*This post originally appeared on Words on Wealth, a personal finance and lifestyle blog by Lauren Zangardi Hayes, CFP®, CIMA
Student loans are the bane of many young professionals’ existence. I have worked with several physicians with $200,000-300,000 in student loan debt.
Fortunately one of these physicians met the 4 requirements for Public Student Loan Forgiveness. Which means that if he continues working for a qualified employer and makes 120 on-time qualified payments on his Federal Direct student loans, a good portion of that debt will be erased.
There are 4 important requirements you must meet to qualify for Public Student Loan Forgiveness and to stay qualified until your remaining loan balances are actually forgiven. Today we’ll go over four things you need to make sure you’re doing so you can qualify for Public Student Loan Forgiveness (plus some best practices).
Qualifying for PSLF: The Right Kind of Loans
To qualify for Public Student Loan Forgiveness you have to have Federal Direct Loans. The full name of the program is the William D. Ford Federal Direct Loan Program. If your loans were taken out before 2010 under the Federal Family Education Loan (FFEL) Program or the Federal Perkins Loan (Perkins Loan) Program, they do not qualify for PSLF but you can potentially consolidate them into Direct Loans. If you do consolidate those FFEL loans into Direct Loans they will qualify for PSLF assuming you meet the other requirements (right kind of employer, right kind of payment, right number of payments).
If you are able to consolidate those older loans into a Consolidated Direct Loan then your payments may qualify you for Public Student Loan Forgiveness. However, the clock doesn’t start ticking for PSLF until those loans are consolidated.
OK, one box checked, three to go
Best Practice: If you are looking to take advantage of PSLF you need to consolidate your loans at the beginning of your first year of residency to get the biggest benefit.
Qualifying for PSLF: The Right Kind of Employment
How much time you spend at work and where you work matters. Not all jobs qualify you for Public Student Loan Forgiveness. First, you must work at least 30 hours a week or the number of hours your employer considers full-time, whichever is greater.
For example, if you work 32 hours a week but your employer considers 40 hours “full-time” then to qualify for Public Student Loan Forgiveness you have to work 40 hours for that employer.
Second, what kind of employers qualify you for Public Student Loan Forgiveness?
- Employment for the government at the Federal, state, local or tribal level
- Employment at a 501(c)3 Charitable Organization (this includes certain hospitals such as VCU Health Systems)
- Certain other non-profits that are not 501(c)3 organizations but who perform a qualifying service.
- Americorp and Peace Corp volunteers qualify.
Tricky Employment Situations that don’t qualify for Public Student Loan Forgiveness:
Labor Union employees, employees for partisan political organization, and employees of religious institutions whose job involves proselytizing are not eligible for Public Student Loan Forgiveness.
What If HR Isn’t Sure If My Job Qualifies?
Gotcha covered – the Consumer Financial Protection Bureau came up with this handbook for you to help your HR department determine if they qualify.
The IRS also has a handy database you can reference to see if you qualify.
Qualifying for PSLF: The Right number of payments
While PSLF is a very generous program (as it is currently structured) you still have to make a significant commitment to repaying your loans. 120 is the magic number of payments. You can’t make 120 payments on separate days or bi-monthly, they must be 120 monthly payments. For those of you who are not math-inclined, that translates into 10 years.
For example, you might make qualified payments while you are in residency at a 501(c)3 (non-profit) hospital for 3 years, then take a job with a physician’s group that has contracted with the hospital but is not a 501(c)3 organization themselves for two years. During those two years, your loan payments would not count towards the 120 payment requirement. However, if you switched jobs and start working directly for a non-profit hospital, then your payments would start counting again and you could pick up where you left off at the end of your residency (i.e. you would only need to make an additional 84 qualifying payments to achieve PSLF assuming you made 36 qualifying payments while a resident).
Yes, 10 years is a long time, but consider this – if you’re a resident and then you complete a fellowship at a 501(c)3 hospital, you could easily have 7-8 years of qualifying payments made before you even finish your training.
Qualifying for PSLF: The Right Kind of Repayment Plan
OK, so you have direct federal loans, you work full-time for a non-profit hospital and making on-time monthly payments but you still have one final hoop to jump through.
You have to be on the “right” kind of repayment plan. A standard 10 year repayment plan qualifies for PSLF but there will be nothing to forgive in 10 years. Remember, you need 120 qualifying monthly payments to qualify for PSLF. Graduated Repayment plans that give you 25 years to repay your loans do not qualify. To get the most benefit you must be on an income-driven repayment program.
The income-driven repayment programs include PAYE, REPAYE, IBR and ICR. Depending on when you first took out your loans, you may not have all four programs available to you. Your loan servicer or financial advisor can help you determine what your options are.
The IBR and PAYE repayment programs start as a percentage of your discretionary income but cap your payment at what your 10 year repayment monthly cost would have been. Others are tied strictly to your income. You will need to re-certify your income annually so your income based repayment can be adjusted.
I’m going to say that again – you must recertify your income and family size annually!
Why does this matter? Under the REPAYE program, if you start making significantly more money (for example: because you finished your fellowship and are now working as an anesthesiologist or surgeon) your monthly payment could increase to 10% of your discretionary income. For some high income earners this means that what you would now owe each month would be higher than the standard 10 year repayment amount. No bueno.
Here are a couple of other important points directly from the US Department of Education’s website:
Payments must be made:
- after Oct. 1, 2007
- under a qualifying repayment plan
- for the full amount due as shown on your bill
- no later than 15 days after your due date
- while you are employed full-time by a qualifying employer
If you’re still in your grace period, “in-school” status, on a deferment or forbearance, any payments you make will not count towards your 120 payment requirement for Public Student Loan Forgiveness.
Yes! You Qualify for PSLF – now what?
File Your Annual Employment Certification Form
Every year you need to re-certify your employment with the Education department by filing a PSLF Employment Certification form. This annual re-certification ensures that you are still on track for Public Student Loan Forgiveness and creates a paper trail. You should also re-certify your employment if you switch employers.
Reminder: You MUST also re-certify your income annually for the income based repayment programs.
If you don’t, you may be kicked out of IBR, PAYE or REPAYE and then possibly all or some of your interest will be re-capitalized (added to the principal balance) on your loan.
Don’t wait until the last minute to re-certify your income and family size and be sure to keep good records.
Did I mention you should keep really good records?
Student Loan processors are not exactly known for their consumer-friendliness. Do contact your student loan servicer to find out what their process is for clients who are eligible for Public Student Loan Forgiveness.
PSLF is not for everyone
Public Student Loan Forgiveness is not the right answer for every person. Some people are simply better off paying down their loans as quickly as possible. However, in the right situation (i.e. significant debt compared to your income) it can provide a serious benefit. The key to taking advantage of PSLF is to make sure you “dot your i’s and cross your t’s.” If you don’t meet all four of the criteria (right kind of loan, right kind of employment, right kind of repayment plan, right number of payments) you won’t be granted forgiveness after 120 payments.
Trying to figure our your annual enrollment? Make the most of your employee benefits!
You don’t want your kids to be saddled with student debt but should you save for college or retirement?
Questions for Lauren?
Financial planner and advisor, Lauren Zangardi Hayes, CIMA®, CFP®, works with families and couples in Williamsburg and Richmond, VA. She offers comprehensive financial planning services so you can live your dreams.
Lauren Zangardi Hayes