Public Service Loan Forgiveness – The Basics (Part 1 of 3)

By: Edmund Lau, CFA

 

--This is the first part of a 3-part article. Part 2 is here and part 3 is here. --

Are you someone who is looking to attend a Master’s program with the goal of working in a non-profit and worried about how much debt you will be saddled with once you graduate? Here is something you may want to look into:

The government’s public service loan forgiveness program (“PSLF”) is a program that offers debt relief in exchange for a 10 year commitment for those who are interested in working in the non-profit or government sectors. Many individuals that I’ve talked to aren’t familiar with the program, do not how it works, may be confused about how to qualify for it, or do not know what the pros and cons are for the program.

This article is the first of a 3-part series intended to shed light into the PSLF program as well as deep dive into the pros and cons and planning strategies to maximize the benefits of this program.

The Basics

Let’s start with the basics. The PSLF program was enacted in October of 2007 to provide debt relief to working individuals in the public sector. Under this program, your Direct Subsidized and Unsubsidized Stafford loans, Direct PLUS loans, and Direct Consolidation Loans can be subject to forgiveness after you graduate, are fully employed, and 120 “qualifying” payments are made.

Some important things to note:

  • You must submit a proof of employment from an approved non-profit or government institution at the time you apply for forgiveness (a link to it is here). Though not required, you can mail one in periodically to track your eligibility and payment progress.
  • Fully employed means your employer’s definition of “full-time” employment but is restricted to at least an annual average of 30 hours per week. Those working multiple part-time jobs who work at least an average annual of 30 hours per week also qualify.
  • The 120 payments do not have to be made consecutively. Of course, it is in your best interests to finish them as soon as possible.
  • You payments must be made under one of the Federal Income Driven Repayment Plans (“IDR”) programs to qualify and benefit from PSLF. This is a critical item as it will determine whether you qualify to benefit from PSLF as well as how much you will have to pay over the minimum 10 year period.

It should be noted that the first wave of people to see their loan forgiven under PSLF won’t arrive until late 2017, 10 years from the program’s date of enactment.  The government has yet to issue their final application for loan forgiveness approval. No one really knows how easy or quick the process really will be. Accordingly, be sure to send in the proof of employment periodically to track your progress, ensuring you are on the right path for forgiveness down the road.

Knowing these requirements and planning ahead before you start school are key steps to ensure that you will come out ahead debt-free and on the right path in your career.

So when does it make sense to look into PSLF?

PSLF is great for those attending private schools or expensive graduate degree programs but still want to work in a non-profit or government setting. It goes without saying that the private sector generally pays higher salaries than the public sector, so the PSLF is one mechanism that is trying to even the playing field.

Keep in mind, if you work in the non-profit/government sector, but you make enough in earnings relative to the amount of debt taken out, that you may not qualify due to the requirements needed to be in IDR. Stay tuned for the next article in this series, where I will walk through what an IDR contract is, how you qualify for it, and walk through a real life example of how the payments would play out under PSLF.

Forgiveness criteria

The Federal government’s general forgiveness plan for new borrowers offers debt forgiveness to anyone after 20 years. However, that amount forgiven becomes TAXABLE income that you must pay taxes on. However, under the PSLF program, the remaining balance of your debt is fully forgiven and you get to walk away with no other obligations (i.e., there are no tax repercussions with PSLF).

To learn more about the PSLF program, click here. As always, if you find our articles useful, please share with others and subscribe.

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