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Did you graduate with a mountain of debt from which you feel you might never escape? It could be time to consider public sector or not-for-profit employment. Under the Public Service Loan Forgiveness (PSLF) program, it is possible to extinguish a substantial amount of debt. The catch? 10 years of disciplined financial behavior in an agency that may or may not be suited to your long-term career goals. In this article, I’ll walk you through how the program works, how to take advantage of it, the trade-offs to consider when deciding whether to enroll in the program, and the program’s future viability.
This program is about who you work for — not what you do. If you work full-time for any governmental organization (excluding government contractors) or a 501(c)(3) not-for-profit organization, serve full-time in AmeriCorps or Peace Corps, or work for other not-for-profit organizations that provide qualifying public services, then you might be eligible. A quick word of caution: neither labor unions nor partisan political organizations meet the definition of eligibility.
“Full-time” means either no less than 30 hours a week, or your employer’s definition of full-time employment if their definition is more than 30 hours per week. However, you may also meet this definition if you work part-time for two or more qualifying employers and have at least 30 hours a week between them.
Which Loans Qualify?
Crucially, only loans made under the William D. Ford Federal Direct Loan (Direct Loan) Program are eligible. These include Direct Stafford, Direct Unsubsidized Stafford, Direct PLUS loans, and Direct Consolidation Loans. If you meet the eligibility stipulations above but have loans made under another program, such as Federal Family Education Loan (FFEL) or Federal Perkins Loan Program, then you will not be eligible. However, these loans may become eligible if you consolidate them into a Direct Consolidation Loan.
If you go the consolidation route, understand that only the payments made on the newly consolidated Direct Loan will qualify for the PSLF program. Similarly, if you have other loans not eligible for PSLF as well as Direct loans that do qualify, consolidating your Direct Loans with your other loans may mean you lose qualifying payments made on the Direct Loan. Be very careful. It is sometimes best to leave your existing Direct Loans alone and consolidate only the debt that doesn’t qualify for PSLF.
If you are unsure which loans are Direct and which loans aren’t, log into My Federal Student Aid. Any loans marked “Direct” qualify. If a loan is not marked “direct,” it’s a loan made under another program.
Which Payments Count?
Payments can only be made during periods where payments are required. For example, say you come into some money during school and pay down some of the principal on a Direct Loan. This doesn’t count. Likewise, payments made during the grace period, a deferment, or forbearance also fail to qualify. A qualifying payment must be one that is made after 10/1/2007, under a qualifying repayment plan, for the full amount shown on the bill, made on time, and it must be made while working for a qualifying employer. If it doesn’t meet these standards, it doesn’t qualify.
An important point to note: while the PSLF program requires 120 payments (10 years), there is no requirement that these payments must be consecutive. You can pick up and drop off at any time. Just make sure you’re submitting the Employment Certification form each time you work for an employer who may qualify. This form can be found via the Department of Education.
What About Overpayments?
Only the amount stated on your bill qualifies. Paying additional sums to principal will help get you to the finish line faster, but this may not necessarily be the best strategy. Ultimately, it will be the government who wins as they will be left with a smaller bill to wipe clean after 120 qualifying payments.
What you can do, however, is contact your loan servicer and ask that the additional payment be applied to cover future payments. This strategy may help if you are asset rich and cash poor.
For AmeriCorps and Peace Corps volunteers, there is a special rule that will allow you to use your Segal Education Award or Peace Corp transition award to make up to 12 qualifying payments in a single lump sum. If you fall into this category, you will be able to knock your PSLF duration down to nine years.
How Do I Know the Amount I’m Paying Is the Right Amount?
All income-driven repayment plans qualify. The 10-year standard repayment plan also qualifies. However, if you embark on the standard repayment plan, your loan will be extinguished in 10 years through your own out-of-pocket payments. You will have no need for PSLF. As a functional matter, only income-driven repayment plans will be able to make use of the PSLF program.
Applying for Forgiveness
Regrettably, forgiveness is not automatic. You will need to submit the PSLF application to receive forgiveness.
Another critical point: unlike many other forms of debt forgiveness, the PSLF program does not require you to include the amount of debt forgiven as income when tax time rolls around. It’s a sweet deal.
Who’s Right for the PSLF Program?
Anybody who has Direct Loans and works for a qualifying employer should be taking advantage of this program. You may not make the full ten years, but why not start the process? The future is uncertain and many times, opportunities open up in areas we never envisioned. The mere possibility of working for a qualifying employer for a decade is reason enough to submit the Employer Certification form.
PSLF in Doubt
The future viability of this program has been cast into the spotlight recently. Originally enacted in 2007 under then President George W Bush, the first PSLF “class of 2017” will be applying for forgiveness this year. This is significant, as no loans have actually been forgiven under this program to date. Neither Congress nor the taxpayer has yet had to foot the bill, which is rather extraordinary given the size of the program and its rapid growth. In 2012, roughly 25,000 people were enrolled in this program. Today that figure is just shy of 670,000*, which represents an average annual program growth of about 93% over the last five years. The price tag for this program is estimated to be about $24 billion†.
A budget put forward by the Trump Administration, but not yet passed by Congress, recommends eliminating PSLF for new borrowers after July, 2018. This is hardly surprising given the sheer size of this program. Some estimates put roughly 25% of the American workforce as being eligible for the program. Continuance in its current form may prove to be too burdensome for an already debt-laden Congress. For current enrollees however, the larger issue at stake is whether the program will actually live up to its promise.
At this point, it’s worth noting that the current stance of the Department of Education is that PSLF still isn’t guaranteed. If you have enrolled in PSLF and submitted the employer verification form, you will have received a letter from FedLoan Servicing informing you of whether your employer meets the requirements for PSLF. The Department of Education has stated that the letters from FedLoan Servicing are “interim, non-binding, individualized determinations” and that only “once a borrower has made 120 qualifying payments, she may submit an application for PSLF.” Although the Trump Administration has stated that the program will stay intact for people already in the program‡, those who actually qualify for the program is largely undetermined.
Teachers, police, fireman, and other public services jobs may be impacted, but their eligibility is likely clear-cut. Others, such as private security guards and ambulance workers working for nonprofit organizations may be in a bit of a gray area. How the Department of Education will view them is unknown.
This issue is already playing out in court. In December of 2016, the American Bar Association (ABA) brought a suit against the Department of Education. A statement put out by the ABA states that the suit was brought because the Department of Education started to disqualify some of those who were already approved for the PSLF program. In response, the Department of Education has sought to make clear that the certifications provided by FedLoan Servicing are not official approvals for PSLF. If the Department of Education wins, it could mean that your employer(s) previously approved in a letter from FedLoan may be rescinded retroactively. But borrowers won’t be able to determine this until after 120 qualifying payments have been made, as that is the only time they can formally submit an application for forgiveness. A decade of uncertainty is a long-time to be lurching in the dark.
Despite the current ambiguity surrounding the PSLF, it is still an excellent opportunity for those who qualify. For those in potentially gray areas, weigh your options carefully. There are many factors to selecting a career path. Bonus money, whether in the form of cash or debt-relief, is only one determinant. Choose a path that makes you happy by providing meaningful opportunities and the right kinds of challenges. Structuring your balance sheet and paying down debts comes next.
This article was contributed by Matt Bacon, CFP® Associate Financial Advisor with CUSO Financial Services, L.P.§ at UFCU. Matt is a native Austinite, Longhorn fan, Sunday league amateur soccer player, and overconfident Yelp reviewer.
* US News and World Report, “The Fate of Public Service Loan Forgiveness”, 10/3/2017
† Forbes, “Is This The End of Public Service Loan Forgiveness”, 08/18/2017
‡ Washington Post, “On Track for Public Service Loan Forgiveness? Good News, you’re not in danger from Trump’s budget”, 05/23/2017
§ Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. UFCU has contracted with CFS to make non-deposit investment products and services available to credit union members.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.