations
- Other not-for-profit organizations providing qualifying public services
- AmeriCorps or Peace Corps
Keep in mind that most academic hospitals and institutions are not-for-profit and would therefore be considered a PSLF qualified employer.
What exactly does full-time mean?
For PSLF, you are typically considered full-time if you meet your employer’s definition of full-time or work at least 30 hours per week, whichever is greater.
Qualifying Loans
A qualifying loan for PSLF is any loan you receive under the Direct Loan Program including Direct Consolidation Loans.
What about FFEL and Perkins Loans?
Student Loans from the FFEL and Perkins programs do not qualify for PSLF, but they may become eligible if you consolidate them into a Direct Consolidation Loan. Consult our previous post on Student Loan Consolidation for more details on eligible loans and the process for consolidation.
It’s important to note that Direct Loan Consolidation will restart the PSLF clock on your 120 payments. For example, if you are consolidating a Direct Loan and a Perkins Loan and have paid PSLF qualified payments on the underlying Direct Loan, those will be lost if you consolidate. If you are unsure which specific loans you have, check back to our first post in this series for steps you can take to get organized.
Qualifying Payments
A PSLF “qualifying payment” is a full, on-time, monthly payment made after October 1, 2007 under a qualified repayment plan while employed full time by a qualified employer. Keep in mind, you cannot make qualifying payments while in deferment, grace, forbearance or default. Your 120 qualifying monthly payments do not need to be consecutive.
What is a qualifying repayment plan?
Qualified repayment plans include all of the income-driven repayment plans (IBR, PAYE, ICR) and 10 Year Standard Repayment (required when your income reaches a certain level under income-driven repayment plans). For more information on repayment plan options, refer to part four of our series.
If you are in repayment and make all 120 PSLF qualifying payments under the 10-year standard repayment plan, you will have no remaining balance left to forgive. Alternatively, if under the same scenario your income allows income-driven payments be lower than 10-year standard payments, you will begin to see benefits from PSLF.
It’s important to understand that the ultimate benefit depends on the variance between the 10-year repayment and your actual qualifying payments (for all 120 payments). The bigger the variance, the larger your forgiveness will be. Therefore, if you are going for PSLF and want to maximize your benefit, you want to seek the lowest payment possible on every payment you make.
A great starting point if you’re considering PSLF would be the Federal Student Aid “FSA” repayment calculator and the PSLF overview page.
Verifying Employment & Tracking Progress
Make sure to qualify your employment using this form annually or whenever you change jobs! Employment verification is not required until you apply for forgiveness, however, it’s far better to keep up with it over time so you don’t run the risk of not being able to verify it when it really counts. Employment verification allows the following to occur:
- Confirm with FSA your employer is or is not PSLF qualified.
- If your employer is PSLF qualified, any of your federal student loans not held at FedLoans are transferred to FedLoan Servicing. This will allow all your PSLF eligible loans to be serviced in one place.
- If your employer is PSLF qualified, FSA will review your payments and determine your progress toward PSLF qualification.
- FSA will notify you of their findings
Once you complete your 120th qualifying monthly payment, you must submit the PSLF application. Keep in mind, you must be working for a qualified organization at the time you submit the application and when your remaining balance is forgiven. Further, under current tax law, the forgiven balance is not subject to federal income taxes.
Maximizing PSLF
The amount you ultimately pay for each income driven payment directly affects your ultimate benefit from PSLF (lower payments = larger forgiveness). In most cases, your payments are set based on your loan situation, Adjusted Gross Income (AGI) and tax filing status.
It’s important to note that you have some level of control over your AGI and filing status. It is possible to lower your AGI based on actions you take over the course of the year. Examples of the most common AGI reducing actions are pre-tax retirement contributions, HSA contributions, and qualified moving expenses. For example, if you contribute to a deductible IRA instead of a Roth IRA, you allow your AGI to be lower which, in turn, lowers your income-based payment. This ultimately provides for greater forgiveness.
A similar scenario occurs with your tax filing status. If you are married and both you and your spouse earn an income, odds are you file taxes jointly. So here’s the scoop… you typically owe more taxes as a couple when you choose to file separately. At the same time, your income-driven payments are reduced as a result of the lower AGI with separate filing. If you want to maximize PSLF, it’s very important to run the married filing separately numbers for BOTH your tax return AND your income-driven payments.
If the amount you save in income-driven payments over the coming 12 months by filing separately over jointly is greater than the tax cost of filing separately, you will benefit by filing your taxes as married filing separately. The larger the variance, the greater the benefit.
This calculation is not simple, however, it can have major impacts on your ultimate PSLF benefit. If you and your spouse both work and one or both of you have federal student loans that are PSLF qualified, make sure your tax advisor runs the analysis every year before filing your taxes!
Stay on Top of Income-driven Repayment
You also have some control over when you file for income-driven payments. Ideally, you file at the most efficient time based on your circumstances. Keep in mind your income-driven payments are based off of prior year returns or other income verification provided by you. It’s important to be aware of your deadlines and options relating to providing income verification.
Unsure About Qualifying for PSLF?
If you haven’t ironed out your exact career path but are currently employed by a PSLF qualified employer, it’s often best to position yourself for PSLF by using one of the income-directed repayment plans.
For example, most medical residents fall into the above scenario. They are working as a resident at a not-for-profit hospital but are unsure if their future employer will be PSLF qualified. On top of that, the medical resident often has limited available cash flow to make payments. Unfortunately, a large portion of this crew is defaulting to forbearance and, in most cases, this is a bad move. It’s worth paying the minimal income-driven payment to position yourself for PSLF and defer interest capitalization.
The Government and PSLF
Many people are worried the government will do away with PSLF midway through their qualifying repayment and, as a result, they will lose forgiveness benefits. They feel it’s risky to count on something that could be taken away at any time, and that if PSLF doesn’t come through, they will be faced with a much bigger problem than they started with. If this is a concern you have, you should read this article from Jan Miller. He is a student loan consultant and has worked in the industry for many years. He eats, breathes and sleeps student loans.
How do you feel about the government’s chances of following through with PSLF promises? Do you have any examples you can share where the government has changed or eliminated a program like PSLF without grandfathering in the existing borrowers? Share your thoughts!
Don’t forget to check out our other posts in the series below: Part 1: Student Loans & Your Situation Part 2: Student Loan Interest Part 3: Student Loan Consolidation Part 4: Student Loan Repayment Plans Part 5: Student Loan Forgiveness Part 6: Qualifying for Public Service Loan Forgiveness Part 7: Student Loan Refinance Part 8: Student Loan Refinance Reviews Part 9: Student Loan Tax Considerations Part 10: Student Loan Resources