How Public Service Loan Forgiveness Affects Future Borrowing

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Public Service Loan Forgiveness (PSLF) is a program by the federal government where after 10 years of on-time payments while working in public service, the remaining balance on your student loans is forgiven.


Sounds like a good deal, right? The problem is the government can take away or alter the program at any time. Thus, if your student is in school now and plans on PSLF when they graduate, it may not be there. 


The best option is always to borrow what you can’t afford, and look at any program that isn’t secured until after graduation.


Here’s what you need to know about PSLF:


Who qualifies by profession for PSLF now


Currently, 1 in 4 borrowers qualify for the PSLF program. Borrowers must work for a public service employer. Employment can be in any position from healthcare to marketing as long as the employer qualifies. 


While PSLF is often thought of as a program for 501(c)3 and government employees, those working in health care or on government contracts can also qualify. There is a special form called the Public Service Loan Forgiveness Employer Certification Form to find out if your employment qualifies. However, students don’t necessarily know where or even in what field they’ll work in before graduation. They should call the number on the PSLF form to ask questions about potential employers and fields they’re considering.


Only federal student loans offer forgiveness. Any private student loans the student or parent borrowers can’t be forgiven under this program. PSLF for parents is based on parent income and the parent must use an income-driven option based on a higher percentage of income called income-contingent


Who qualifies by repayment plan


PSLF requires selecting either choosing the standard repayment plan or an income-driven repayment option. Income-driven options are great when income is low. But if your student’s income jumps in a few years, it can go up to as high as the 10-year repayment plan. They may not be able to afford this payment if living in a city with a high cost of living. 


For example, we used the federal government’s Repayment Estimator to calculate payments on $50,000 of federal student loans issued at a 4 percent interest rate. The standard repayment is $506. The income-driven repayment is $177 with a $40,000 adjusted gross income and $427 if income is $70,000. Students need to be able to afford the standard repayment, just in case. 


You can’t qualify for PSLF if your loans aren’t issued directly from the government. For students and parents, this means private student loans can’t be forgiven. Parents can’t get FFEL loans forgiven. FFEL loans are federal student loans that were issued by banks before direct loans existed. FFEL loans can be considered for PSLF if you parents consolidate to a direct lending loan.


Typical ways borrowers disqualify


In order to receive PSLF, the borrower must have 10 years of on-time payments while working for a public service employer. If the borrower works for a public service employer for 9 years and 10 months, they won’t qualify.


Thus, if your student later decides to switch jobs they could lose out on all their forgiveness opportunities.


Failure to choose the right repayment plan. PSLF requires repaying student loans under either the standard repayment plan or an income-driven option for any forgiveness to happen. 


How the program could change


It’s unlikely PSLF will go away anytime soon. BUT it is likely that there may be a new salary cap. For instance, doctors may no longer qualify if they make $200,000 per year. While that seems reasonable, it sure changes how they look at $250,000 loans for medical school.


Bottom Line: Borrow what your family can afford to pay back and don’t count on special programs. Look at the extended and consolidated plans for up to 30 years as the barometer for what is a reasonable borrowing limit. Use tools such as Edmit’s free tool for comparing schools to find out the schools that will likely give your student the most scholarships.


After all, the scholarships they earn this year don’t depend on the state of federal programs still existing in 4 years. 


5 Takeaways

  • PSLF is a nice perk for public service employment.
  • Only borrow what you can afford in case the program disappeared or changes.
  • Use what you could afford to repay on a 25 or 30 year repayment plan as a maximum borrowing limit.
  • The student should have at least an inkling they will choose a PSLF before thinking about the program.
  • Know the reasons why your student may not receive the program such as changing repayment plans or not working in an accepted employer for the full 10 years required.

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