A Guide to Public Service Loan Forgiveness (PSLF)

You may think you know PSLF, but it’s good to review the basics to make sure you understand whether this program is right for you. Many borrowers apply and make payments in good faith only to learn later that their employment or payments didn’t qualify. Even if you qualify, make sure you understand the tax consequences of PSLF.

Law school is more expensive than ever. The increased price has students looking for a variety of ways to pay for law school, but often students have to take out loans. Upon graduating law school, there are many ways to pay back those loans. One option that is often discussed is the Public Service Loan Forgiveness (PSLF) program.

PSLF is a program from the U.S. Department of Education that is administered through Federal Student Aid (FSA). If someone works for 10 years full-time in public service employment and makes 120 monthly qualifying payments towards their student loan debt, then the remaining balance is forgiven. PSLF started in 2007, so the first group of borrowers had the opportunity for loan forgiveness starting in 2017. Out of the 726,811 applications for PSLF, only 8,429 have qualified for loan forgiveness. A key factor in why so few borrowers qualify for PSLF is its complicated nature. This article provides an in-depth explanation of what PSLF entails and how to determine if it is the right program for you.

Eligible loans and student loan repayment programs

In terms of eligible loans, the loans need to be one of the following federal student loans:

  • Federal Direct Stafford Loans (Subsidized and Unsubsidized)
  • Federal Direct PLUS Loans
  • Federal Direct Consolidation Loans

Perkins Loans and Federal Family Education Loans (FFEL) are not covered, but if you consolidate your loans and the consolidation includes Perkins Loans and FFELs, then these loans can be included. FFEL used to be another way to take out federal loans, where the federal government would guarantee private loans. However, this program ended in 2010, so there are still people repaying these kinds of loans, but there will not be any new loans under this program.

Another major determinant is if you are on the right payment plan. There are only four qualifying repayment plans:

  • Revised Pay As You Earn (REPAYE)
  • Pay As You Earn (PAYE)
  • Income-Based Repayment (IBR)
  • Income-Contingent Repayment (ICR)

These four plans are known as “income-driven repayment” plans. These programs all limit your monthly payment to 10-20% of your “discretionary income” and offer student loan forgiveness after 20 or 25 years. Every year, you need to re-verify what your income is and the size of your family. The reason for this is that if you face a change in income, it will impact what you pay.

The detriments of these programs are that you will pay more interest than most programs because it takes so long to pay off the loan that the interest compounds. If you do not qualify for PSLF, you will need to pay taxes on whatever amount is ultimately forgiven and your spouse’s income might count towards your income level, which could make things more difficult if both of you have student loans. It is worth noting that if you qualify for PSLF, two of the major determinants for income-driven repayment plans go away because whatever is forgiven through PSLF is not taxed and the amount can be paid off in as little as 10 years, so the interest will not compound as much in 10 years as 25 years.

Where income and employers come in

Interestingly, income level does not determine whether someone qualifies for PSLF, but your income level will impact how much you pay for each loan payment. If your salary is high enough, then the individual loan payments might become so high that you will pay off your loans within 120 payments.

There are many qualifying employers, they can be a government organization at any level, including tribal governments. Individual examples of employers include the Department of Justice or a local District Attorney’s office. AmeriCorps and Peace Corps are two other prominent employers that qualify. The military services, public education institutions and public transportation providers are some general examples of government employers. It is important to note that a government contractor does not count as a government employer.

Additionally, some non-for-profit organizations also qualify. In order for a non-profit to meet the eligibility requirements, it needs to be a 501(c)(3) tax-exempt organization. There are some not-for-profit organizations that are not 501(c)(3) tax-exempt organizations that are still eligible for PSLF. The non-501(c)(3) organizations that qualify for PSLF have to perform one of the following public services: emergency management, public safety, aiding the military, supporting police forces, legal groups that are at least partially funded by the government, pre-schools, public health settings, public education settings and library services. The program forbids partisan organizations such as labor unions or political groups from qualifying for PSLF. As of July 20201, religious workers are eligible for PSLF.

Reading all of this can be confusing in terms of whether you qualify for Public Service Loan Forgiveness. So rather than categorically assuming whether you are not or are eligible for PSLF, it is worth checking out the PSLF Help Tool. It takes about a half hour to fill out. All you need is your W-2 or Federal Employer Identification Number. The PSLF tool provides an array of helpful information. It can tell you what employers qualify, what you need to do to be eligible for PSLF and give you a PSLF form to submit to formally see if you are eligible for PSLF.

If you are employed and have direct loans, then after submitting the form, you will receive information on how many of your direct loan program payments that you have made qualify for PSLF. This section provides a primer of what you will need to submit in the PSLF Help Tool, so you can use it to make sure you have the relevant information before opening the form.

Ultimately, less than 3% of PSLF applicants qualify for the program. About three-fourths of these applicants are employed by the government. About 56% applicants are declared ineligible because they did not make 120 payments that qualify for the program. The average amount forgiven is $75,090.

Whenever you change jobs, you will need to fill out an “Employment Certification for Public Service Loan Forgiveness form”. The point of this form is for you to verify that your employer is eligible. In order to prove your eligibility, your employer will need to fill out part of the form. Technically you only need to only complete the employment certification form when you change jobs, but it is a good idea to fill out the form annually to make sure you are continuing to qualify.

A key element of whether it is worth pursuing PSLF as part of a student loan repayment strategy is whether you would have a lot of loan balance to pay off after 10 years anyway. PSLF is key for people who do not earn enough to pay off much of their loans within 10 years. If you can pay it off within 10 years, then it might not be worth the hassle of dealing with the reporting and restrictions that come with pursuing PSLF.

Can public service loan forgiveness be taxed?

Loans forgiven through PSLF cannot be taxed, but the IRS can tax borrowers on other loan forgiveness programs. If you attempt to get your loan forgiven through PSLF but end up benefiting from another forgiveness program, it is important to be vigilant about what those taxes could mean. While loan forgiveness is like getting a check for potentially as much as tens of thousands of dollars, all it does is cancel your debt, so you do not get any cash in your bank account. Yet, you still need to pay taxes on the forgiveness as if it is a lump-sum payment.

As a result, you can work with the IRS to engage in a payment plan for the taxes. You should investigate your repayment options because sometimes the IRS can find you “insolvent”, meaning that you cannot afford to pay the taxes on the forgiven amount. When this happens, the tax will be reduced or even forgiven. It is best to work with a tax attorney or an accountant on this.

Another option for disabled borrowers

For borrowers who are disabled, it is possible to get your loans forgiven on account of your disability. The Department of Education mandates that you must have a “total and permanent disability” (TPD) to not have to pay back a loan. This program only applies to federal loans, but unlike PSLF, it includes both direct loans and FFELs.

To find out if you qualify, you need to submit documentation from the US Department of Veteran Affairs, the Social Security or a physician that proves you have a qualifying disability. You also need to personally fill out an application. After you submit the application, your form will be reviewed. During this time, you do not need to pay back any loans. If your application is denied, you can appeal, but you must do so within 12 months.

When you qualify for the program, you will face a “three-year post-discharge monitoring period”, where the government needs to check that you continue to qualify for the program. Elements that can disqualify you include: if you make a salary that exceeds the income guideline, if you take out a new direct loan, or if you are determined to no longer be disabled.

If you received a TPD discharge you can still take out further loans. There can be conditions. If you received the discharge based on a debilitating condition, you need to provide your educational institution with a letter that shows you can participate in school. You also must sign a letter that says you will not receive another TPD forgiveness for this loan unless your condition gets severely worse.

The situation of whether someone needs to pay taxes on a discharge through TPD is a bit complicated. Any TPD discharge received before Jan. 1, 2018 will be considered taxable income by the IRS. A TPD discharge that occurs from Jan. 1, 2018 to Dec. 31, 2025 will not be taxed.

Solutions for student loans that do not qualify for PSLF

If some of your past loans do not qualify for PSLF, you still may be able to receive forgiveness for those loans through a temporary program. In 2018, Congress passed the Consolidated Appropriations Act, established the Temporary Expanded Public Service Loan Forgiveness (TEPSLF).

TEPSLF only applies to direct loans. The payments that qualify must be after Oct. 1, 2007, have been paid in full on what you owed, be no later than 15 days after the due date, and must have been made while being employed full-time.

The point of TEPSLF was that if you ended up in the wrong student loan program but could have qualified for PSLF,  the Temporary Expanded PSLF provides a temporary opportunity to correct this issue.

Additionally, if PSLF is not available to you, there are potentially other options. Sometimes states help with loan repayment. Additionally, the military offers their own loan forgiveness programs. Sometimes certain professional associations provide repayment services.

Moreover, there are programs like fedloan servicing that have an official partnership with the federal government to help you form a program to repay your loans, whether it involves PSLF or not.

If you experience a financial hardship such as the loss of a job or a family emergency, you can seek forbearance. This program allows you to temporarily make lower payments or even no payments on the loans for a period of time. However, often this period will not apply to your repayment plan. Additionally, interest may still accrue during this period. There can even be mandatory forbearance when working for the government in certain programs like the Department of Defense or AmeriCorp.

Criticism of PSLF

The PSLF program has faced many criticisms. One is the lack of proper notifications regarding qualification for the program. Many borrowers have reached out to their student loan servicers to express that they intend to enroll in PSLF and then make payments for years, only to be told after this period that they do not qualify. Other borrowers face the issue that they qualify for PSLF but their loan servicers never tell them. Additionally, consolidation has taken exceptionally long because the professionals handling it are not prepared. Many state officials have taken aim at FedLoan for failing to provide the service that consumers deserve in regard to their loans.

Further developments with PSLF

Covid-19 brought several temporary changes to the program. For people in eligible loans, they did not need to make loan payments, they faced a 0% interest rate and no longer needed to deal with collections for default loans. If you have a Income-Driven Repayment Plan, then each suspended month of payment still counts towards the total 120 payments needed for forgiveness.

There are no loan forgiveness programs specifically centered around Covid-19.

Other options

While PSLF perhaps receives the most attention as a repayment strategy, there are many other ways to repay loans, some that will prove more flexible than PSLF. It is important to evaluate your options and make an informed decision. This guide provides you with an array of resources that can help you develop a loan repayment plan that makes the most sense for your situation. Refinancing can also serve as a key part of a loan repayment solution. Given the problems that PSLF continues to face, it is always worth researching alternatives.

PSLF started with an admirable goal that everyone could support—making repaying loans easier for people who choose public service careers—but given the complex nature of PSLF and the litany of problems that have emerged since its creation, PSLF ultimately does not become an option for 97% of borrowers who even try to apply for it. While PSLF can still serve as a powerful tool to eliminate your loans, to ensure that you can make good use of it, it is crucial to be informed of all of the elements of the program.

Todd Carney is a graduate of Harvard Law School. He holds a Bachelor’s degree in Political Science and Public Communications. He has also worked in digital media in New York City and Washington D.C. The views in his pieces are his alone and do not reflect the views of his employer.

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