Finance Friday - What Is Public Service Loan Forgiveness (PSLF)?

Happy Friday! For many of us, it's the start of the holiday break! Thank you so much for your hard work! You deserve it! 

As the year wraps up and tax season looming around the corner, it's probably a good time to start reevaluating your finances. Today's topic is Public Service Loan Forgiveness (PSLF) that some of us should qualify for. I'm on it myself and it's a frustrating process. Let's talk about what it is, the pros and cons of PSLF, and its considerations. 
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WHAT IS PUBLIC SERVICE LOAN FORGIVENESS (PSLF)?
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This is the part that tends to surprise me. A lot of people (educators) are unaware of this program. I remember during my first year a representative from the NEA (National Education Association)  Member Benefits came to my district to do a workshop on it, the room was packed! If you're an NEA member, check out NEA Member Benefits. Lots of awesome resources. 

There were all sorts of questions flying around and many of those in attendance did not know it exists or never knew they qualified (or lost qualification because of certain actions they made). I knew about it going into my teacher credential program because mine was a MA of Education + credential program and that means a $$$$ price tag. I'm a social science teacher. There are barely any financial incentives/aid for my content area. Science, math, and special education credentials are where there's plenty of educational grants and scholarships. My science classmates got thousands more in grant and scholarship money than me and my social science and English counterparts. I got a small "grant" from my grad school, but I'm just going to call it what it is. It's a tuition discount. I believe it was only a "15% discount." I ended up going through with my masters and credential program because of PSLF. I have $50,000+ in student loans... 

SO WHAT IS PSLF AND WHO QUALIFIES?

The Public Service Loan Forgiveness program was created in 2007 as a way to relieve and encourage those who pursue in career in public service, such as teaching or non-profit. If you're at a private school and it's status is "not-for-profit," then you qualify. If your private school is labeled as "for-profit," then you won't qualify for PSLF.

Next, you'd have to make 120 qualifying payments in a qualifying repayment plan while working full-time with a qualifying employer. Three "qualifying." This is perhaps the most frustrating and confusing part of PSLF, especially the qualifying repayment plan part. 

Fall 2017 was when the first cohort of borrowers were eligible for loan forgiveness. A very small percentage got their loans forgiven. 99% got denied. According to the Department of Education, 864 applications for loan forgiveness were approved through March 31, 2019. Another 10,000+ are still pending. That just sounds absolutely sad and demoralizing. I had just finished my first year in the classroom and started my second when that news hit me. It was scary. 

WHAT IS A QUALIFYING REPAYMENT PLAN?
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As I had just mentioned this is the most frustrating part and a major reason why many people were denied loan forgiveness. Many people thought that once they made 120 loan payments, equivalent to 10 years, they can apply for and receive loan forgiveness under PSLF. Unfortunately, that's not the case under PSLF. 

You would have to be under an IDR (Income-Driven Repayment) Plan, which includes any of the following:

• Revised Pay As You Earn (REPAYE)
• Pay As You Earn (PAYE)
• Income-Based Repayment (IBR)
• Income-Contingent Repayment Plan (ICR)

You will have to recertify your income and family size each year. 

Check with Federal Student Aid to see if you qualify or want to enroll in it. Additional information on each IDR Plan can be found here. 

Those types of repayment plans will allow you to maximize your loan forgiveness. If you're on a 10-Year Standard Repayment Plan, then there's no point in PSLF. There's no balance to be forgiven!

I have been on the PAYE plan since I started making payments in April 2017 and this is what I've been paying:

​From April 2017 to March 2018 (the year I started PAYE), I paid $376.18 every month.
From April 2018 to March 2019, I paid $94.98 every month. 
From April 2019 until March 2020, I am paying $279.10 every month.

According to FedLoan, under PAYE, payments are generally around 10% of your income and calculated based on your discretionary income and family size. This is where I got a bit confused because I've been paying varying amounts over the last 3 years. Even though my income has been growing because of upward movement along the salary schedule, I am paying less than when I first started at the bottom of the salary schedule! The second year was even more confusing when I paid less than $100/month. I called FedLoan just to make sure I don't get screwed over after hearing all those horror stories and they said those were qualifying payments. Okay. Cool.

As of December 2019, this is how many qualifying payments I have made under PSLF. About a year ago, you had to personally call or email to request how many qualifying payments have been made. Recently, FedLoan has made it easier that you can see it from the "Loan Details" section. 

120 qualifying payments do NOT have to be consecutive

Lastly, payments do not have to be consecutive to make up the 120 qualifying payments. It is 120 qualifying payments, not paying 10 years of payments. The 10 years is assuming you are making 120 CONSECUTIVE payments, which will obviously equal to 10 years. You can take a break in between and work in the private sector. You have to do the math yourself. Is it worth it to have the interest continue to accrue if you plan on hopping back onto PSLF? Or will taking a job in the private sector help you repay the loans quicker? 

WHAT IS A QUALIFYING LOAN?
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Not all loans qualify for PSLF...adding more to the frustration.

The following loans are considered qualifying loans for PSLF:

• Direct Subsidized Loans
• Direct Subsidized Loans
• Direct PLUS Loans
• Direct Consolidation Loans

All these loans are under the William D. Ford Direct Loan Program. Perkins Loan does not qualify. 

The part that screwed most people over was when they did a loan consolidation for a lower interest rate. This disqualified a lot of people. If you can consolidate your loans into a Direct Consolidation Loan, then you're eligible for PSLF. 

IMPORTANT NOTE:
​Please know that when you consolidate your loans, you lose any previous qualifying payments you have made and it restarts because it is a "new" loan you are paying

Personally, I have student loans from just graduate school. I was quick to pay off my $15,500 in undergraduate Federal Stafford Loans. After undergrad and a very brief stint overseas for grad school (that didn't work out), I moved back home, started working, and focused on paying off my loans. I currently carry a balance of $54,079.03 (at time of writing) with a 5.9% average interest rate. Two years ago, I put $10,000 in to pay down the principal. In hindsight, it wasn't that smart of a decision. 

WHY I DECIDED TO PAY OFF SOME OF MY LOANS

I recently converted my TEACH Grants into loans, which would qualify for PSLF. The school I teach at does not meet the qualifications for TEACH Grant forgiveness, but my grants continued to accrue interest. 

​I decided to pay them off instead of doing PSLF with them. Why you ask? 

My two TEACH Grants came out to $5,582, but had accumulated $1,448.37 in interest! In just 4 years, my interest was equal to almost 26% of the principal! It is absolutely freaking ridiculous. Student debt is killing this economy. I have an acquaintance who is not even bothering to make any payments on their loans anymore. I am not surprised if the next Great Recession is caused by the student loan bubble.  

Another reason for paying it off instead of PSLF is because the converted loan would begin their own 120 qualifying payment counter. As you see above, I have already made 26 qualifying payments and should be eligible in March 2027 for loan forgiveness. Below you can see what the new counter will look like with my converted loans. I have an eligibility date of February 2030. AND I was put in a 3-month grace period, which meant interest will continue to accrue. 

I don't know where I will be in 10 years. Will I still stay in the classroom? Pursuing a doctorate degree? Or will I be pursuing something else in the field of education? I rather not have to think that I have to teach another 3 years before I make the next career move. 7 years is more manageable. 
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TIPS & CONSIDERATIONS FOR PSLF

​After about 3 years through the PSLF program, the following are my tips for PSLF:

1. Make sure your loans are eligible for PSLF.
2. Fill out the PSLF application to actually get started on PSLF. You are not automatically enrolled into PSLF just because you work in public service. 
3. Make sure to submit your Employment Certification Form (ECF) every year instead of waiting  to do it at the end. It will help you keep an accurate count of your qualifying payments and fix any discrepancies. Make sure to fill it out correctly and check all the right boxes. Every single year I get denied the first time because I checked some wrong box or over some small detail. My HR person told me this is common. This can drag out for at least a month because of how slow FedLoan is to responding. 
4. Each qualifying loan has its own 120 qualifying loan counter. It's not how many years you've made in loans. It's how many qualifying payments you've made to a specific loan.
5. Qualifying payments do not have to be consecutive.
6. If you consolidate your loans, especially for a lower interest rate, you lose qualifying payment credit to previous loans because you will be making payments to a "new" loan. Definitely evaluate if loan consolidation will benefit you or harm you in the long run.  
7. Do you plan on committing to public service for at least 10 years? Is pursuing PSLF worth your time and money?

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Federal Student Aid has a repayment estimator you can play around with. Personally for me, it's not quite accurate because it doesn't put income growth into consideration. 
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BEWARE OF POTENTIAL HIDDEN COSTS OF LOAN FORGIVENESS
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Great. Now you have started PSLF and you're off to have your loans forgiven after about 10 years!

According to the IRS, the loan amounts forgiven under PSLF are not considered income for tax purposes. 

Whew. 
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However, some other loan forgiveness programs out there might consider that amount as taxable income. Definitely do your research! You may be slapped with a tax bill at the end!

This is important. Let's say I am in a non-PSLF loan forgiveness program and the remaining balance is considered taxable income. In 2027 when I am eligible I am making $80,000/year and I am getting $20,000 forgiven.  For the 2027 tax year, I will have to report that I have an income of $100,000! Check your tax brackets. Loan forgiveness may not benefit you that much in the end. And it if benefits you, make sure to have money set aside to pay those taxes. 

This didn't occur to me until recently.  I am beginning to reevaluate and reaching out to financial advisors to see if PSLF will truly benefit me. I will update you all later with my findings. 

Hopefully this information has been helpful to you! If you have any questions, feel free to reach out. Or if I got any information wrong, please let me know!