If you knew you were holding a ticking time bomb, you’d do everything in your power to get rid of it… right? Well, this student loan time bomb is like none other and most people don’t realize what they have in their hands. They can’t really even tell it’s a bomb. Nonetheless, it’s going to become a problem for a lot of people starting in 2017 – the year people start applying for “PSLF” – or public service loan forgiveness. So what’s all this craziness I’m talking about?
Well, first, it’s not the government. Existing borrowers often worry that the government will pull the plug on PSLF before they hit 120 payments. I know anything is possible – and we’re talking about the rule maker here – but I don’t expect this to happen. The fact they are updating repayment plans would imply that they are sticking with the program – why would they work to adjust something they planned to cancel?
And historically when the government makes changes, they grandfather in existing participants. This is already happening with adjustments to income-driven repayment options. They are cutting the married filing separately and very high income loophole for new borrowers by introducing REPAYE. However, existing borrowers were grandfathered in as they still can use IBR and PAYE.
So if it’s not the government, who am I talking about?
The borrowers. People are screwing up and missing opportunities all over the place – and they don’t even realize it. The programs have become so complex and ever-changing that borrowers can’t keep up with it. The resulting damage for these people is massive – I’m talking $10’s of thousands and even up to $100,000 worth of missteps. This is especially true for the largest borrowers – young medical professionals.
PSLF is a long-term deal – we’re talking a minimum of 10 years. Intensive effort is required from people who are not trained for this stuff, and people who don’t have the time to keep up with it. Further, there isn’t a formal progress track – no required year end check-in or testing – there’s only one exam that comes at the very end.
The final exam comes in the form of the PSLF forgiveness application – which has yet to be created. There are programs along the way, such as employment verification, that help you monitor progress. But according to government research, only 3% of eligible borrowers are utilizing the optional progress check-ins.
So the majority of people are flying blindfolded and just crossing their fingers in hope of success after the 120th payment. My prediction: most borrowers will be blindsided by the outcome. I suspect many will be declined. Others will be forced to continue making payments because they didn’t have enough qualified payments. Some will realize certain loans did not qualify when they thought otherwise. The process could get drawn out for many borrowers as they work to get 10 years worth of information organized… all the while continuing income-driven payments beyond the suspected 120th payment at their higher future income levels.
Do I have you freaked out yet? Hopefully so, because it’s a big deal and now is the time to take action. There will be a small minority of borrowers that knock this thing out of the park and win big with PSLF – however, I am discouraged at the current moment by how few of these cases exist.
Are Your Student Loans in Order?
I know you think you probably have your student loans in order. I would have taken your word for it before my recent experiences. It can’t be that complicated, right? Today, I realize I was wrong.
I made two mistakes – first, I underestimated the complexity of PSLF (turns out it’s beyond insanely complicated – and I am professionally trained in finance and business) and second, I assumed people were good with PSLF because they said they were. These people weren’t lying, they just didn’t quite understand. It’s just so complex, and people don’t know what they don’t know. I am hesitant to believe anybody has them in order – no matter what they say – until I have completely analyzed the situation.
About 6 months ago, I committed to learning more about student loans and quickly began to sniff all this out. Over a period of several months, as I dug further into the details, it became apparent this was a much bigger issue. You can see the 10 student loan articles I wrote along the way (that was painful by the way). The plan was just to write a few informational articles, but I just kept uncovering more stuff! In the end, it was actually hard to limit it to 10.
As a result of digging into student loans, I decided to offer a specific service helping people manage student loans. This forced me to dig even deeper and, more importantly, it allowed me to begin looking at real cases. That’s when I began to realize the true scope of the problem.
Since then, almost every single case I analyzed had major missed opportunities or costly errors – all with smart people, too. Since then, I have developed relationships with several “student loan experts” who all have very similar experiences – and they deal with far more borrowers than myself.
What can you do to diffuse your PSLF time bomb? The good news is everything I suggest is in your control – you just have to do it. And sooner is better. Here is my list…
1) Verify all of your federal loans by pulling your NSLDS file. – many of the below items can be verified with the NSLDS file. It includes all the gory details of your student loan story. We comb through these with clients to figure out exactly where they stand. I refuse to accept information from any other source and you shouldn’t either.
2) Complete employer verification today and every year after – it’s required once you hit 120 payments. Would you rather do it now or do it when you’re trying to apply for forgiveness and your income is much higher? Keep in mind payments don’t stop until approval. It may be harder than you think to drum up 10 years worth of employment verification.
Plus, when you complete the annual employment verification application, the federal government will send you their records of your PSLF qualifying payments so far. You may be surprised by what you see – it’s better to know now than when you’re applying for forgiveness. Many of the clients we have complete this form are shocked with the reply. Often the # of qualifying payments is less than they have anticipated for various reasons – or sometimes there are errors.
3) Avoid the annual administrative forbearance by being on the ball for annual income verification requests. Often borrowers procrastinate filing updated income verification which leads to a short period of forbearance each year around the time when they apply. This adds up to big time missed opportunity by further delaying your qualifying for PSLF. You may have made a payment that month but because your paperwork wasn’t sent with plenty of time, you were forced into forbearance (most commonly for 1 or 2 months out of each calendar year). This is shockingly common.
4) Watch out for times when you changed loan servicers – make sure nothing was missed or overlooked. When you apply for consolidation or when you complete employment verification, your loan servicer often changes. This requires information to be moved and can often lead to errors or miscommunication.
5) Make sure you correctly consolidate all non-PSLF loans into new loans that do qualify. They must be DIRECT loans to be considered PSLF eligible. If any of your loans are not, consider consolidation.
6) Compare the costs and benefits of the various PSLF qualifying repayment options – including REPAYE (the new repayment option). The variance between them is surprisingly large and totally based on your circumstances. It’s worth revisiting regularly to make sure you’re always using the most efficient repayment option.
7) Plan ahead when it comes to the timing of when you renew your income-driven repayments to minimize payments.
8) If your spouse also earns an income and you are eligible for PAYE or IBR, consider the net financial impact of filing separately on your taxes.
9) Look for deduction opportunities that reduce income and increase total forgiveness.
I really felt it was important to start getting the word out. Please share this with people you know who have big student loans. I hope more people realize this before their final exam. There is still time!