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How Does the Public Service Loan Forgiveness Program Work?

April 30, 2017
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If you've been following our student loan series, you've heard me talk about the potential for having your federal student loans forgiven if you make payments for a certain amount of years under a select number of repayment programs, such as the Pay As You Earn plan (PAYE), the Revised Pay As You Earn plan (REPAYE), and the Income-Based Repayment plan (IBR). And while those plans do offer borrowers the potential of having some of their loans wiped away, they also come with downsides as well: first, forgiveness only occurs under these plans after you've been making payments for 20 or 25 years, which is a long time to be paying off loans. Secondly, you must pay income taxes on any forgiven loans. You can see an example of how those taxes work from Part 3 of our series below:

So, what if you want your loans forgiven but don't want to have to make payments for 20 years? Enter the Public Service Loan Forgiveness Program, or PSLF for short. Created under the College Cost Reduction and Access Act of 2007, the PSLF offers forgiveness to borrowers who make ten years worth of qualifying payments while working for a qualifying employer.

Now the first benefit of doing the PSLF is pretty obvious; if your loans are forgiven after 10 years, that means you're making payments for 10-15 years less; that's money that could be saved or flushed down the toilet, but it's not going to the federal government. The second benefit is more subtle: you don't have to pay taxes on any loans forgiven under the PSLF.

So, how do you qualify? First, you have to make qualifying payments. For a payment to be considered qualified, the following must be true:

  1. Made after October 1, 2007
  2. Paid while working full time (30 hours a week or your employer's definition of full time, whichever is greater)
  3. Paid on time or within 15 days of due date
  4. For the full amount due as shown on your statement

But that's not it. You also must make your ten years, or 120 monthly payments while meeting the following requirements. Ten years under...

  1. A qualifying loan
  2. A qualifying repayment program
  3. A qualifying employer

Let's take a look at each of the these requirements in detail.

Qualifying loan

Only Direct loans qualify for the PSLF, and you can find the type of loans you have on a statement from your loan servicer. If you have loans that don't qualify, such as a Perkins loan or a Stafford loan that's not Direct, you're not out of luck. To be considered, you would need to consolidate all of your loans that don't qualify into a new Direct Consolidation Loan. It's important to point out that if the PSLF is something you're interested in and you don't have loans that qualify, consolidation needs to happen sooner than later. Unfortunately, any past payments you make towards ineligible loans do not count towards your ten years of qualifying payments. The counter starts at zero once your new consolidated loan is disbursed.

If you're wondering how loan consolidation works and are considering the process, more information can be found here

Qualifying repayment program

To have a qualifying repayment program, you must be utilizing one of the four income-driven plans we referenced in Parts 1-3 of the student loan series. To recap, those plans are the PAYE plan, the REPAYE plan, the IBR, and the Income-Contingent Repayment Plan.

The government also considers a 10 year Standard Repayment plan as a qualifying plan under the PSLF, but with a caveat: even if you use a 10 year Standard plan for a portion of the ten years, the majority of your 120 monthly payments must come under an income-driven plan. This makes sense, because if the PSLF offers loan forgiveness after 10 years, it would be pointless to use this program if your loans would already be paid off in full within that time.

Qualifying employer

Here's the rub, so to speak. There's a lot of confusion about what it means to be working for a qualified employer under the PSLF. I'll keep it simple here, and expound in the Frequently Asked Questions Section in case you want to stop reading early. A qualifying employer means you work for one of the following:

  • Nonprofit 501(c)(3) organizations
  • Any level of nonpartisan government
  • AmeriCorps or PeaceCorps
  • Certain nonprofits that are not 501(c)(3) but provide qualifying services

That's it! Those are the ins and outs of the PSFL. If you meet all these criteria, any remaining loans will be forgiven after you've made 120 payments, with no tax obligations. This program can be a significant boon to low-income earners and high-income earners with significant debts, and in my opinion it is definitely worth looking into if you're struggling to see yourself paying on loans for over two decades. If you understood everything feel free to stop reading here. But if you have further questions, let's quickly cover some that I hear frequently.

FAQs about Public Service Loan Forgiveness

Do my 120 monthly payments have to be consecutive?

Payments do not have to be consecutive. You can work off an on under the program as long as you like, but loans will only forgiven after you've made 120 qualifying payments.

If I'm an independent contractor that works at a qualifying employer, am I eligible?

You must actually be an employee of a qualifying organization, not an independent contractor. I see this a lot with physicians who may work shifts at a qualifying hospital but are not employed by that hospital. Or from physicians who work for private groups who see patients at a qualifying facility, but again, any payments under these circumstances would not count unless you actually work for that organization.

How do I find out if my employer qualifies?

The easiest way would be to call your loan servicer and give them the name of your employer so that they can check for you.

Isn't it likely that one of these organizations will pay less? Is it still worth doing?

It depends on your situation, but if the pay gap isn't substantial, ABSOLUTELY. You don't have to stay at the job forever. And as a matter of fact, the higher your income, the more likely I would be to go towards the PSLF. Think about this example: let's say I don't work for a qualifying employer, and I pay $1,000/month under the PAYE plan, which asks for 20 years of payments. That's $12,000 every year. Because I have to pay for 10 years longer than people under the PSLF, that would mean I pay $120,000 more towards my loans than I would have under this program. Plus, if there are any loans left at the end of that time, I have to pay taxes on it! If all I had to do to avoid that fate was take a job making a little less money for a few years, I would leap at the chance. Now if the pay gap is significant than it's worth the discussion of which opportunity is better. But if you're comparing two jobs with similar salaries, and one qualifies for the PSLF, it is worth your serious consideration.