Written by: Corey Janoff
This post was originally published on our previous blog website on May 30, 2017 and has since not been revised and/or updated.
This week’s post was written by John Neri. Feel free to get in touch with John at john.neri@thefinitygroup.com.
Many are trying to benefit from the public service loan forgiveness program (PSLF). However with the recent changes in the administration there is a bit of panic on whether or not it will stick around. Let’s get to the facts around the program.
The Public Service Loan Forgiveness program was created under the College Cost Reduction and Access Act of 2007 and put into effect by President Bush. The purpose around it was to create a way to provide indebted professionals a way out of their federal student loan debt by working full time for a qualifying business entity and making 120 qualifying monthly payments. After that period of time your entire loan balance is forgiven.
How to Enroll
The first step is to make sure that you are working for a qualifying institution and are working full time which is defined by at least 30 hours per week. A few common examples of qualifying employers are:
- A government organization (which entails federal, state, local or tribal organizations, entities, or universities).
- A not for profit, tax exempt organization under section 501(c)(3) of the Internal Revenue Code
- A private, not for profit organization that provides services in the public sector such as: emergency management, military service, law enforcement, and public health/education.
This list is not exhaustive and there are others qualifying employers but that should at least help you understand if you have the potential to qualify.
One piece of advice I often tell my clients is to fill out the Employment Certification Form annually. It lets the government know that you are indeed working for a qualifying institution and creates a paper trail for them to follow. You will need to fill out the form for each qualifying employer you were working for when you satisfy the requirements of the program, so it helps to eliminate having to backtrack the past ten years with past employers.
The second step is to make sure that all your student loans have “direct” in the title. The current loans that are eligible currently are Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Consolidation Loans, and Direct PLUS Loans. If you have loans that don’t have direct in the title it can be amended by filling out the federal direct loan consolidation application. It’s important to note that if loans without direct in the title are consolidated with existing direct loans, only new payments moving forward will count towards PSLF. So if you have existing direct loans that you have been paying on, it would be wise to keep those ones separate from any loans you plan on consolidating into a new direct loan.
The third step is to make sure you are making student loan payments under a qualifying income driven repayment plan. A few common examples of these plans are Revised Pay As You Earn (REPAYE), Pay As You Earn Repayment Plan (PAYE), and Income Based Repayment Plan (IBR). Each of these plans offer different payment requirements and offer different forms of interest subsidization, so looking over them carefully is important when deciding which plan makes the most sense for your situation.
Common Misconceptions
A few common misconceptions that I have run into with my clients are whether the balance that is forgiven is taxed. The answer to that question is yes and no. For many of my clients in the medical/healthcare field, the game plan around student loans is to sign up as soon as they finish schooling. Once they are in training they enroll under the program and most often their employers qualify for public service loan forgiveness. Seeing as residency/fellowship can range anywhere from 1-9 years depending on your occupation/specialty, the idea of public service loan forgiveness can be appealing as your student loans are payable based on your income and while they are in training those payments tend to be low. After training, there may be a few more years of payments under a qualifying repayment plan while still maintaining the status of working for a qualifying employer and at the end of that 10-year period the balance of their student loans are forgiven and is NOT taxable as income. For individuals who enroll under an income driven repayment plan and don’t plan for forgiveness in 10 years the balance forgiven at the end of either 20 or 25 years is taxable as income.
One other misconception comes when a client starts working in a private practice setting after making qualifying payments while in training and then decides to switch jobs and return to a qualifying institution and believes that they need to start from scratch on the public service loan forgiveness program. It’s important to understand that payments under this program do NOT need to be consecutive. In the event you wanted to work for an employer that didn’t qualify but then changed your mind, your payments would not restart and would instead pick up where you left off.
Where We Currently Stand
Currently the program plans to offer student loan forgiveness to the first round of individuals in October of 2017. There have been talks of potential reductions in the amount forgiven but for now that is just a rumor. The most concrete evidence of a potential reduction came in 2015 when President Obama proposed capping the Public Service Loan Forgiveness amount to $57,500. Another is in President Trump’s new budget proposal which would end the program for new borrowers taking out loans after July 1, 2018. However, until October of 2017 rolls around, these rumors are merely that and the program as of now still should forgive the outstanding student loan balance if all requirements are met.
In Summary
As always, we will continue to bob and weave as legislation changes. It’s important to understand that whatever happens with the program, there are alternative options such as a new program coming up, or potentially considering a student loan refinance.
Disclosure:
This is not individualized financial advice. It is important to consult with your financial advisor to determine the best course of action for your financial situation.
