How To Qualify For Public Service Loan Forgiveness

In October of last year, the first round borrowers became eligible for loan forgiveness under the Public Service Loan Forgiveness (PSLF) program. It’s been a long time coming, with more than half a million borrowers enrolled as the program enters its tenth year.

So why aren’t we hearing about anyone having their loans forgiven?

As many borrowers are finding out, having your loans forgiven through PSLF is more complicated than just enrolling. When October rolled around, thousands of people found out they were ineligible for reasons ranging from the obvious to the obscure. To put it simply, anyone looking for loan forgiveness through public service loan forgiveness needs to monitor their eligibility like a patient in critical care.

If you’re uncertain about your PSLF eligibility status – or whether you should consider the program in the future – read ahead for the details.

What is Public Service Loan Forgiveness – PSLF?

Public Service Loan Forgiveness (PSLF) is a program in which federal student loans may be eligible for forgiveness after 10 years of working for a government or non-profit entity. The program was established in 2007 to encourage college graduates to work for lower-paying organizations.

There are two main requirements. Only borrowers with federal student loans, not private loans, qualify for this program. You also must work for an eligible employer while making qualified payments for 120 months or 10 years. Any time spent in default or in forbearance on a loan won’t count toward your forgiveness. If you’re unemployed for a month, that month won’t count toward your 120 minimum.

While working toward PSLF, graduates can choose from one of several income-based repayment plans, which have a lower monthly payment than the standard plan. By choosing an income-based plan, they can reduce their monthly payment while still aiming for loan forgiveness.

Though the federal government has other forgiveness programs, none are as beneficial as PSLF. Student loans forgiven through the public service loan forgiveness program are not considered taxable by the IRS the way other programs are – and you only need to make qualified payments for 10 years to get your loans forgiven.

Doctors who plan to work for non-profit or public hospital organizations should absolutely consider PSLF. They’ll save thousands on their student loans and shorten their repayment timeline at the same time.

What Jobs Qualify for Public Service Loan Forgiveness?

PSLF requires physicians to work for a government or 501(c)(3) not-for-profit organization. An organization without the 501(c)(3) designation that still serves the public as its main objective may be eligible. Working in a private practice will disqualify you from public service loan forgiveness, as will working for a for-profit hospital.

You must work full-time for the employer so independent contractors or those with part-time hours don’t qualify for public service loan forgiveness. There is no income limit to PSLF.

Many doctors give up on public service loan forgiveness because they can earn more in private practice, but paying the full cost of student loans could easily negate that larger income. Making $20,000 more a year won’t matter much if you’re carrying a six-figure loan balance.

Of course, if you’re giving up $200,000 a year to work for a non-profit, you’re likely better off choosing a private job. Still confused? Talk to a fee only financial planner to see how the math works out. They can go through your situation with a fine-tooth comb, giving you the information you need to make your decision with confidence

What Loans Qualify for Public Service Loan Forgiveness?

Only federal Direct Loans qualify for public service loan forgiveness. If you have a Perkins or Federal Family Education Loan (FFEL) loan, you have to consolidate them into a Direct Consolidation Loan in order to apply for PSLF.

If you have a mix of Direct Loans, FFEL and Perkins Loans, make sure to only consolidate the non-Direct loans. When you consolidate your loans, the clock for public service loan forgiveness restarts and any eligible payments you’ve made are erased. Borrowers with Perkins or FFEL loans should make sure not to include any Direct loans when they consolidate.

How do the four income-driven plans compare?

Because PSLF allows borrowers to use any repayment method they wish, many opt for an income-based repayment plan. These plans charge borrowers far less than the standard 10-year plan. Because these repayment options are calculated off your income, payments change each year depending on your earnings.

But how do you choose the plan right for you? Read below to see how each plan differs. If you’re still confused, call your student loan servicer and ask them how your monthly payment will change under each plan. While you’re on the phone, verify that your loans qualify for public service loan forgiveness.

Income-Based Repayment Plan (IBR)

If you are a new borrower after 7/1/2014, the monthly payment will be 10% of your discretionary income, which is the difference between your annual income and 150% of state poverty guidelines. If you were a borrower before 7/1/2014, the monthly payment is calculated at 15% of your discretionary income. You can find the poverty guidelines here.

Under IBR plans, your spouse’s income only counts toward the total if you file a joint tax return. If you were a borrower before 7/1/2014, forgiveness under IBR would be after 25 years and if you were a borrower after, forgiveness was changed to occur after 20 years of payments.

Pay As You Earn Repayment Plan (PAYE)

Borrowers who choose PAYE will have a monthly payment of 10% of their discretionary income. Discretionary income under PAYE is the difference between your annual income and 150% of state poverty guidelines. PAYE doesn’t count your spouse’s income if you file separate tax returns. Under PAYE, forgiveness would occur after 20 years.

Revised Pay As You Earn Repayment Plan (REPAYE)

Monthly payments under this plan are limited to 10% of your discretionary income, which is defined as the difference between your annual income and 150% of poverty guidelines.

Under REPAYE, your income includes your spouse’s as well – even if you file taxes separately.

Income Contingent Repayment Plan (ICR)

ICR payments are the lesser of 20% of your discretionary income or how much you’d pay in a 12-year plan based on your income. Discretionary income for ICR plans is the difference between your yearly salary and 100% of the poverty guidelines for your state and household. Under ICR, forgiveness would occur at 25 years.

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Filing the Public Service Loan Forgiveness forms

Every year, you can file a form with the PSLF program to document your payments, validate your employer and prove you’ve been following the requirements. Submitting these forms each year will save you a lot of time when you’re ready to file for forgiveness since the government will already have proof of your eligibility.

After you file the form, the government will send back a letter showing how many payments you’ve made that will count toward qualification for public service loan forgiveness. You’ll get a notice back if there’s a problem verifying your employer or your payment.

How Public Service Loan Forgiveness affects investment strategy and taxes

It may seem counterintuitive, but those looking to pay back their loans under PSLF should aim for the lowest salary possible. Because your monthly repayment plan varies depending on your income, doctors working toward PSLF should strive to reduce that income as much as possible.

The government looks at your adjusted gross income (AGI) to decide how much your monthly payment will be. Your AGI is how much you earn after subtracting retirement, Health Savings Account and 529 contributions. Reducing your AGI will lower your student loan payment.

This strategy only works if you save in tax-advantaged accounts like traditional 401ks, IRAs, and 457s – not Roth IRAs. You can contribute up to $18,500 in a traditional 401k and another $18,500 in a 457 plan as well as up to $5,500 in a traditional IRA every year. HSA contributions are limited to $3,450 for individuals and $6,900 for families. Contributions are also deductible on your taxes.

By lowering your AGI, you will lower your minimum amount due on your student loan payment. Typically, this will result in your outstanding loan balance to increase, which in turn, would increase the amount that will be forgiven after 120 qualified payments for public service loan forgiveness.

This article is part of the Student Loan Debt Movement, which is encouraging and inspiring people to take action on their student loans.

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