Student loan debt in the United States continues to grow by $2,726.03 every second. Right now the running tally is about 1.35 trillion dollars (comapared to 13.8 trillion in outstanding mortgage debt) as of March 2016. (Click here to watch our generation get buried in student loan debt). When your student loan debt is crushing you, any opportunity for reprieve is welcome. Today’s article will provide an in-depth review of one existing loan forgiveness option, Public Service Loan Forgiveness (PSLF). Or, as you may know it, 10 year loan forgiveness.
What is PSLF?
Public Service Loan Forgiveness (PSLF) was signed into law as part of the College Cost Reduction and Access Act of 2007.
Who is PSLF for?
PSLF is for anyone employed by a government or not-for-profit organization.
When did PSLF start and when will the first payout be?
PSLF started in Oct 2007, that means the first eligible borrowers can officially apply for forgiveness in Oct 2017.
Why did PSLF start?
PSLF was started to relieve the pressure of high student loan debt for borrowers working in public service where pay is often lower than private sector work.
How does PSLF work?
After 120 payments on an eligible payment plan are made (10 years worth) the remaining balance is forgiven (tax free).
Those are the basics of PSLF but you’re not after the basics because you know the devil is in the details. You might be wondering How do I know if my employer qualifies? What if I change jobs? What if I’m in deferment? How many people are doing this? Can PSLF go away? Who does PSLF make financial sense for?
There are no short answers to any of these questions but stick with me because a financial decision this big is worth some thought.
Qualifying employers
Government organizations including federal, state, local, or tribal organizations qualify. Not-for profit tax exempt organizations under 501(c)(3) and private not-for-profit organizations that provide a public service (not religious, labor union, or partisan political group) qualify.
Changing jobs and periods of no payments (deferment, grace periods, in school status, forbearance)
Changing jobs is no big deal when it comes to PSLF. The requirements are straightforward. You need to make 120 payments while employed by a qualifying organization and then you’re eligible for forgiveness. The 120 payments don’t have to be consecutive, so if you’re between jobs any payments you make won’t count toward your 120 total. The same is true during any time your’e not required to make a payment. Any payments made during these periods don’t count toward your 120 total until you enroll in an income-driven payment plan.
Enrollment by the numbers
As of June 2015 there were about 335,520 individuals enrolled in PSLF.
Unfortunately of the enrolled borrowers 17% were currently signed up for a 10 year standard repayment plan. DON’T DO THIS! That completely mitigates the entire point of the loan forgiveness because you will have paid your loan off in 10 years.
How PSLF can disappear
“The Department [of education] cannot make any guarantees regarding the future availability of PSLF. The PSLF Program was created by Congress, and, while not likely, Congress could change or end the PSLF Program.” Yep it’s really that straightforward. Congress could vote and repeal PSLF. Some folks have suggested that there could be a class action lawsuit by borrowers against the government but I don’t think so. Technically no one in this program is eligible for anything until 120 payments have been made. So there’s nothing being promised and then not delivered…
In 2015 President Obama proposed capping the amount of loan forgiveness at $57,000. The republican party has proposed stopping the program all together. However the cap and cancelling the program have been quiet for a little while so I think you’re safe from both… for now.
Deciding if PSLF makes sense for you
Objectively:
Financially, deciding if PSLF is right for you is relatively straight forward but requires making a few assumptions. Calculate the amount you’re going to pay over 10 years like this: Monthly payment (in your income-driven repayment plan of choice) X 120 = the total amount you will pay over 10 years. Huge assumption number one is that you will make the same income and therefore payment. This is unlikely because you will probably get raises over 10 years and your payments will slowly increase. The second assumption is that you will be continuously working full-time for an eligible employer. If you take breaks between jobs or work a stretch for an ineligible employer you could seriously reduce the amount of loans forgiven because payments made during that time won’t count toward your 120.
If the amount you calculate is significantly less than the amount you owe, for example if you owe $150K and you calculate you’ll repay $110K on an income-based plan then it might make financial sense for you to do it.
Other considerations:
Can you get out of debt faster on your own? If your income enables you to pay enough each month to shorten your repayment period by years then I propose that’s the route you take.
Nothing in this payment plan is a guarantee and holding onto debt comes at it’s own cost. It leads to the cliche’d stuff like delaying marriage, first home, and kids. But it also leads to more subtle entrapment. You may feel trapped in a certain type of employment or at a specific job or employer. Even if your job isn’t meeting your needs you may stay for the sake of loan forgiveness.
If this gets revoked you essentially handed yourself a bunch of interest. All it takes is a vote by the old, rich Americans in congress who have a track record for not caring a whole lot about the cost of education (if you don’t believe me see rising costs of tuition, outrageous federal interest rates, and the student debt doomsday clock). You could hope that existing participants would be grandfathered in. However, 10 years is a long time to make payments. If this were to be revoked you would end up paying a lot more than if you went after it early.
If you have private loans you need to carefully examine what loan amount will actually be paid off. The only loans that qualify are Direct Loans. Not Perkins, FFEL, or health professionals loans. IF you want those loans to qualify consolidate them into a Direct Consolidation Loan early. You will then have to make 120 payments on that consolidation loan to be eligible for forgiveness and any previous payments made wouldn’t count.
Social vs fiscal responsibility:
If you can afford to make your student loan payments, even at a sacrifice, and pay your debt off it seems like your social responsibility to do so. The PSLF program was designed for folks who would take low-paying jobs that benefit society. Jobs that could almost certainly never generate the income needed to pay back student loans.
As a pharmacist I ended up with $132K in student loan debt. Yea it was a lot and yea I still get crabbed making massive payments and dumping money into interest. But I took out these loans and I have the means to pay them back. If all goes well I’ll have them paid off by the end of 2018. Sure I could’ve hung on to my loans for 10 years and saved myself $20-25K but at what cost to our society? Higher interest rates for future students? Additional government debt? Delaying big expenses 10 years? Guilt and worry about what might happen if they cancel the program? No thanks! I’ll just go all out and pay it off. I would suggest refinancing if you’re of a similar mindset and trying to knock down your debt. Check out this walk through of refinancing with Earnest.
From a purely financial point of view PSLF would’ve made sense. My month to month would have been more comfortable because I would have been making income-based payments. And at the end of the 10 years my balance would have been forgiven. I would’ve come out ahead and perhaps I would even have more socked away in my 401K.
In the end you need to do what feels best for you. For more information check out these resources.
https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service
https://studentaid.ed.gov/sa/glossary#Qualifying_Public_Services
https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven`
Check out the Repayable YouTube series: 5 Fast Facts, Three Things to Consider, and Three Ways PSLF Could Change.
Share your questions, worries, and experience in the comments below or head over to the Millennial Maxims Facebook group to join the discussion already underway!
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