The government has done a great job in making any rules pertaining to student loans as confusing as possible. For many young professionals, having a thorough understanding of how to qualify for PSLF could mean the difference between saving tens of thousands of dollars (or more) or experiencing a lot of heartache. To qualify, you must meet ALL 5 of the following requirements:
- Have eligible loans: These loans must have been received under the Federal Direct Loan Program. The older FFEL Loans and Perkins loans don't qualify. But they may become eligible if you consolidate them under a Federal Direct Consolidation Loan. Keep in mind that whenever you consolidate federal loans, that restarts the clock toward PSLF on any loans included in the consolidation, even the ones you have already been making qualified payments on. As an example, this week I had a meeting with a prospective client. We started talking about their student loan debt. It turns out, they had been making payments for years on $45k worth of FFEL loans under the old income-based repayment (IBR)plan. Because they were on an income-driven plan, this person assumed they would qualify for PSLF. Unfortunately, I had to break the bad news that FFEL loans, even if being paid under an income-driven plan, don't qualify for PSLF. Loans from private lenders also do not qualify. This is why you want to carefully consider refinancing federal loans to private loans because that decision can not be reversed.
- Work for a qualifying employer: You must be employed by a federal, state, local or tribal government, or be employed by a not-for-profit organization. If you are banking on PSLF, you want to confirm you work for a 501(c) nonprofit. Most hospitals qualify. The official rules state that if your employer is not a 501(c), but they provide other public services, they still may qualify. But the rules on this are ambiguous and it seems very few organizations actually fall under this definition. Keep in mind it doesn't matter what type of work you do for your employer. Somebody who mops floors full time at a 501(c) hospital has qualifying employment for PSLF. Some healthcare professionals are independent contractors and this is where the rules can get tricky. If you are doing work for a 501(c) but your actual employer is a for-profit contractor, your employment does not qualify. According to the most recent clarifications provided by the government, if you are a 1099 employee and therefore do not receive a W-2, you will not qualify. In this situation, doesn't matter who you work for. There was a lot of uncertainty around this the past few years but it appears that having the W-2 is a core requirement.
- Have full-time employment: You have to work at least 30 hours per week or meet your employer's definition of full time. This means if your employer defines full time as 32 hours per week, and you only work 30, your employment doesn't qualify. Your qualifying hours don't have to be with the same employer. If you work for 2 separate qualifying employers you are allowed to combine the hours from both to meet the hourly requirement. *TIP- According to the Family and Medical Leave Act, you can take up to 3 months off work for maternity or family leave if it falls under your employer's definition of FMLA, and as long as you keep making payments, they will count towards pslf even though you aren't technically working full time.
- Be making payments under a qualified repayment plan: Basically you have to be making payments under one of the income driven repayment plans (ICR, old IBR, new IBR, PAYE, or REPAYE). Most healthcare professionals on an income driven plan should be on PAYE or REPAYE, unless they have older loans that don't qualify for PAYE, and REPAYE doesn't make sense. The other repayment plans such as extended or graduated do not qualify. Technically the standard 10 year repayment plan qualifies, but if you are on that plan, your loans will be paid off in 10 years anyways, so nothing will be left to be forgiven through PSLF.
- Make qualifying payments: Payments must have been made after October 1st, 2007. They must be made for the full amount due as shown on your bill and no more than 15 days late.
Payments only count when they are required. (see cares act update pertaining to this below) This means that any payments made while you are still in school, or on loans that are under the grace period, are in deferment or forbearance, or bankruptcy, WILL NOT COUNT. This is why if you know you will be targeting PSLF, you should enroll in an income-driven plan as soon as possible. Especially if you have just started your residency, as your low salary could allow you to enroll in a plan that starts your PSLF clock, and brings your payments close to $0.
*IMPORTANT: Under the CARES act, federal student loan payments have been paused until 9/30/21. Even if you are not currently making payments, as long as you meet all the other requirements for PSLF, your suspended payments WILL count towards PSLF as long as you meet all the above criteria. If you are targeting PSLF, you should be taking advantage of the pause in payments to boost your emergency fund, or if that is sufficient, boost your retirement savings. By increasing your tax-deferred savings to your retirement accounts, not only is this of course good for your retirement savings, but you will reduce your taxable income. This could actually lead to you having an even lower payment once the freeze is lifted, than what you had before the freeze.
Also, keep in mind that your 120 payments do not have to be consecutive. For example, lets say you made 36 qualifying payments during your residency at a 501(c) hospital, then leave to become an attending at a private practice. If you go back to work for a 501(c) a few years later, you still get to count the 36 payments you made during your residency towards PSLF.
So what should you do if after reading this you realize you don't qualify for PSLF? It's important to know that PSLF isn't the only type of loan forgiveness. You still may qualify for forgiveness through an income-driven repayment plan after 20 or 25 years of qualifying payments. However, you have to be mindful that unless the laws change, any amount that is forgiven will be taxed as ordinary income. Depending on the forgiveness amount, you could end up owing thousands or even tens of thousands of dollars in extra taxes that calendar year so you need to plan for that. You should also research what kind of state-backed loan forgiveness programs you may qualify for. For example, I live in Florida and my wife is an RN at the Mayo Clinic. She has been benefiting from the Florida Nursing Student Loan Forgiveness Program which reimburses nurses up to $4,000 per year for 4 years for their student loan payments. The nice thing about this program is that they reimburse for both federal and private loans.
Should You Refinance?
You can also consider refinancing to private loans if you are absolutely confident that you won't be targeting any type of federal loan forgiveness. Right now refinance rates are at all-time lows. But as I mentioned at the beginning of this article, you need to be absolutely sure you are willing to give up the many benefits of having federal loans. I would only consider this if you are confident your income is stable because once you refinance to private loans, your payments are what they are regardless of your income. If they are federal and you lose your job or take a big pay cut, you can recertify your income under an income-driven plan and make your payments more manageable. I would also wait until about a month before the cares act freeze is lifted to refinance. This way you can take still take advantage of the zero percent interest rate which is still a lot better of course than even the best refinance rates. Lastly, nobody really knows if Congress will enact some type of mass loan forgiveness program any time soon. If they for example say they will forgive up to $10k in Federal loans for everyone, but you refinanced to private loans, you would lose out on that benefit. I wouldn't make any decisions based only on this possibility, but it is something to consider
As you can see, qualifying for PSLF isn't cut and dry. The only way to be sure you are on the path towards forgiveness is to have a thorough understanding of the rules and to keep yourself updated on them.