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Public Service Loan Forgiveness | Is It Right For You?

1 higher_education_challenges_todayEducation surely does come with a hefty price tag.

The cost of studies, especially for the higher education has gone up so much that students and parents take up financial aid to fund for the higher education.

These loans are slowly cleared over a course of time, after completion of the education, when they enter the workforce and start earning.

In the United States of America, the federal loans are given a preference over the private loans.

Opting for a federal loan has its own benefits; number one being that it qualifies the student to be eligible for the president loan forgiveness program. Apart from this, the federal loans come with better terms such as low interest rate, better repayment options etc.

The US federal government has come up with several programs to ease the financial burden of the students. One such program is the Public Service Loan Forgiveness or the PSLF in short. After graduation, students who take up jobs in the public sector, often face the financial burden of repaying the aid, mainly because of the comparatively low salaries present in this sector.

The PSLF program is a boon to eligible graduates as it offsets some of the financial burden.

Some common questions answered:

  1. What is PSLF?

As part of the College Cost Reduction and Access Act of 2007, the Public Service Loan Forgiveness program was created with the main aim of reducing the debt burden of indebted professionals working in the public sector. This comes with a rider about the financial eligibility as well as the public sector jobs that come under the eligible criteria.

Generally, non-profit jobs and certain public sector jobs come under the ambit.

The PSLF program encourages individuals to work in the public service jobs, full time. The program, especially for public sector employees and is meant to strike a balance between the salaries offered by the employers and the cost of higher education. Salaries are comparatively low in the public service jobs when compared to salaries in other careers.

  1. What are the eligibility criteria to qualify for PSLF?

Broadly, the requirements to qualify for the public service loan forgiveness program are classified as under.

  • Have eligible federal direct loans.
  • Make 120 qualifying payments.
  • Work in public service organisations which come under the eligible criteria.
  • Employment status should be full time.
  • Make payments under the eligible repayment plan.
  • Do not default on loans where forgiveness has been requested for.

 

  1. What are the eligible loans for PSLF?

Not all federal loans come under PSLF eligibility. TheWilliam D. Ford Federal Direct Loans or simply the Federal direct loans qualify for the public service loan forgiveness program, while the Federal Perkins loans, Federal Family Education Loans (FFEL) and the private loans are not eligible.

The types of federal direct loans that qualify are mentioned here under:

  • Federal Direct Subsidized Stafford/Direct Loans
  • Federal Direct Unsubsidized Stafford/Direct Loans
  • Federal Direct PLUS Loans
  • Federal Direct Consolidations Loans

A point to be noted here is that even though certain loans do not qualify for the PSLF program, consolidating these loans under the Direct Consolidation Loan program, makes them eligible for PSLF. But the 120 qualifying payments that are made on the Direct Consolidation Loan are only counted towards the final 120 qualifying payments.

Any payments made before consolidation do not count.

  1. What are the qualifying monthly payments to be made?

2 student with ipadAny monthly payment that the borrower makes under the following circumstances is considered as qualifying monthly payment.

  • Payments made after October 1st 2007
  • Payments made while being employed full time under a qualifying employer.
  • Payments made under a repayment plan which is eligible.
  • Full payments made on the amount due.
  • Payments made after the due date, not more than 15 days.

These monthly qualifying payments need not be made when the loans are at grace period or at default, or there is a deferment or forbearance in the loan or even an in-school status. Apart from this, the 120 payments that have to be made need not be consecutive, even when the repayment term crosses 10 years.

Quoting an example here to understand this consecutive payment part. A borrower works in a public service position for 5 years and has made 60 qualifying payments. He changes his public service job and goes into a non-public sector job and still makes payments. After some time, he goes back to the public sector job.

Here, when he starts to make the monthly payment after re-joining the eligible public service job, this monthly payment will be considered as the 61st qualifying payment under the PSLF. So, essentially, the gap does not matter much and the qualifying payments hence need not be consecutive.

 

  1. What are the public service organisations to work for, to be able to qualify for PSLF?

To be eligible for PSLF, public service employment with certain employers is considered for the qualifying criteria. The table below explains it clearly.

Type of employer Whether qualified or not.
Federal government Yes
State government Yes
Local government Yes
Non-Profit 501(c)(3) Yes
Non-Profit in Public Services Yes, Maybe.

 

Serving in the Peace Corps or the AmeriCorps is considered as being qualified as eligible for the PSLF program.Employment inatribal agency or organisation and a family service agency or a public child service agency is an eligible qualification.

There are a few private employers which come under not-for- profit category, which provide any of the following public services and are counted as qualified employers for the Public Service Loan Forgiveness program.The public services include:

  • Public safety
  • Public service for individuals with disabilities and the elderly
  • Military service
  • Emergency management
  • Law enforcement
  • Early childhood education
  • Public health services
  • Law services – Public interest
  • Health care support
  • Public library services
  • Public education
  • School based services
  • Public libraries

These private, not-for- profit organisations providing any of the above public services should not be a partisan political organisation and should not be a labour union.For-profit organizations and organisations which are not tax exempt under Sec 501(c)(3) of the Internal revenue Code, not providing the services that are qualified also do not come under the eligible employers criteria.

 

  1. What is meant by full time employment status?

Working for at least 30 hours per work or fulfilling the employers’ definition of full time by working for the prescribed number of hours is considered as working full time. If employed in more than one part time job which qualifies for PSLF, then a combined average is taken and the number of working hours should be minimum 30 hours per week with the employers.

Debtors who are employed in not-for- profit organisations should know that any time spent on religious activities like religious instructions, services for worship, or any form of proselytizing etc. will not be counted for meeting the requirement of full time employment.

 

  1. How to make payments under eligible repayment plan?

There are two basic criteria to be met with when qualifying. First is that the borrower should have made the 120 monthly payments and secondly, having enrolled in the right qualifying repayment plan.

The qualifying repayment plans under the Public Service Loan Forgiveness Program include:

  • The Standard 10 year repayment plan
  • The Income Driven Repayment plans (IDR)

Standard 10 year Repayment plan

The Standard Repayment Plan is the most basic plan wherein the payments are fixed and are made for up to 10 years.For consolidation loans, the time period varies from 10 to 30 years. This is a repayment plan for loans taken under the Direct Federal Loan Program or the William D. Ford Federal Direct Loan and the Federal Family Education Loan (FFEL) Program.

Under FFEL, the loan is paid off in the shortest time, even though the monthly payments are on the higher side. The monthly payment can go up to a minimum of $50 per month, under the standard repayment plan.

 

The Income Driven Repayment plans (IDR)

The income driven repayment plans are based on the family size and as the name suggests, income. The plans clear the eligibility criteria and can reduce the monthly payments significantly. These plans are ideal if the federal student loans are much higher than the income earned.

It then becomes a wise choice to repay back the loan under the Income Driven Repayment plan. Payments could go as low as $0 if the income low enough. An important point to be noted here is that these plans have to be re certified annually.

The different types of Income Driven Repayment plans are as follows:

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

 

Pay As You Earn Repayment Plan (PAYE Plan)

This plan considers the family size and income and to all those eligible, it offers lower monthly payments. The reduced monthly payments are calculated by using the adjusted gross income and the family size. If applicable, the spouse’s income is also included along with the eligible student loan, if any.

Here, in this plan, loan forgiveness is given after 20 years of the qualifying payments instead of the 25 years and payment amount is calculated at 10% of the income.

Revised Pay As You Earn Repayment Plan (REPAYE Plan)

The Revised Pay As You Earn (REPAYE) Repayment Plan makes the student loan payments very affordable. It considers the income and family size of the borrowers who are eligible. Borrowers under the federal direct loan program are eligible for this repayment plan. Here the monthly payments are capped at 10% of the discretionary income if single and if married, it would be 10% of the combined discretionary income.

On subsidised loans, the accrued interest need not be paid for the first three years of consecutive repayment of loans.Please note, your repayment term under this plan could be longer than 20 or 25 years if you postpone payments with a deferment or forbearance, or if you make payments under a different plan that does not meet qualifying criteria for forgiveness.

The repayment plan can go beyond 20 or 25 years, if the payments are deferred or if payments are made under plans that do not meet the criteria of loan forgiveness.

Income-Based Repayment Plan (IBR Plan)

This plan came into being only in July 1st 2009, as part of the program to make loan payments affordable. The Federal Family Education Loan Program (FFELP) and Federal Direct Loan Program (FDLP) loans are all eligible for the Income based repayment plan. The monthly pay out is calculated using the adjusted gross income, total indebtedness and the family size.

As with all IDR plans, this plan too need to be re-certified annually and the monthly payments are calculated based on the current income documentation and family size.

 

Income-Contingent Repayment Plan (ICR Plan)

  • Here the monthly payments are calculated based on the adjusted gross income, the total amount of the eligible loan debt and the family size. The maximum repayment period of the loan is 25 years. Once an equivalent of 25 years of qualifying monthly payments is made, loan forgiveness is given.
  1. How the IDR plans figure in comparison and the PSLF Calculator?
Income-Driven Repayment Plan Payment Amount Repayment Period
 

PAYE plan

 

10 percent of your discretionary income, but never more than the 10-year standard repayment plan amount.

 

20 years, after which the loans are forgiven
 

REPAYE plan

 

10 percent of your discretionary income, which can be more than the 10-year standard repayment plan amount.

 

 

-20 years if all loans you’re repaying under the plan were received for undergraduate study. After this period, the loans are forgiven.

-25 years if any loans you’re repaying under the plan were received for graduate or professional study. After this period, the loans are forgiven.

 

IBR plan

 

-New borrowers on or after July 1, 2014: 10 percent of your discretionary income, but never more than the 10-year standard repayment plan amount.

-Borrowers prior to July 1, 2014: 15 percent of your discretionary income, but never more than the 10-year standard repayment plan amount.

 

-New borrowers on or after July 1, 2014: 20 years. After this period, the loans are forgiven.

-Borrowers prior to July 1, 2014:
25 years. After this period, the loans are forgiven.

 

ICR plan The lesser of the following:

-20 percent of your discretionary income, or

-What you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.

 

25 years, after which the loans are forgiven.
   

** Source: Department of education

 

  1. What is Employment certification for PSLFform?

It is a form that verifies whether the employment required is completed or not, for the program every year. This helps track eligibility.

  1. Will PSLF be automatically received after making the requisite 120 qualifying monthly payments?

 

After making the 120th qualifying monthly payment, the PSLF application has to be submitted in order to receive loan forgiveness. This application will be available from the year 2017 onwards. That is the year when the first borrowers will become eligible for PSLF, as the program was introduced in 2007.

 

The borrower should still be working under the qualified public sector jobs when the application for loan forgiveness is submitted.

 

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