In the Fall of 2016 I had the opportunity to connect with Heather Jarvis, a national advocate/expert on student loans. She is one of the people behind the efforts that materialized into the Public Service Loan Forgiveness act that passed in 2007. There is a handful of student loan forgiveness programs available, but none that match the overall benefits of the Public Service Loan Forgiveness (PSLF). For example, in other programs, a person benefiting from a $25,000 loan forgiveness will owe taxes on the forgiven amount. (For someone in a 25% tax bracket, that can translate into a $6250 tax liability.) However, if this same forgiveness were a PSLF, there would be no tax owed.
Although a bit technical in nature, I hope this overview will inform, educate and bring a little more clarity.
How does it work?
We have an idea of how it is supposed to work and we have been give advice/direction from the department of education to better understand the details. Yet, the challenge we all face is the unknown, because the first time someone can take advantage of this government program will be September of 2017, despite having been making 10 years of payments since the Loan Act passed in 2007.
Step One: Does Your Job and Place of Employment Qualify?
Among the many steps needed to qualify is the Public Service Loan Forgiveness Employment Certification form to be filled out by and signed by both the borrower and the employer. A copy of this form can be found on my website YaishFinancial.com/StudentLoans
Who is eligible?
A person that works for a non-profit organization or the government and has made 120 payments to a qualified federal loan may apply to have the balance of their federal loan forgiven. Types of employment may include administrators, teachers, therapists, nurses, special ed. professionals, office staff and government workers etc.
Please note, according to the Department of Education, “You are not permitted to apply the same period of service to receive a benefit under the PSLF Program and the Teacher Loan Forgiveness.” (I will be discussing Teacher Loan Forgiveness in the near future.)
There is an exception for individuals with a religious job description. According to Heather Jarvis, who quoted the regulations that govern this program, a member of clergy may qualify for public service loan forgiveness “as long as they spend at least 30 hours a week engaged in activities ‘unrelated to religious instruction, worship services or any form of proselytizing.”
You may have determined that your job description and place of employment qualify you to pursue this forgiveness plan. What next?
Step Two: Are Your Payments Kosher?
To qualify an individual for PSLF, the payment plan type should be an Income Driven Repayment Plan. According to FinancialAid.ed.gov, “An income-driven repayment plan sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size.” In general, the payment amount is a percentage of a person’s discretionary income. The percentages range from 10 to 20 percent.
The following are four income-driven repayment plans that qualify a person for PSLF:
Revised Pay As You Earn (REPAYE)
Pay As You Earn (PAYE)
Income-Based Repayment (IBR)
Income-Contingent Repayment (ICR)
Although there is another, known as a Standard Repayment Plan, this payment plan is usually structured to pay off the loan in 120 payments, which would defeat the purpose of trying to get a “balance” forgiven.
Step Three: Got the Right Loan?
What types of loans can be forgiven?
Please note that not all Federal Perkins Loans and Federal Family Education Loans (FFEL) are eligible for forgiveness. Only the loans initiated from the Direct Loan Program are eligible.
Federal Direct Subsidized Stafford/Direct Loans
Federal Direct Unsubsidized Stafford/Direct Loans
Federal Direct PLUS Loans
Federal Direct Consolidations Loans
What if you have another type of loan?
All is not lost; if you can get your ineligible federal loans to be consolidated into a Direct Consolidation Loan, this new loan would be eligible. The downside to this consolidation is that your 120 payments towards PSFL resets and starts from scratch. So before going this route make sure to exhaust your eligibility options for other forgiveness programs.
You May Be Eligible, But Is This the Right Move?
I’d recommend going to https://studentloans.gov/myDirectLoan/ and go to the far right tab labeled “Repayment and Consolidation.” Then choose the “Use the Repayment Estimator.” Pursuing this option may be a hassle but it’s important to run the numbers and see if the extra effort is worth it.
Also, it is important not to lose sight of the “forest,” since the goal with this forgiveness plan is not just to have your balance forgiven. The ultimate should be to pay the least amount overall, between payments and forgiveness. That’s why I recommend seeking professional financial advice to hash through these details as they pertain to your specific situation.
If you do decide that this is something you want, it may be a good idea to fill out the employment Certification and begin submitting it to Fed Loan Servicing, which can be found at MyFedLoan.org. I recommend this for two reasons. If you are eligible for this loan and it makes sense, you will not have to scramble to get this additional paperwork done. In addition, there currently is no cap for the forgiveness balance. There are members of government discussing a cap. Should a cap be placed, it may not impact “currently active applications” and it seems that submitting a certification form may grandfather borrowers.
By Ronn Yaish, MBA
Ronn Yaish, is Wealth Advisor and CEO of Yaish Financial Services, a New Jersey-based investment and wealth-management firm. Ronn earned a masters in Education and an MBA in Finance. He has been featured in Forbes, AOL Finance, Credit.com, GoBanking and US News and World Report. His goal is to educate and help clients “keep things simple” when managing their money.