Public Service Loan Forgiveness (PSLF) Program - Eligibility, Taxes, and Consolidation

Learn all about Public Service Loan Forgiveness (PSLF) programs, its eligibility and requirements, how to apply for it and more in this article given below.

Updated by Sharan Kumar on 10th June 2019

In the year 2018, the first batch of public service employees became eligible for public service loan forgiveness (PSLF) program. These employees were the first ones to have their Direct student loans forgiven with this program.

With the growing popularity of this program and also an increase in the number of income-driven repayment plans, a greater number of people are becoming eligible for loan forgiveness. You could be eligible for the same program as well. 

Have a look below and find out.

You might just save yourself a world of trouble if your loans are forgiven.


Table of Contents


Definition

To put it in simple terms, Public Service Loan Forgiveness or PSLF is a program run by the Federal Government for the employees who work full time in a public or non-profit sector and hence qualify for the same. It turns out to be for a variety of employers. Full-time employees are considered only if they have been working for more than 30 hours per week.

Most often the terms for the qualification of a federal student loan applicant for Public Service Loan Forgiveness is when you have made 120 on-time payments (10 years). It can lead to the rest of your Federal student loans being forgiven.

Most of the employers that qualify for the PSLF program are as follows.

  • The government (including military, law enforcement, schools, and universities)

  • Peace Corps or AmeriCorps

Tax-exempt non-profit 501(c)(3) companies (including tax-exempt hospitals, charitable organizations, educational institutions, and others. It’s also important to note that if you’re a member of the clergy or your work is religious in nature, it may not be possible for you to receive an exemption. (To qualify, you must spend at least 30 hours per week on work that has nothing to do with convincing, conducting worship services, or providing religious instruction.)

Other non-profit organizations that provide one of the following services -

  • Law Enforcement

  • Public interest law services

  • Early Childhood Education (including licensed or regulated healthcare, Head Start, and state-funded pre-kindergarten)

  • Emergency Management

  • Military Service

  • Public Safety

  • Public Health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in healthcare practitioner occupations and healthcare support occupations, as such terms are defined by the Bureau of Labor Statistics)

  • Public Service for individuals with disabilities and the elderly

  • Public Library Services

  • School library or other school-based services

  • Advocacy, political groups, or labor unions are not qualified as employers

  • Public Education


How does the 120-payment system work?

To be genuinely eligible for this program, one is required to have made 120 timely payments on your student loans. These payments that are qualified must meet the following criteria -

  1. You are a full-time employee (worked greater than 30 hours per week)

  2. Your loans have not been in default, deferment or forbearance.

  3. The payment made was after Oct 1, 2007.

  4. The payments made were on time and in full within a period of 15 days of your due date.

  5. You are under a qualified repayment plan (A very important part of the requirements is being under a qualified repayment plan), such as the income-driven repayment plans. This might also include the $0 payments that accumulate interest if you earn a wage below the poverty line. Payments that are made under the standard repayment plan would qualify for PSLF for Direct Consolidation loans if only the max tenure was set to 10 years. In the instance where you have a Direct Consolidation loan, make sure that you combine it with an income-driven repayment plan.)

  6. Since the 120 payments for your public service loan forgiveness program do not have to be consecutive, you will be eligible to take a couple of years off the work and come back and join in where you started.

  7. Be careful if you plan on consolidating your loans because when you do consolidate your loans, the number of payments required by you to make resets to the 120 payments regardless of how many payments you have made so far.


[Also read: Your guide to student loan consolidation ]


Be sure to consolidate the loan carefully and at the beginning of your loan forgiveness process. There is not another best time to consolidate your loans.

Ways to get the best out of your PSLF -

  • Keep your payments to the bare necessary amounts.

  • Keep payments to as little as once a month and not more.

  • Switch to an income-driven repayment plan ASAP.

  • Considering consolidating your loans? Do it right after graduating from college.


Wondering when your 120 loan payments clock starts?

You are eligible to begin making payments when your grace period that includes the in-school deferment and the post graduation 6 months or so time period has passed. If you believe you will be able to handle making payments sooner rather than later and want to get as little to pay in the form of interest as possible then consolidate your loans and begin making payments ASAP.

Consider yourself lucky as the 120 monthly payments are cumulative and not consecutive. In the sense, they are not necessarily required to be made from a single employer straight up for 10 years without breaks.

You could work for 3 years at a non-profit and then work at a private sector for another couple of years and get back into a government job for 7 years totaling 10 years of public service. After this, you qualify for the Public Service Loan Forgiveness. It makes sure that there is an encouragement in the flexibility and mobility of the workforce between the government and not for profit sectors respectively.

For PSLF, you can go for the plans that are available under income-driven repayment which are REPAYE, PAYE, and IBR. You could continue making payments and switch between part-time and full-time status, in the meanwhile slowly building up credit towards 10 years of full-time credit required. 

 

[Also read: What are income-driven repayment plans? ]

 

Even if you do not manage to get the Public Service Loan Forgiveness, you could get the 20-25 year IDR forgiveness on the same payment plan. Although if you do not get the Public Service Loan Forgiveness plan, you would be obliged to pay taxes on the forgiven balance. This does not apply with the forgiveness granted with the PSLF where no taxes are owed.

NOTE -

Consolidating your loans will definitely restart your PSLF process back to 120 payments. Always remember, consolidating your loans will restart the payments required to be made to become eligible for the PSLF. So do not consolidate if you have already made a number of payments that are eligible under the program.


Greatness about the program

One of the greatest and best student loan forgiveness programs is Public Service Loan Forgiveness as it is a tax-free benefit.

Keep in mind that this program is different from the private sector IDR in the sense that this program is a tax-free benefit. Whereas, the private sector employees although are paid better, sometimes they have to save up for the future tax penalty. Also, non-profit or government employees are not required to cover this extra cost.

Most of those who borrow loans do not mind working for 10 years for the reason that at the end of those 10 years, they no longer have to worry about the loan amount that they had to pay.

It would be wise to keep a side account to put your money into a brokerage. It is to make sure your assets grow during the period you wait for forgiveness. This, however, will likely end up back in your pocket and not be wasted on paying the loan as the Public Service Loan Forgiveness (PSLF) gets approved.


How to apply

The first step is to apply annually to the PSLF program through the submission of the Employment Certification form even when you change employers.

Mail it to -

U.S. Department of Education

FedLoan Servicing

P.O. Box 69184

Harrisburg, PA 17106-9184

Following this, your loan servicer will change to FedLoan Servicing. Further ahead FedLoan Servicing will proceed with reviewing your loan payments prior to now to check how many qualified loan payments have been made by you so far. If you are employed by multiple people make sure you submit multiple Employment Certification forms.

Submission of necessary documents - Every year, you must keep submitting Employment Certification forms. But keep a copy of your IRS W-2 and other supporting documents so as to prove that you have been working as a full-time employee. This makes it an easier job for FedLoan Servicing to keep a track on your payments. (You should also be able to dodge quite a number of hassles once your 120 payments are complete.)

FedLoan Servicing has its own account access area where you have the liberty to check the number of payments that you have successfully made.

After making payments - Once you have made 120 complete full-time payments (well done on that job), you become eligible to apply for federal student loan forgiveness programs.

After this, you can either directly upload the form to MyFedLoan.org/FileUpload or mail it to the FedLoan address given above.

Once FedLoan Servicing approves your loan, it will inform you and you shall also receive notifications of loan balances which will be nullified.


Qualifying loans for PSLF program

Since PSLF is a program given out by the federal government, private student loans are ineligible for loan forgiveness.

The loans that are eligible for PSLF are as follows -

  • Direct Subsidized Loans

  • Direct Unsubsidized Loans

  • Direct PLUS Loans

  • Direct Consolidation Loans

If the loan isn’t on the list above, it’s not qualified for loan forgiveness.


Do Direct Consolidation Loans qualify for the PSLF program?

Yes, they are eligible for loan forgiveness, but there are some drawbacks or clauses one has to watch out for.

First of all, if you consolidated your loans with your spouse together to a direct consolidation loan, and the only one who meets the employment requirements is either one of you, the portion that you own in the loan is forgiven whereas the rest is not. 

Also, any joint consolidation loans which belong to the federal family education loan (FFEL) program will not be eligible for this program.

Lastly, if at any time you consolidate your loans, you will be resetting your 120 payments requirements and in the process nullify any previous eligible payments you have made.


Do FFEL loans qualify for forgiveness via the PSLF program?

Until the month of June 2010, Federal Family Education Loan (FFEL) Program Loans were one of the largest federal loans to be issued to student borrowers. Since these weren't issued by the US Department of Education, hence, they do not qualify for the PSLF. One way of getting it done would be to consolidate it into a Direct Consolidation Loan.

If you are sure your employer qualifies for this program and your application for PSFL got rejected, then this most probably means that you might have non-qualifying loans.

If you have loans which you took before the month of June in the year 2010, then you should be paying a little more attention to the types of loans that you currently have. Most of the loans made on or after the year 2010 will be made through the Federal Direct Program. 

Loans from 2010 or earlier are probably from the FFEL loan program, which sadly does not qualify for the Public Service Loan Forgiveness program. You should be able to fix this issue with Loan consolidation that converts the loans you have into Direct Consolidation Loan. However, this will probably reset your timeline for payment since technically it becomes a new loan.


Affect on tax benefits with loan forgiveness

When you have an income-driven repayment plan, you should be looking at the taxable income that you make and reduce that as much as possible by making contributions which can be exempted from taxation as much as possible to get more Public Service Loan Forgiveness programs. The simplest way to achieve this is to pay the max amount to all your pre-tax accounts.

In the instance where you are married, you may also have your spouse do the same. This will lower your total income as a whole economic unit. The most usual references for pre-tax savings accounts are your 401K and your Health Savings accounts.

 

[Also Read: Affect of marriage and divorce on student loans ]

 

Here are a few other accounts that will help you reduce your taxable income and increase the Public Service Loan Forgiveness programs that you may be able to receive.

  • 403b

  • 401k

  • HSA

  • 457 (in addition to the 403b)

  • Solo 401k (indicated for income that you accumulate from any side hustle)

  • Traditional IRA

If you have lost anything greater then $3,000 in investments, you should be able to write that off against ordinary income. There are a few other write-offs as well that are plausible for real estate investing that have been noted for those that have side hustles or other incomes from businesses outside their main sources of income.

Regardless of the amount of loan taken, the amount remaining or the interest that is accumulated so far on the loan, the entire balance of the loan amount that is to be paid is forgiven and it is not taxable.


Considering Health Savings account for the bigger picture

Health Savings account can help you reduce your pre-tax income to a good amount. For instance, if you are single at that moment, your contribution to a health savings account can be up to $3,500. Whereas, You could also receive an indirect match from the Federal Government for about 10 cents on the dollar that you contributed.

married individuals are able to contribute up to $7,000 to their Family Health Savings account if this wasn't enough of a good reason as it was a triple exempted account.

For example, let us say you put in $4,000 into your health savings account for the family and your income after adjustments for the poverty line set by the Federal government is $100,000.

PAYE or REPAYE would expect you to make yearly payments of $10,000 towards your Federal student loans. After you save about $4,000 through your health savings account, your income becomes $96,000 and you'd be required to make $9,600 payments every month on your student loans.

Since you get your student loans forgiven tax-free later on this, it does not make any difference to the health savings accounts, hence, this becomes pure savings. It is one of the best-missed parts of someone going through for the Public Service Loan Forgiveness (PSLF) Program to save the money.


What happens if my loan goes to default?

Considering that you are on an income-driven repayment plan, repayment of your student loans must be at the top of your priorities list as these student loans must never be defaulted upon to be eligible for the PSLF Program. 

If in certain circumstances you default on your payments towards the loan, that payment will not be considered for the qualifying repayments. It also includes the time you spend getting your loan back to normal status.

 

[Also Read: What are student loan default and delinquency? ]

 

Make sure to stay out of default on your student loans by making repayment of those loans a priority. In such a situation where your income takes a dive due to some circumstances, for say if you lost your job, you could be considered resetting your repayment plan in the middle of the year.


Can it be reserved?

Yes, it definitely is a possibility. But, Public Service Loan Forgiveness has strong and wide backing from some powerful sets of individuals and to support that we have some really high costing grad school programs. Hence, the chances that the current borrowers do not end up receiving the PSLF at all is very unlikely. This is mostly due to political reasons.

The number of lawsuits would be insane in such a situation. It is sort of to say that the PSLF program is a contract that is set between the borrowers and the federal government that would be difficult to be broken. 

The Public Service Loan Forgiveness program will end up causing labor market imbalances that are yet to be realized. It would also cause a huge rift between the public and private sector employees.

For such reasons, we do expect the days of the PSLF program to be numbered. But the odds at those who are currently borrowers who wouldn't be able to receive the full benefit is at about 10% or lower. This also includes the part that is regarding the risk posed by the means of testing the program.


Summary - Final Thoughts

Since the program gives you complete forgiveness without the need to pay a cent back nor with any taxation on the amount that is forgiven, we can conclude that it is a pretty amazing program to consider. But then again, it requires a good amount of patience to follow through with the rules and more to get your loan forgiven.

Sometimes there can be those who are in doubt about the PSLF and those who currently have an outstanding debt might have their outstanding student debt reversed. Although this might be true, one must not worry about this and in the same instance must not offer to pay more on a loan that in the eventuality has a good chance of being forgiven. 

You should rather put that money elsewhere, in say a taxable savings account or mutual fund and or a brokerage account. It will build your savings at a faster rate in comparison to inflation and in the instance that repeal does occur, you should then cash out on this and begin repaying the loan but at a much faster rate and with much higher payments and finish off much quicker.


FAQ's

  Is it possible for me to be denied income driven payment?


It has become a regular affair to be denied the right under the law to be able to make lower payments this is as noted nationwide. Usually, when a borrower is denied the access to income-driven plans they may end up paying a lot more than they can afford, and this mismatch in the income and payment can force them into delinquency or loan default.

  What's the limit to the public service loan forgiveness?


At present, there appears to be no given limit on the amount of loan forgiveness that is made available to public service employees. Regardless of the amount being $20,000 or $200,000 in student loan debt, you should be able to receive complete loan forgiveness once you've satisfied the terms of the PSLF program.

  What is the duration taken for the teacher loan forgiveness application to be processed?


It is usual for the loan holder to be allowed 60 days from the day their completed application is received to process and forward the same to the guarantor. Further ahead the guarantor then has an additional 45 days to make a decision and either approve or deny the request.

  Qualifying non-profits for the student loan forgiveness program?


The criteria to qualify for the student loan forgiveness for non-profit entities are -

  • Must have a loan that is eligible (Federal Direct loans qualify)

  • Must have an eligible job (Public service jobs)

  • Should make 120 timely monthly loan payments on an income-based repayment plan.

  Are hospitals considered for the public service loan forgiveness program?


If any organization that is without the 501(c)(3) designation but still serves the public primarily as its main target then it might be eligible. But if you work in private practice this will lead to disqualification from the public loan forgiveness program which also includes those working in a for-profit hospital.

  Are University employees considered for public service loan forgiveness?


Yes, but only those that work full time at the universities that are more than 30 hours per week of work in those universities that are not for profit and tax-exempted organizations under the 401(c)(3). These must also qualify for all the other basic requirements of the program such as the 120 timely monthly payments made in full to qualify for the program.

  What are the ways to get rid of my student loans as fast as possible?


9 simple methods to employ to get rid of your student loans.

  • Make payments that are more than the minimum required

  • Make extra payments whenever possible

  • Think about refinancing your loans if the interest or monthly payments are high

  • Engage a side hustle

  • Take advantage of your job

  • Figure out ways to reduce the interest rates

  • Make good use of tax deductions and credits

  • Try to avoid certain repayment plans

  • Cut down on your budget

  Is my employer considered for the PSLF?


There are mainly 3 employers who are regarded as public service employers.

Government - Federal, state and local.

Non-profit - 501(c)(3) organizations.

  Will my $0 payments also count for the PSLF?


As long as you made 10 years of standard payments on your loans there wouldn't be any balance that would remain to forgive. Months, where your loan was in forbearance and or deferment, will not count towards the 120 payments required before forgiveness. But income-based repayment plans will even when the payments are as low as $0 per month.

  The loan repayment plans that qualify for the PSLF?


Getting the best out of the PSLF program is through the following repayment plans,

  • Income-based repayment plan (IBR)

  • Pay as you earn repayment plan (PAYE)

  • Income-contingent repayment plan (ICR)

  What are the jobs that qualify for student loan forgiveness programs?


There are about 11 jobs that offer the loan forgiveness program

  • Federal agency employee

  • Public service worker

  • Doctor/physician

  • Lawyer

  • AmeriCorps, Peace Corps and other qualifying volunteer organization workers

  • Nurse

  • Teacher

  • Automotive professionals: SEMA Loan Forgiveness Program

  • Dentist

  • Pharmacist

  • Veterinarian