How To Qualify For Public Service Loan Forgiveness (PSLF)
*Updated To Reflect Most Recent Rules As Of 12/1/2022
The government has done a great job of 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.
First: PSLF Updates
First, all federal student loans were put into forbearance with no payments due through perhaps as long as summer 2023. The pause will be extended until 60 days after the Biden administration is allowed to implement its student loan forgiveness plan and litigation is resolved, according to a press release by the U.S. Department of Education. If it can’t proceed with its policy and the legal challenges are still unfolding by June 30, 2023, student loan payments will restart 60 days after that.
Second, the Education Department issued a limited waiver of sometimes-onerous provisions for counting payments. While a one-year waiver for PSLF expired on Oct. 31, 2022, a very similar income-driven repayment waiver extends most of the provisions into summer 2023.
For PSLF seekers, the waiver means a broader range of past payments will count toward forgiveness, as long as you were working for a qualified employer at the time of repayment. If you want to apply for PSLF under these relaxed rules, you'll need to do so by May 1, 2023.
Federal loan payment pause
Federal student loan borrowers seeking PSLF don't need to make payments until the extended automatic forbearance expires sometime in 2023, depending on the outcome of legal challenges to debt relief. As long as you're still working full-time for an eligible employer, those months of nonpayments will count toward the 120 payments needed to qualify for PSLF.
In other words, if you have not made payments since March 2020 and won't make another until, say, August 2023, you are more than three years closer to forgiveness.
The PSLF Limited Waiver Program
Although the time-limited changes ended on Oct. 31, 2022, borrowers who work in public service will have another opportunity to have their payment count increased under a one-time account adjustment announced by the Department of Education (ED). Through the one-time account adjustment, borrowers with Direct Loans will be provided with many of the same benefits that were available under the limited PSLF waiver. Borrowers who do not have Direct Loans can consolidate and receive PSLF credit for prior payments as part of the one-time account adjustment, as long as they submit a consolidation application by May 1, 2023. While the department of education is working to process PSLF forms and update accounts with credit under the limited PSLF waiver, this also means that borrowers with federally-managed loans may still see an increase in their payment counts in July 2023, as a result of the one-time account adjustment.
The limited waiver applies to borrowers with Direct Loans, those who have already consolidated into a Direct Loan, and those who consolidate into a Direct Loan by May 1, 2023.
While grad PLUS loans are included under the limited waiver, parent PLUS loans are not.
Some federal loans are not Direct Loans. If you have FFEL or Perkins loans, for instance, you will need to consolidate your loans into a Direct consolidation loan before May 1, 2023. You will then need to verify that you work for an eligible employer and submit a PSLF form — also before May 1, 2023. You can technically submit a combined PSLF/Employer Certification Form prior to consolidating, but you must consolidate in order to get forgiveness.
How To Qualify For PSLF
- 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 young 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 anyway, 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.
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 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, let's 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 have increased drastically in the past year, making this a less desirable option. And 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 for sure when and if the $20k loan forgiveness will happen. If you refinance 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 toward forgiveness is to have a thorough understanding of the rules and to keep yourself updated on them.