Many student loan borrowers spend years paying off their debt, but forgiveness programs can help cut that time down. The Public Service Loan Forgiveness (PSLF) program allows certain federal student loan borrowers to get their loans forgiven after at least 10 years of working in the public sector. While the potential to have your loan forgiven sounds appealing, the eligibility is very strict.
My friend Catherine works at a non-profit in Washington, D.C, providing therapy to middle school kids with special needs. She recently expressed her burden of paying off her student loans. I told her to look into the Public Service Loan Forgiveness program. It was great to hear that she already knew about it. But I was surprised that she refuses to enroll because she didn’t trust that the government would honor their word.
What is the Public Service Loan Forgiveness Program?
The Public Service Loan Forgiveness Program (PSLF) was created in 2007 and signed into law by President George W. Bush. The program allows federal student loan borrowers to have their federal student debt forgiven after 10 years of working for either the government or a 501(c)(3) non-profit. You must have also made 120 qualifying monthly payments under an income-driven repayment plan.
It started as a way to encourage people to work in the public sector. The salaries are usually lower in the public sector but the need is high.
Has the COVID-19 pandemic changed any aspect of the PSLF?
Federal student loan borrowers who are seeking public service forgiveness don’t need to make payments until September 30, 2021.
The other good news: If you have qualified federal loans that are not in default, and work full-time for a qualifying employer during the payment suspension, you can still earn credit toward PSLF.
Why are people scared of PSLF?
Many Americans who are currently enrolled in PSLF are very anxious. Public Loan forgiveness is proving to be more difficult than people initially thought it was going to be.
As of the end of June 2019, over 110,000 applications have been submitted for PSLF, but only 1,216 (or about 1.1%) have been approved.
In 2016, the Department of Education refused to honor loan forgiveness commitments it made (under PSLF) to four individuals who have dedicated their careers to public service. Jamie Rudert served aging Vietnam-era veterans with disabilities and their families. Michelle Quintero-Millan provided legal services to unaccompanied immigrant minors on the U.S.-Mexico border. Geoffrey Burkhart worked to improve public defender systems in the United States. Kate Voigt educated the public about crucial issues facing immigrants in this country. All of them were initially told that they qualified for the PSLF program because they were working for non-profits. However, in 2016, they were told that they didn’t actually qualify because they weren’t working for 501(c)3 non-profits. The American Bar Association has filed a lawsuit against the U.S. Department of Education on behalf of these plaintiffs.
Why should I consider it?
If you have a large amount of student loan debt, then Public Service Loan Forgiveness (PSLF) could potentially save you thousands of dollars. It also might knock years off your repayment timeline. You must meet all of the criteria to be eligible, but the payoff can be worth it.
How can I get Public Loan Forgiveness?
Most borrowers are denied because they don’t meet the program’s requirements. Make sure you know the requirements because they are very strict on these.
- Have the correct type of loans: Only loans that are part of the federal Direct Loan Program are eligible for PSLF. Private student loans and non-direct federal loans aren’t eligible. You can also consolidate other types of federal student loans to make them PSLF-eligible.
- Work full time for a qualifying employer: You can complete an employment certification form to confirm if your employer qualifies. Make sure that you submit a new form if you change jobs. Qualifying employers include:
Government organizations at any level.
AmeriCorps or the Peace Corps.
Nonprofit organizations that don’t have 501(c)(3) status but provide a qualifying public service as their primary purpose.
- You must be enrolled in an income-driven repayment plan before you begin making repayments. The four most common income-driven repayment plans are:
– Revised Pay As You Earn Repayment Plan (REPAYE Plan).
– Pay As You Earn Repayment Plan (PAYE Plan).
– Income-Based Repayment Plan (IBR Plan).
– Income-Contingent Repayment Plan (ICR Plan).
- Make 120 qualifying monthly payments. President Biden has previously proposed expediting borrowers’ eligibility for forgiveness to five years in public service (versus the current ten years), but it remains to be seen if actual legislation will be passed.
- Apply for forgiveness: Once you have met all of the requirements, you can submit a Public Service Loan Forgiveness application. When you apply, you must be working full-time for a qualifying employer. You can fill out the application online or download a copy and fill it out by hand.
Are the forgiven loans taxable?
Loans canceled under the Public Service Loan Forgiveness program are not taxable. There are income-driven repayment plans which can also result in loan forgiveness outside PSLF, but they are generally taxable. However, any student loan forgiveness you receive between now and 2025 will be tax-free thanks to the government’s American Rescue Plan.
What are the downsides to Public Service Loan Forgiveness?
- You may have to wait a long time for forgiveness and your loan may grow while you wait. It’s best to continue making payments while your application is being processed. However, if your application is approved, any payments you made after your 120th qualifying payment, will be refunded.
- Your career or financial situation may change. If you no longer want to work in the public sector, then you will no longer qualify for Public Service Loan Forgiveness.
- The criteria is very strict. Make sure that you meet all of the requirements to be eligible otherwise you will be denied forgiveness.
Other ways to pay off your student loan
If you don’t work in the public sector, or if public service loan forgiveness is not an option for you, there are other ways to repay your loans quickly.
1. Refinance your loans to potentially reduce your interest rate,
2. Use the debt snowball or;
3. Use the debt avalanche method.
Depending on your income and the interest rate of your loan, these options may be a better option for you anyway. You may want to work with a credentialed financial planner who has experience navigating the complex student loan debt environment to make sure you are making the best decision for yourself.
Public Loan Forgiveness is great for those who work in the public sector. However, many people won’t qualify. When you are deciding how to repay your student loan, it’s important to think about the pros and cons of each strategy. Deciding to have a debt repayment strategy is already putting you steps ahead of others. If you are interested in public service loan forgiveness, or if you want to pay off your student loan debt faster, schedule a complimentary discovery call today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help middle-class professionals achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.