What’s New for 2015?
There is talk of major changes to the Public Service Loan Forgiveness Program, and only some of those changes would lead to better forgiveness benefits.
I’ll start with the positive – Senator Blumenthal’s proposed change to offer PSLF benefits incrementally (meaning that you’d earn a little bit of student loan forgiveness for each year that you have qualifying experience, rather than getting all your forgiveness at once after 10 years) remains on the table, but no real movement has been made to get it passed… yet.
I’m optimistic that it could happen 2015 though, because this year we’ll be facing not only the Reauthorization of the Higher Education Act, but also the 2016 Presidential election. Once the campaigns really get going, I’m expecting to see a lot more noise about student loans (especially from the left side of the aisle).
On the bad side, the Federal Government has spoken about capping Public Service Loan Forgiveness benefits at $57,000, which would cause major problems for those borrowers with extremely high debt loads (especially Doctors, Lawyers, Dentists, etc.).
If this change were enacted, anyone with debt over $57,000 would have to wait longer than 10 years to have it forgiven, plus the amount actually forgiven would be limited to $57,000. That means no more free rides for those entrepreneurial graduates who rack up $100,000+ in student loans, work public sector jobs for 10 years, then write it all off, which could protect the program from going bankrupt, but would definitely hurt individuals who planned on using this program to get out of their student loan debt.
The good news for those of you with very high debt loads who plan on using PSLF to wipe it out is that the virtually no one has been talking about the proposed cap since it was originally introduced, and in my opinion, this is a dead issue that will not be implemented any time soon (or perhaps even ever).
Senator Blumenthal’s Proposed Changes to PSLF
(Updated October 1st, 2014)
I’ve got great news for a major potential change to the way that the Public Service Loan Forgiveness Program works.
On Friday, September 26th, Senator Richard Blumenthal unveiled a legislative proposal to relax PSLF program requirements and start allowing incremental debt forgiveness, rather than the current all-or-nothing approach.
Currently, Public Service Loan Forgiveness benefits cannot be claimed until 10 full years of qualifying payments have been completed (that’s 120 monthly payments), but under Senator Blumenthal’s proposal, this is all set to change.
First, the new proposal would make it possible for for new participants in the PSLF program to place their eligible loans in deferment during the period of time they’re employed in public service work, and secondly, loan forgiveness will be doled out incrementally, with certain percentages of the loan balance forgiven for every two years of public service work completed.
We don’t have all the details yet, but one thing we noticed about this proposal is that it seems to take away the requirement of making a set number of payments to receive loan forgiveness, and focus more on the actual public service work itself as the determining factor.
Under the existing PSLF program rules, you’ve got to hold a job in public service and make enough monthly payments to qualify for forgiveness, but under this new proposal it sounds like you could place your loans in deferment, not even make payments on them, and start receiving forgiveness as long as you’re working in a qualifying public service job.
We could be reading this wrong, and details are relatively scant so far, but we’ll be sure to update as soon as any more information is revealed.
In the meantime, this looks like a major opportunity for anyone interested in pursuing a public service field, as it would essentially make your education entirely free, allowing you to borrow massive loans, then simply write them off.
What Is The Public Service Loan Forgiveness Program?
The Public Service Loan Forgiveness Program (PSLF for short) was created by an act of Congress in 2007, and the good news is that it’s still fully funded for 2014, but the bad news is that it’s changing (for the worse).
This program offers Federal Student Loan Forgiveness for public service work, including forgiveness benefits for jobs as varied as teaching, nursing, working for the peace corps or americorps, or as a Federal or State employee.
The stated purpose of the PSLF program is to “encourage individuals to enter and continue to work full-time in public service jobs”.
(Updated March 27th, 2014)
Obama’s Proposed Changes to the PSLF Program
In March of 2014, the Obama Administration’s Fiscal Year 2015 Budget proposed some significant changes to the Public Service Student Loan Forgiveness Program, most of which severely reduce the value of PSLF benefits.
If Congress adopts the proposed 2015 Fiscal Year Budget without amending it, then student loan forgiveness benefits for public service workers are about to see some dramatic, negative changes.
Here is a summary of how these changes could impact you:
1. High Debt Borrowers Won’t Qualify for Early Forgiveness
The Pay As You Earn Repayment Plan was originally introduced by President Obama’s Student Loan Forgiveness Reforms and offers comprehensive student loan forgiveness for federal loans once borrowers have made 20 years of scheduled, full, on-time payments.
Under the current Public Service Loan Forgiveness Program, that requirement is reduced for public sector employees, who only need to make 10 years of schedule, full, on-time payments before they’re eligible to receive total loan forgiveness.
However, if the proposed 2015 Budget is passed, then PAYE student loan forgiveness and PSLF loan forgiveness won’t be available as early for high debt borrowers (those with over $57,000 in federal student loans).
Instead of receiving forgiveness at the 20 and 10 year marks, these borrowers will have to wait a full 25 years before their loans will be forgiven.
That’s a full 15 years of extra payments that PSLF program participants will need to make, and it’s a major disincentive to participate in this fantastic program.
How are those with excessive student loan debt and a public service salary supposed to purchase a home, buy a new car, get married, or start a family if they’ve got to wait an entire 25 years to discharge their debt?
2. Loan Forgiveness for Public Service Will Be Capped at $57,000
Currently, there is no maximum to the amount of loan forgiveness made available to public service employees.
That means that whether you have $50,000, or $500,000 in student loan debt, you’ll be eligible to receive total loan forgiveness once you’ve satisfied the conditions of the PSLF program.
Unfortunately, this is set to change if the 2015 budget gets approved as-is, because the public loan forgiveness program will only offer up to $57,000 in total forgiveness benefits.
Yes, $57,000 does sound like a lot of money, but for those students who racked up $100,000, $150,000, or even $200,000+ in student loan debt, this change is going to devastate their financial futures.
And while $100,000+ in student loans might sound like an unreasonable amount of debt, it’s fairly easy to rack that much up by attending medical school, dental school or law school nowadays.
3. Only Payments Made Under Income-Based Plans Will Count Toward PSLF Forgiveness
The current public student loan forgiveness program allows payments under any of the seven Federal Student Loan Repayment Plans to count toward the 10 years of required payments, but that too is set to change should the new budget be implemented without modification.
Instead of any payment counting toward the 10 year minimum, only those payments made under income-based repayment plans will be included in the calculation.
Sure, that’s not that big of a deal for some people, as many are already on one of the available income-based plans, but for others this change could hit especially hard.
At the very least, it’s an annoyance that you’ll need to switch from the Standard Repayment Plan to one of the income-based plans.
Should this change go into effect, those seeking PSLF forgiveness will have to be enrolled in one of the following federal student loan repayment plans:
- The Income-Based Repayment Plan
- The Income-Contingent Repayment Plan
- The Income-Sensitive Repayment Plan
- The Pay As You Earn Repayment Plan
4. Married Borrowers Won’t Be Able to Separate Income
This change will affect everyone who’s married and working toward public service loan forgiveness, since by default, all of you will be forced to be enrolled in one of the income-based plans listed above.
Under current law, married borrowers can reduce their monthly student loan payments by filing taxes as maried filing separately, since that allows them to exclude their spouse’s income from the calculations that determine their monthly payments.
However, should the new budget be approved, this practice will be outlawed.
Sure, the change won’t affect everybody, but it’s guaranteed to have a devastating impact on a small slice of the population who don’t deserve to be singled out.
Those borrowers married to high-income earners, especially high-income earners who helped support them during extensive schooling (like med school, dental school or law school), are going to get crushed by this change.
Instead of being able to calculate their monthly payments on the meager public-service salary of someone who’s just entered the field, they’ll have to include their spouse’s income as well, which could be extremely high.
We anticipate that this will cause monthly payments to double, triple, quadruple, or worse, and we anticipate seeing a massive spike in the divorce rate once couples catch on to the fact that it’s fiscally irresponsible to remain married.
President Obama’s Previous Reforms
The original public service loan forgiveness regulations provided borrowers the opportunity to qualify for complete loan forgiveness on the remaining balance of their eligible federal student loans, once they’ve made 240 payments (20 years worth of payments) on their student loans via qualified repayment plans, while also being employed full time by specific public service employers.
The recent creation of President Obama’s Student Loan Forgiveness Program has reduced the number of repayments from 240 (20 years) to just 120 (10 years), making the program significantly more attractive to those who aren’t quite as interested in public service work.
The PSLF Program is not without controversy, as some have argued that it’s rules are too stringent, leaving many students in the dust, while others like Diane Auer Jones, assistant secretary for postsecondary education stated that the entire PSLF program is virtually worthless, saying:
“You have to make 10 years of payments before the remainder of the loan is forgiven…. and most federal education loans are 10-year loans, which means there will be nothing left to be forgiven.”
Whether or not the PSLF Program will help you, it’s first necessary to determine if you’re even eligible for this benefit at all.
And since it’s not necessarily all that easy to understand in paragraph form, here’s a bullet point list showing exactly what you have to do to qualify for having your remaining student loan debt forgiven under this program.
Eligibility Guidelines for the PSLF Program
- You must have an outstanding balance on a Federal Student Loan that you received under the William D. Ford Federal Direct Loan (Direct Loan) Program
- You must make 120 on-time, full, scheduled monthly payments on your Direct Loan, including only payments that were made after October 1st, 2007 (meaning that the earliest you can possibly have all of your debt forgiven under this program is October 1st, 2017, so there is no way for you to qualify for this entirely yet)
- You must make your 120 payments under a qualifying repayment plan (see below for qualifying repayment plans)
- While making each of these 120 payments, you must be working full-time at a qualifying public service organization (see below for qualifying public service organizations)
To summarize – the Public Service Loan Forgiveness Program is extremely helpful, but not quite yet.
Since you have to make 120 loan repayments after the date of October 1st, 2007, there’s no way that you could possibly have all of your loans forgiven yet under this plan, and that won’t be available until 2017.
If you need immediate student loan forgiveness, then this plan won’t help you, but if you’re working at a qualifying public sector job (or planning on doing so), then you should definitely do your best to conform to the eligibility guidelines below so that you can utilize this incredible benefit once you’re fully qualified to do so.
Which Student Loans are Eligible for PSLF?
While it may seem unfair, not all Federal Student Loans qualify for PSLF forgiveness. In fact, some of the most popular forms of loans will disqualify you from eligibility for this benefit.
Only loans that have been awarded under the William D. Ford Federal Direct Loan Program are eligible for PSLF.
If you received loans under the Federal Family Education Loan (FFEL) Program, the Stafford Loan Program, the Perkins Loan Program, the Grad Plus Loans Program, or any other Federal loan program, then you do not qualify for Public Service Loan Forgiveness benefits.
If you do happen to have FFEL loans or Perkins Loans, and want to take advantage of the PSLF plan, then you will first have to consolidate your loans into a Direct Consolidation Loan.
Keep in mind though that only payments you have made on the new Direct Consolidation Loan will count toward your 120-month (10 year) payment requirement for PSLF eligibility.
Any payments you might have previously made on your FFEL or Perkins loans will not count toward this requirement, even if they were made after October 1st, 2007, under a qualifying repayment plan and while you were working full time at a qualifying public sector employer.
To find out about how to consolidate your FFEL or Perkins loan into a Direct Consolidation Loan, check out www.loanconsolidation.ed.gov (note: this is a Government site so you can trust it).
If you don’t know what type of loan you have, then visit www.nslds.ed.gov to find out.
Which Payments Count?
Three different factors go into determining whether or not your student loan repayments qualify as one of the 120 required to receive complete PSLF forgiveness. They are:
- Payments Must Be Made On Time – Any payment received by whoever services your Direct Loan no later than 15 days from the scheduled payment due date counts as an “On-Time payment”.
- Payments Must Be Made In Full – Any payments make on your Direct Loan that equal or exceeds the amount you are required to pay each month according to your Direct Loan repayment schedule count as “Full Payments”. If you made, or make a payment that is less than the amount set in your repayment schedule, then those payments will not count toward your required 120 payments. However, if you make multiple payments per month equaling or exceeding the required full monthly payment amount, then you will get credit for a single Full Payment. You cannot game the system by making many payments each month though, as the maximum number of credits that you can receive in a 30 day period is 1.
- Payments Must be Scheduled – Any payments that you make on your Direct Loan which is made under a qualifying repayment plan after your loan servicer has billed you for the month’s payment will count as “Scheduled Payments”. Any payments made while your loans are in the in-school status, or during a grace period status, or under deferment or a forbearance period will not count as Scheduled Payments.
*NOTE: Qualifying payments must also be made as separate monthly payments. You cannot game the system by making lump sum payments, or payments for future months that you have not yet been billed for, as these will not count as qualifying payments toward your 120 payment requirement.
However, if you are employed with AmeriCorps or the Peace Corps, you may fall under special rules allowing for lump sum payments. Contact your employer for additional details.
Keep in mind that only payments which were made while you were a full-time employee at a qualifying public service organization will count toward your required 120 qualifying monthly payments.
You also need to be a full-time employee of a qualifying public service organization both at the time that you apply for PSLF benefits, and when your student loan forgiveness is actually granted.
What Repayment Plans are Eligible?
The two best repayment plans for PSLF benefits are the Income-Based Repayment Plan (IBR) and the Income-Contingent Repayment Plan (ICR). Using either of these two repayment plans will be your best bet for maximizing your PSLF benefits.
The 10-Year Standard Repayment Plan is also PSLF-qualifying, as are any other repayment plans where you make a monthly payment that would be as much, or higher than the amount you would be paying under the 10-year Standard Repayment Plan.
Keep in mind that your repayment plan could actually completely invalidate the PSLF benefit, as, for example, if you decided to use the 10-Year Standard Repayment Plan throughout the entire course of your loan, never missing a payment of paying less than the scheduled amount, then you wouldn’t have any student loan debt to forgive anyway, so the PSLF benefit would be worthless to you.
Using the IBR or ICR repayment plans, you will make a lower monthly payment, which allows you to stretch payments out for an extended period of time (more than 10 years), and will cost you more interest in the long-run, but allow you to take advantage of the PSLF benefits once you’ve satisfied all the eligibility criteria.
However, if you failed to meet the eligibility criteria for any reason (for example leaving public sector employment), then using the IBR or ICR plans would backfire, leaving you with substantially higher debt levels than you would have had using the 10-Year Standard Plan.
If you are not absolutely certain that you want to remain employed at a qualified public sector position for the duration of your eligibility period for PSLF, then you should not rely on PSLF benefits, as they are likely to provide you nothing of value.
What Kinds of Jobs Qualify for PSLF?
Employment with a federal, state or local government agency, entity or organization counts as qualified employment for PSLF.
Additionally, any federal, state or local non-profit organization designated as tax-exempt by the IRS under Section 501(c)(3) of the tax code counts as qualified employment too.
Some private non-profits that are not qualified tax-empty organizations under 501(c)(3) may also count as qualifying public service organization, if they provide certain specific public services.
Eligible public services include: military service, emergency management, public safety or law enforcement, public health services, public education or public library services, school library or other school-based services, public interest law services, early childhood education, public service for individuals with disabilities and public service for the elderly.
One stipulation to qualification is that labor unions and partisan political organizations do not, under any circumstances count as qualified employers.
What Counts as Full-Time Employment?
First, your position must meet your employers definition of full-time employment.
Even if you work more than 40 hours a week, if your employer somehow does not define your role as a full-time employee for their tax liabilities, then your position will not allow you PSLF eligibility.
Additionally, your position must meet the following criteria:
- Your position must be at least 30 hours per week when averaged annually
- Your 30 hours per week cannot include any time spent participating in religious instruction, worship services, or any form of proselytizing
Teachers and employees of public service organizations with contracts for at least eight months per year must also meet full-time standards if they work an average of at least 30 hours per week during the contractual period, and must receive credit from their employers for a full year’s worth of employment.
Also, If you work at more than one qualified part-time job simultaneously, you are allowed to meet the full-time employment eligibility requirement if you work a combined average of 30 or more hours per week at your positions with eligible employers.
Typically, your actual work duties and the type or nature of your employment with your employer is irrelevant to PSLF eligbility, unless you work for a not-for-profit organization that has something to do with religion.
In that case, when determining full-time work, you may not include any time that was spent participating in religious instruction, worship services or any form of proselytizing (as mentioned above).
How Can I Track My Progress?
To keep track of your eligibility for PSLF forgiveness, the Government provides a form called the Employment Certification for Public Service Loan Forgiveness (which you can find here) that you should download, print, fill out and submit to track your progress for completing PSLF requirements.
The ECPSLF form will guide you through the process of collecting required employer’s certification of employment, and submitting the form will provide you with confirmation of qualifying employment and eligibility for your Direct Loan payments.
This form should be submitted annually, though it could be submitted less frequently as long as you’re able to provide all the necessary data for the time period covered, and it will essentially prevent you from discovering any problems along the way, or from straying from the path of eligibility from the Public Service Loan Forgiveness Program.
You are not required to use this form, but it should help you to remain organized, understand how much of the eligibility you have completed, and how much you have left to complete, and keep you on track for receiving total loan forgiveness once you’ve finished PSLF requirements.
If you do choose not to submit the form along the way, you will still need to submit a separate form for each employer at the time that you request final clearance for PSLF benefits, so you might as well be using it throughout the process when it’s easier to collect the required information.
Seven Steps to Receiving Forgiveness:
- Complete the Employment Certification for Public Service Loan Forgiveness form each year, or whenever you change jobs, providing the Government with your employer’s certification credentials.
- Submit the completed form to FedLoan Servicing, who services all PSLF loans, following the instructions found on the form itself (which you can read here).
- FedLoan Servicing will review the form you submitted, make sure it’s completely filled out properly, then determine whether or not your employment qualifies you for PSLF benefits.
- If the form wasn’t filled out properly or if you do not qualify for the PSLF Program, FedLoan Servicing will let you know and provide you with another opportunity to give them the correct information.
- If FedLoan Servicing can’t tell whether or not you qualify for the PSLF Program, they might request more documents from you to prove that you have been or are employed by a qualifying public service organization. You may be asked for IRS forms (W-2’s), pay stubs, or any other documents to prove your employment at the business you’ve listed, or to prove that your employer is in fact a qualified public service organization.
- If your employment does qualify you for the PSLF Program, but some or all of your federally held loans are not currently being serviced by FedLoan Servicing, then those loans will be automatically transferred to them so that you have a single servicer for all of your federal student loans. Once your loans have been transferred to FedLoan Servicing, all payments you made to different servicers in the past will be reviewed to see if they qualify as counting toward PSLF payments.
- FedLoan Servicing will let you know if your employment qualifies for the PSLF Program, and will let you know how many payments you have made that count as qualifying payments. You will know exactly how many qualified payments you still have to make before you are eligible for complete loan forgiveness under PSLF benefits.
What To Do Once You Qualify for Forgiveness
After you’ve completed the entire process and made your 120th qualifying payment, you should immediately submit the PSLF application to request loan forgiveness.
The application does not yet exist (since no one can possibly qualify until 2017 anyway), but the Government has promised that it will be ready well in advance of the first day that qualification is possible.
Remember that you will need to be working for a qualified public service organization when you submit your final request, and that you will have had to be working for a qualifying organization, in a qualified position, and have made 120 qualified payments before you can even consider submitting this request.
Finally, you will need to remain working for a qualified organization when they receive your request, and offer you complete forgiveness.
Do not think that simply submitting your application will mean that you can now change jobs, leaving the public service space, and still receive your loan forgiveness – this program has not been set up to work that way.
For additional information about PSLF benefits, please visit the resources listed below:
View the PSLF Fact Sheet here.
View the PSLF Question & Answer Page here.
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