How Public Service Loan Forgiveness might solve your student loan problems

First in a three-part series on student loan forgiveness programs you shouldn’t overlook

You just graduated and landed a job, but your federal student loan payments are almost impossible to make. Before you consider a forbearance to postpone your loan payments, or try to barely scrape by while making your standard payments, or even refinance your federal loans into a private vendor, there could be other options.

Public Service Loan Forgiveness (PSLF) can potentially offer huge savings on your federal student loans. If PSLF is properly used, the amount of forgiveness can reach into the six digits for some borrowers.

This program provides forgiveness on your remaining student loan balance after 10 years of making qualifying payments while working for an eligible government agency or nonprofit, and the forgiven balance is NOT taxable to you.

This makes a big difference because if six figures was forgiven and that amount was taxable as income, you could be facing a large tax bill that year.

You may be thinking, what would be left to forgive since under the standard repayment plan the loan is paid off in 10 years? One of the ways PSLF lessens the financial burden is by requiring you to be on an income driven repayment plan (IDR), which results in lowering your monthly payments. This is one of three aspects to being eligible for PSLF.

Here are three parts to qualifying for PSLF:

1. Must have the right job

You must work a full-time position, which equates to at least 30 hours a week. Your job qualifies if you work full-time for a federal, state, local or tribal government organization, or a 501(c)(3) non-profit, AmeriCorps, Peace Corps or a Public Service Organization. This covers more areas than you may think, as qualifying PSLF jobs are widespread across many careers. See which jobs qualify using the Federal Student Aid website’s help tool.

2. Must have federal Direct loans

Only federal Direct loans qualify for forgiveness under PSLF. Even if you are on an IDR plan, your loans might not be Direct. To find out which loans you have, log into the Federal Student Aid Website. You want to see “Direct” in the name of the loan. If you don’t see Direct, don’t panic because certain loans can be converted to Direct. Use this help tool to determine if your loans qualify.

Consolidating your loans can be helpful in turning non-qualifying loans into qualifying when done properly. Be careful to avoid consolidating non-qualifying loans with already qualifying Direct loans because it could erase past qualifying PSLF payments. Another big mistake is refinancing federal loans with private loan vendors. This makes your federal loans permanently ineligible for PSLF along with other forgiveness programs.

3. Must be on an Income Driven Repayment Plan (IDR)

There are four categories of IDR plans, all of which lower your monthly student loan payments by calculating monthly payments based off a percentage of your annual discretionary income and your family size. If you are on these repayment plans without qualifying for PSLF, loan forgiveness is received in 20 or 25 years and the forgiven balance is taxable to you. These are two of the biggest benefits to PSLF. Non-taxable forgiveness in 10 years compared with taxable forgiveness in 20-25 equates to substantially larger savings.

This article will focus on choosing an IDR with the intent of qualifying for PSLF. Your strategy for choosing an IDR could differ if you were to choose a plan while not qualifying for PSLF.

The goal when qualifying for PSLF is to have the lowest monthly payment possible since your loan balance is on track to be forgiven in 10 years. Why put more toward paying off your debt when it will be forgiven? The payment amount is determined by taking your adjusted gross income (AGI) less the federal poverty line income, then multiplying this discretionary income by the appropriate payment percentage.

Income Driven Repayment Options:

1. Income-Based Repayment (IBR)

IBR is based off financial need, which means that your debt-to-income ratio must be relatively high. If you borrowed after July 1, 2014, the monthly payment is 10% of your discretionary income divided by 12, and your repayment period is 20 years. If you borrowed before that date, 15% of your discretionary income will be used, and the repayment period is 25 years.

Discretionary income is calculated by subtracting 150% of the federal poverty line from your AGI. To be eligible for starting the plan, the payment must be less than what your standard repayment plan payment is. Once you are on the plan, your monthly payments will be capped at the standard repayment plan amount even if your income spikes.

Payment example:* With a student loan balance of $250,000 and annual AGI of $50,000, the monthly payment = $261 (New Borrower IBR) or $391 (Old IBR) — as compared to $2,652 on the standard 10-year repayment plan.

Total projected savings of IBR with PSLF versus the standard 10-year repayment plan = $280,996 (New Borrower IBR) or $262,396 (Old IBR).

2. Pay As You Earn (PAYE)

PAYE has many similarities to IBR, but this plan is harder to qualify for. To qualify you must have borrowed your first loan on or after October 1, 2007, and have received a disbursement of a Direct loan on or after October 1, 2011. PAYE has a 20-year term, and payments are calculated based on 10% of your discretionary income and 150% of the federal poverty line. Just like IBR, once on PAYE you have the payment cap. PAYE is also based on financial need. One drawback to PAYE is that it requires you to consolidate more loans into Direct federal loans than IBR for eligibility.

Payment example:* With a student loan balance of $250,000 and annual AGI of $50,000, the monthly payment = $261as compared to $2,652 on the standard 10-year repayment plan.

Total projected savings of PAYE with PSLF versus the standard 10-year repayment plan = $280,996.

3. Revised Pay As You Earn (REPAYE)

REPAYE is easier to qualify for than PAYE and IBR. It is not based on financial need and you are not required to have taken a loan out before or after any specific time. The payments are based on 10% of your discretionary income, calculated with 150% of the federal poverty line.

Since this plan is easier to qualify for, it has a couple stipulations.

The first is that your repayment term goes from 20 to 25 years if any of your loans were for graduate or professional study. REPAYE also does not cap your payment at the standard repayment plan amount like IBR and PAYE. Another impactful drawback: Your spouse’s income must be included in calculating the monthly payment. REPAYE is the only IDR plan where this is the case.

Payment example:* With a student loan balance of $250,000 and annual AGI of $50,000, the monthly payment = $261as compared to $2,652 on the standard 10-year repayment plan.

Total projected savings of REPAYE with PSLF versus the standard 10-year repayment plan = $280,996.

4. Income-contingent Repayment (ICR)

ICR is the easiest plan to qualify for because it is not based on financial need, but it results in higher payments than the other plans. Generally, only borrowers with Parent PLUS loans benefit from choosing this plan. Your payment is the lower of 20% of your discretionary income with only 100% of the federal poverty line subtracted from AGI, or your income-adjusted payment amount on a 12-year standard repayment plan. ICR does not cap your payment at the standard plan amount and has a 25-year term.

Payment Example:* With a student loan balance of $250,000 and annual AGI of $50,000, the monthly payment = $625as compared to $2,652 on the standard 10-year repayment plan.

Total projected savings of ICR with PSLF versus the standard 10-year repayment plan = $230,383.

*Note: These payment examples include the assumptions of a single borrower with one Direct Unsubsidized loan with an interest rate of 5% who is living in Wisconsin with no dependents.

Find out which loans qualify for each IDR plan

Estimate your payments

Getting started with Public Service Loan Forgiveness

You must make 10 years of monthly payments while all three qualifying requirements discussed above are being satisfied. These 120 payments do not have to be consecutive.

You also need to submit the PSLF employment certification form annually to confirm your continued qualification. The form is mandatory to provide proof of annual qualification. Not submitting this form annually is one of the biggest mistakes people make when trying to receive PSLF.

This program doesn’t fit everyone but, if you do qualify, the student loan savings you could receive from PSLF can be sizable.

If you do not qualify under PSLF, forgiveness under IDR plans could still provide worthwhile savings depending on your debt-to-income ratio.

As a rough rule of thumb, if your household debt equals more than 1.5 times your household income, being on an IDR plan without qualifying for PSLF could benefit you.

If you do not qualify for PSLF and your household debt is less than roughly 1.5 times your household income, refinancing could be your best route to savings.

Contact Wipfli Financial for help navigating planning strategies to maximize the benefits available to you through these student loan forgiveness programs.

CONTACT US

Public Service Loan Forgiveness might solve your student loan problems

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services and fees is set forth in Wipfli Financial’s current Form ADV Part 2A brochure, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Madeline Neumeier
Madeline Neumeier

Madeline Neumeier is an Associate Advisor with Wipfli Financial Advisors, LLC, based in Green Bay, WI.

No Comments Yet

Comments are closed

How Public Service Loan Forgiveness might solve your student loan problems

time to read: 6 min