In 2007, the civil service loan forgiveness program was created to help civil servants repay their student loans after ten years. Fast forward 15 years, and this program is getting a makeover. Are you eligible?
The Public Service Loan Forgiveness (PSLF) program was part of the College Cost Reduction and Access Act of 2007. This program benefits student debtors who choose a career in the public sector. This would include careers in government, military, public safety, law enforcement, nursing, teaching, child care, social work, etc.
Unfortunately, when the first group of borrowers requested forgiveness in 2017, many people who anticipated their loans would forgive faced various obstacles. The program was confusing, disinformation was rampant, and forgiveness rates were low.
To address this situation, in October 2021, the Department of Education announced changes and expansions aimed at reducing barriers and allowing more people than ever to qualify. In fact, if you weren’t eligible earlier, you can now!
The basics of the PSLF
This loan cancellation program serves as an incentive to attract top talent to areas of public service and encourage them to stay for at least ten years. Generally, public service jobs do not pay as much as private sector jobs. Therefore, adding this financial benefit helps close the gap.
The basis of the program is relatively simple. Here are the requirements:
- Work in an area of the public service
- A full time of at least 30 hours per week is required. or part-time for two qualified employers, an average of at least 30 hours of work per week in between may also be eligible.
- Make 120 on-time loan payments on direct loans
- Direct loans include subsidized and unsubsidized Stafford loans, PLUS loans, and direct consolidation loans. Unfortunately, private student loans are not eligible.
- Make payments based on an eligible repayment plan
- Eligible plans include: Pay As You Earn, Revised Pay As You Earn, Income Based Refund or Income Based Refund.
If all the conditions are met, the remaining loan balances are canceled. Typically, when a loan is canceled, the borrower is still required to pay income tax on the canceled amount. This is not the case with the PSLF. Forgiveness is not taxable!
Unfortunately, these requirements were not fully understood and many who thought they met the requirements were deeply disappointed when they learned otherwise. This prompted the Department of Education to make temporary and permanent changes to the curriculum.
Prior to October 2021, as noted above, only borrowers with direct loans and specific repayment programs were eligible for the rebate. Often, borrowers did not understand this until they applied for a forgiveness and found that their past payments or the structure of their loan did not meet the necessary qualifications.
Good news! One of the new changes initiates a “limited PSLF waiver” that will allow all prior payments while working for an eligible employer to count as an eligible payment regardless of the repayment plan.
Do not be too long ! The waiver is only valid until October 31, 2022. The process will take some time and may require you to consolidate your current loans into direct loans. Borrowers can start at www.studentaid.gov/pslf.
The Ministry of Education will also review all loan payments that were not previously accounted for in the PSLF due to technical issues. All identified eligible payments will be automatically applied for those who have already certified a PSLF job.
Military personnel can now apply months of active service to their payment record, even if their loans are deferred or forbidden. In addition to this, the Department of Education will begin to cross-check borrowers with data from other federal agencies to automatically provide military and other federal employees with PSLF credits.
For those who have been denied a loan forgiveness, there is hope! All refused PSLF requests will be reviewed for errors. Borrowers will also have the option of performing a second review if they feel their application should be reconsidered.
Federal Loan Payments Suspended – What’s The Impact?
In March 2020, student loan payments were temporarily suspended due to the COVID-19 pandemic. From January 2022, payments should resume on May 1, 2022. The PSLF program will count these 25 months of suspended payments for the 120 payments required! Borrowers will receive credit for several months of payments they never had to make.
The PSLF program hasn’t had the best reputation, but recent changes should make it more user-friendly and accessible to the people it was designed to help. Borrowers should review their situation at www.studentaid.gov. Do not wait ! The October deadline for PSLF waiver will be here before you know it!
Sarah Mahaffa, CFP® is a Senior Wealth Management Advisor at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information visit their website at www.bedelfinancial.com or email Sarah at [email protected].