PSLF - Public Service Loan Forgiveness

While there are 100's of different and specialized student loan forgiveness programs, if you work for government or eligible nonprofit organizations (contractors are not eligible) for a total of 10 years, you could obtain public service loan forgiveness. After 10 years of payments on an income-driven repayment plan, any debt that is left over will be forgiven without any tax implications. The program was instituted to ease the burden on borrowers who are in the public sector, which typically pays less than jobs in the private sector. The program also serves as an incentive, to encourage people to spend at least 10 years in public service jobs.

In this article, our longest by far (but worth the read), we will review the major advantages and drawbacks you may come across. 

Advantages 

  1. Your total repayment amount becomes significantly reduced. On an income-driven repayment plan, it could take up to 25 years to pay off your debt. In that case, getting it forgiven after 10 years would mean cutting the total amount in more than half. For example, if your total debt is $70,000 and your annual income is $60,000, then with most income-driven repayment plans it would take 36 years to pay off--so it would be forgiven after 20, according to the terms of those income-driven repayment plans. But under public service loan forgiveness, it would be forgiven after 10, so you’d save a total of $42,000 in payments.
  2. The forgiveness is not taxable. Unlike the 20-25 year forgiveness that may come with income-driven repayment plans, public service loan forgiveness doesn’t count as taxable income. That can make a huge difference. Using the previous example, being taxed on $42,000 of forgiveness would cost about $8,000 at around a 20% tax rate.

Drawbacks 

  1. Limits career choices. Working at a qualifying “public” organization limits your choice of employers. Keep in mind that it doesn't matter what your job is, but it does matter who you work for. For some people, it may not make any difference--if you were planning to work as a public school teacher, or at a nonprofit hospital, or for a city government, etc. But for others, this might be a deal-breaker.You might also feel “locked in” career-wise. If you’ve already been working toward the forgiveness for many years, your debt has increased beyond its initial amount (being on an income-driven repayment plan, rather than a higher monthly payment). You might feel it's necessary to “finish out” your commitment in the public sector because you're relying on that forgiveness to be able to pay off your debt.
  2. Lose out on the option to refinance. Getting public service loan forgiveness only works on direct federal loans--so you won’t be able to refinance with a private company to get a lower interest rate. This may not be an issue since you’ll be on income-based monthly payments until the rest of the debt is forgiven and refinancing will not be needed.

Requirements

Here are the details on what is actually needed to obtain the forgiveness:

  • Direct loans. Only direct loans from the federal government are eligible. (Any federal loan with “direct” in its name should qualify.) This means that other federal loans, such as FFEL and Perkins, don’t qualify. However, you can consolidate those loans into a Direct Consolidated Loan, which is eligible for the forgiveness. (Note that only payments to the consolidated loan count, so if that’s what you're planning to do, consolidate as soon as possible.) You can find out your loan types by speaking to your loan servicer or reviewing your loan details in your Federal Student Aid accoount

Here are job types that qualify:

  • Government organization
    • Federal, state, local or tribal organization, agency or entity
    • Public child or family service agency
    • Tribal college or university
  • Not-for-profit organizations that are tax-exempt
    • Any nonprofit with 501(c)(3) status
  • Not-for-profit organizations that are not tax-exempt, but are providing specific public services
    • Emergency management
    • Military service
    • Public safety
    • Law enforcement
    • Public interest law services
    • Early childhood education
    • Public services for elderly or disabilities
    • Public health (nurses, nurse practitioners, etc.)
    • Public education, public library services, school library or other school-based services

Note: With the final category, you’ll have to confirm with FedLoan Servicing that your specific employer qualifies. (There’s also some risk with working in this sector, since it is possible for FedLoan Servicing to change the definition of public services--so although government organizations and tax-exempt nonprofits will always be safe, the others won’t necessarily be.)

  • Employed full-time. 
    • You must work for one of those employers on a full-time basis, however that employer defines “full-time” and it must be at least 30 hours/week. You could also work part-time at multiple eligible employers as long as the hours are equal to or greater than 30 per week.
  • 120 payments. 
    • 12 monthly payments comes out to 10 years, but note that it doesn’t necessarily need to be consecutive--you could work in public service for 7 years, then spend a few years in the private sector, than finish 3 more years in public service. Also note that overpaying won’t count as an extra payment--so if you're planning to receive the forgiveness, there’s no reason to pay more than the minimum required amount each month.
  • Qualifying payments. 
    • You must be in an income-driven repayment plan. Something worth noting: the requirement for getting forgiveness is that at least half of the 120 payments must have been on an income-driven plan; but it's certainly in your best interest to be in one as soon as possible, if you're aiming for the forgiveness. These payments must be on time, for the full amount that your income-driven repayment plan states. Time spent in deferment (unless mandatory, i.e. Covid-19 Relief) or forbearance won’t count so be mindful of your recertification timeline and due dates.

Next Steps

First, determine if you plan to work in one of the fields noted above for at least 10 years. If you're planning on it anyway, aiming for the public service loan forgiveness is a no-brainer.

If you're only planning to spend a few years in public service and not sure if you should go for all 10, here are two factors to consider:

  1. Do you plan to use an income-driven repayment plan anyway?(A) If so (because the alternative--fixed monthly payments--are too high to handle), you might as well aim for the public service loan forgiveness. If you don’t end up making all 120 qualifying payments, you can still get forgiveness after 20-25 years. (B) If not, then you want the total repayment amount to be as low as possible. Getting public service loan forgiveness will lower it, but so will making higher monthly payments. You can compare the two options and decide which makes the most sense for yourself.
  2. What is the difference in income between jobs you could have in the private sector vs. public sector?(A) In our previous example--with $70,000 in debt and a $60,000 income--obtaining the public service loan forgiveness would save you about $69,000 (in debt you won’t have to pay off) over the course of 10 years. But getting a higher salary in the private sector, perhaps $70,000/year instead of $60,000/year, would earn you $100,000 over the course of 10 years.

Once you’ve decided to aim for public service loan forgiveness, here’s what you do:

  • Enroll in an income-driven repayment plan, if you haven’t already.
  • Although you won’t apply for the actual forgiveness until at least 10 years after you take out the loans, you should still submit the Employer Certification Form now to indicate that you're aiming for it--and to check if your current employer qualifies.
    Note that this will switch your loan service provider to FedLoan Servicing.
  • Remember to re-submit that Employer Certification Form every year and any time you switch employers. You might want to resubmit it even more frequently than that, just to confirm with FedLoan Servicing that your payments have been tracked accurately and are counting toward the required 120.
    In addition, we recommend that you keep your own records, just in case. Store a copy of all letters you receive from FedLoan Servicing, as well a copy of each of your W2s (the annual income statement you receive from your employers every January). 10 years is a long time to store these documents, but it's important, in case anything goes wrong and you need to prove that you were working in public service.
  • Once you have made the required 120 payments, you can submit the form to request public service loan forgiveness. You might need to reply to follow-up queries, or submit additional documents, before everything goes through. If you are having trouble obtaining the forgiveness, you might qualify for the Temporary Expanded Public Service Loan Forgiveness program.

Summary

  • Public service loan forgiveness is a way to eliminate your remaining debt if you work for 10 years (can be non-consecutive) in public service.
  • This can massively reduce your total repayment amount, and (unlike the 20-25 year forgiveness on income-driven repayment plans) that reduction is free from income taxes.
  • Consider the pros as well as all of the cons, such as limiting your career options--as we saw, even a relatively small increase in income, over 10 years, can sometimes make more of a difference than the entire amount of the forgiveness.
  • In order to qualify, your employer must be a government organization, a tax-exempt nonprofit, or a nonprofit that provides a specific type of service. You must also be in an income-driven repayment plan in order for your payments to qualify.
  • It's best to submit the Employer Certification Form early and often to ensure you're on-track. Keep a record of these communications, as well as a copy of your W2s, just in case you ever need to use them as proof.

RELEVANT EXTERNAL LINKS:
https://studentaid.gov/https://studentaid.gov/manage-loans/repayment/plans/income-driven
https://studentaid.gov/sites/default/files/public-service-application-for-forgiveness.pdf
https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service/temporary-expanded-public-service-loan-forgiveness

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