Since 2007, the Public Service Loan Forgiveness (PSLF) Program has offered a route for public servants to have their outstanding student loan balances canceled after dedicating 120 months, or 10 years, to a full-time job in public service.
In theory, borrowers who make payments for 120 months while in a nonprofit or government job are eligible to see their entire loan balance forgiven, with no income tax due on the loan forgiven. However in practice the program has been rife with hurdles. Many borrowers with PSLF-eligible employment were ineligible to benefit from PSLF forgiveness — many chose or were placed into repayment plans that did not qualify for PSLF, had the wrong type of student loan or made payments just a day or two late — and were thus unable to count their service time towards loan forgiveness.
In an attempt to rectify the hurdles faced by so many student loan borrowers entering public service work, the Education Department
More specifically, the waiver will give borrowers who work for a qualifying employer the ability to apply their repayment history toward the 10-year repayment period even if they had previously been repaying their loan on an ineligible repayment plan or loan type. Additionally, it will count payments that may not previously have counted due to minor technicalities (such as paying one day late or being a penny off the required payment amount).
The Education Department is also working to make long-term changes to the program through the negotiated rulemaking process. While those details are far from final, the department has signaled that its intention is to make the program easier to navigate by simplifying the rules and putting more resources into ensuring borrowers get credit for all the months they have been paying their student loans and working public service jobs.
Additionally, while FedLoan Servicing currently services the PSLF Program, they have not renewed their contract to continue servicing the program beyond December 2021. Accordingly, many questions remain about how the transition to a new service provider will be implemented. That challenge is compounded by
With so many major changes happening all at once, advisors should be in regular contact with their clients who have student loans to navigate this series of changes. The key detail, though, is that this waiver only runs through Oct. 31, 2022, so advisors have limited time until then to help clients who may be eligible to access potential (Public Service Loan) forgiveness.
Challenges of the PSLF program
While the PSLF Program was designed to fully forgive the student loan debt of public servants after 10 years of timely payments, the program has had a litany of challenges that have kept thousands of public servants from accessing the promised forgiveness.
Currently, borrowers must complete a PSLF application form, which also includes a section to certify that their employment is eligible for PSLF. This form is submitted to FedLoan, the servicer for the PSLF Program, which then matches the months when on-time payments were made with the dates certified in the PSLF Employment Certification Form, and updates the borrower’s qualifying payment count. Once the borrower reaches 120 qualifying monthly payments (i.e., 10 years), they can then use the same form to formally apply for forgiveness.
Because the program was initially rolled out in 2007, the first eligible borrowers could apply for forgiveness in late 2017, the earliest point when 120 qualifying monthly payments could be made. Yet in the four years since then,
Some of the errors that have been made were due to incorrect advice and bad service from student loan servicers,
Which means that some of the institutions that borrowers have trusted and leaned on for advice have been responsible for the errors that made borrowers ineligible for forgiveness in the first place!
PSLF process and impact of the overhaul
What are the errors borrowers have run into? Let us go down the list of requirements to detail what errors can be encountered. Per the
- Be employed by a U.S. Federal, state, local, or tribal government organization, or a not-for-profit organization;
- Work full-time for that agency or organization;
- Have Direct Loans (or consolidate other Federal student loans into Direct Loans;
- Repay loans under an income-driven repayment plan; and
- Make 120 qualifying monthly payments
Requirement 1:
This requirement is unchanged by the PSLF Waiver and is more straightforward than most. Generally, any borrowers who work for a 501(c)(3) or a government agency should qualify. This applies to the overwhelming majority of borrowers.
Some borrowers who are employed by a 501(c)(6) private organization were initially told they would qualify, only to later be told their employment would not qualify.
Requirement 2:
This requirement is also mostly straightforward, as you must meet your employer’s definition of full-time employment or work at least 30 hours per week, whichever is greater. Employment means being a payroll employee receiving salary or wages, so being an independent contractor for a government agency does not count. This will remain unchanged with the new waiver.
Requirement 3: Have
This is where many of the problems emerge. Prior to 2010, the majority of student loans issued were through the Federal Family Education Loan (FFEL) program, in which private lenders – notthe federal government – issued student loans, which were insured by guarantee agencies, and reinsured by the federal government.
The FFEL program was discontinued as of July 1, 2010, and all student loans issued by the Federal government after that date were through the Direct Loan program, wherein the Federal government directly lends money to borrowers and contracts the servicing of those loans to private companies. Which means that Direct Loans are the only loans that can qualify for PSLF; FFEL loans do not.
This has been a huge source of confusion for many early borrowers under PSLF’s initial years (especially from 2007 when it began until 2010 when FFEL was discontinued), as they did not realize that their FFEL loans were ineligible for PSLF. Instead, they incorrectly believed that their loans were issued directly by the federal government instead of by private lenders whose loans were only backed by the federal government.
Thus, borrowers with FFEL loans spent years making payments on FFEL loans, wrongly assuming they would qualify for PSLF. A borrower would have needed to consolidate their FFEL loans into Direct Loans immediately after PSLF was announced in order to start making qualifying payments. Very few borrowers did so at the time.
Even if a borrower did manage to catch the error somewhere along the way and consolidated their old FFEL loans into a new PSLF-eligible Direct Consolidation loan, doing so would still wipe out their prior payment history, effectively zeroing out any past FFEL loan payments.
According to the press release that came with the announcement of this waiver, about 60% of borrowers who have certified qualifying employment for PSLF fall into this category of borrowers who made payments on ineligible FFEL loans.
Example 1: Alex is an attorney who graduated from law school in 2010. Since most loans given out prior to 2007 were through the FFEL program (as the Direct Loan program did not fully take over originating all Federal student loans until 2010) he had financed his education all through FFEL Loans. He worked for a nonprofit organization for the next 10 years, making minimum loan payments on time each month.
In mid-2020, Alex applied for PSLF and was told that his loans did not qualify for the program.
Not only is Alex at square one, but due to negative loan amortization by making only the minimum income-based repayments (i.e., Alex’s interest accrual exceeded the amount of loan principal being paid down, resulting in the loan balance going up over time, instead of down), Alex now owes moremoney than he originally took out!
Alex is now faced with a terrible choice because of having FFEL Loans that he did not know were ineligible for PSLF. If Alex were to consolidate his FFEL loan into a Direct Loan to become eligible for PSLF, he would be completely tied to public service work for 10 more years, so he would need to work for 20 years to get the forgiveness that was supposed to take only 10.
And notably, even if Alex had realized the issue years ago and consolidated his loans into a Direct Loan in 2015, he still wouldn’t have been eligible for PSLF today, because while his Direct Loan would qualify, his prior payment history (from 2010 to 2015) would have been lost; as a result, even though he had made nearly 11 years’ worth of payments (from 2010 to 2021), he would only be credited with six years of payments since the Direct Loan consolidation.
The waiver that was just announced will count all prior payments by a borrower working towards PSLF, regardless of which loan program their loans were issued through. It will also include federal loan payments made prior to consolidation into a Direct Loan, which has never been an option before.
Accordingly, in the example above, the waiver would allow Alex the attorney to go from having zero qualifying payments to 120, as it would count all of his FFEL loan payments since 2010 (regardless of whether he had consolidated into a Direct Loan midway through the decade, or not), thus putting him on track to get all of his loans forgiven.
Another federal loan program that did not previously qualify, Perkins Loans, will also now qualify for PSLF. If a borrower made payments towards a Perkins loan prior to this waiver being announced, the borrower can consolidate their Perkins Loan into a Direct Loan and have their previous payments made under the Perkins Loan be counted for PSLF. This program is much smaller and will impact a much smaller number of borrowers than the fix for FFEL loans.
Requirement 4:
There are
Notably, the government also offers non-IDR plans, which, as noted above, are not eligible for PSLF. These include
Example 2: Sarah is a speech pathologist who works at a public elementary school. Upon graduation from her master’s program, she had $90,000 of total debt across various Direct student loans.
In order to keep her monthly payments as low as possible, Sarah consolidated her loans and was put in the standard repayment plan for consolidation loans, which, given her large loan balance, has repayments over a 30-year period.
While Sarah has the right type of employer (public school) and loan (Direct) to qualify for PSLF, she does not have the right type of repayment plan (her standard 30-year plan is not an Income-Driven Repayment plan). Thus, Sarah is not currently eligible for PSLF.
The waiver just announced will count payments made on any repayment plan, offering a fix to borrowers who were repaying loans under previously ineligible repayment plans, such as consolidation standard plans, extended repayment plans and graduated repayment plans.
The Education Department previously made an attempt to fix this problem with the
Additionally, the TEPSLF Program has a limited pool of funds available; as of April 2021, TEPSLF helped 2,962 borrowers and had almost $130 million of loans forgiven. Given the scope of the problem and the complexity of the TEPSLF route, many more borrowers will benefit from the recently announced waiver than will benefit from TEPSLF.
Requirement 5:
In order to be considered a qualifying payment, the borrower must meet several requirements:
- The full amount due shown on their bill must be paid;
- Payment must be submitted no later than 15 days after the due date;
- The payment must be made while the borrower is employed full time by a qualifying employer; and
- The borrower must be on an IDR plan.
Despite these seemingly clear-cut rules, borrowers have still been denied credit for making a qualifying payment for a variety of reasons, including
In some instances, borrowers have been denied credit for qualifying payments because of bad advice offered by service providers. For example,
By contrast, though, if the borrower had instead recertified their $0 income on their IDR plan, their monthly payment would have been adjusted to $0 (as income-driven repayment plans limit student loan repayments to a percentage of income, and any percentage of $0 of income results in a required payment of $0). But having a “required” payment of $0 is still a payment for PSLF purposes. Thus, recertifying $0 income on an IDR plan with a $0 payment would have counted the months of not making payments toward PSLF (because their monthly amount due was $0, and that at least was “paid”).
All the above issues will be rectified with the new PSLF waiver. Per studentaid.gov, “Under the new rules, any prior payment made will count as a qualifying payment, regardless of loan type, repayment plan, or whether the payment was made in full or on time. All you need is qualifying employment.”
The Education Department estimates that via the waiver, 22,000 borrowers will be immediately eligible to have their federal loans discharged. Another 550,000 who had previously consolidated their loans will see their progress towards PSLF grow, as those pre-consolidation payments will become eligible toward PSLF. Another 27,000 borrowers could potentially qualify for forgiveness if they certify employment during a period they have not yet certified. Which could mean that someone who has paid on the Extended repayment plan, but who has never applied for PSLF, could now be eligible, even if they never previously had any payments certified as qualifying for PSLF.
Some experts believe these estimates are low, and the number of borrowers impacted by these changes could be in the millions.
What borrowers need to know and do to benefit from the waiver
The PSLF overhaul aims to rectify the problems created by unclear PSLF rules and inconsistent servicing by offering a temporary waiver, in effect for one year, which will let borrowers get credit for qualifying payments they may have been denied prior to the waiver.
The key date for borrowers is Oct. 31, 2022, which is the deadline to submit a
Payments made by borrowers who have already consolidated loans will be automatically adjusted
For borrowers who have already consolidated their FFEL loans prior to the announcement of the overhaul, and have previously applied for and been rejected for PSLF, no further action is necessary. The
Example 3: Seth has been working as a nurse for a public hospital since 2012, and took out $97,000 in student loans between 2007 and 2011.
In 2016, Seth realized he was paying on FFEL loans and thus was ineligible for PSLF. He consolidated all his loans into two Direct Consolidation loans and began certifying payments for PSLF.
Prior to the recent waiver announcement, Seth had 70 qualifying payments from his Direct Consolidation loan payments made between January 2016 and October 2021. Thus, he still needed 50 more payments to qualify for PSLF.
Since Seth has already been submitting his employment certification showing that he worked for an eligible employer since 2012, the Education Department will update his payment count automatically to include the 48 payments made between 2012 and 2015 during the years he was making FFEL loan payments.
With the PSLF waiver, Seth’s new total qualifying payment count will be 48 (FFEL Loan payments) + 70 (Direct Loan payments) = 118, bringing him to the brink of the 120 required qualifying payments to apply for final forgiveness.
FFEL loan borrowers need to consolidate their own loans
If a borrower has met all other PSLF program requirements but was paying on PSLF-ineligible FFEL (or Perkins) loans, they should
Once the consolidation is complete, they should submit the
Example 4: Jessica is a nonprofit worker who has been consistently paying her FFEL loans since March 2014. Because her loan type wasnota Direct loan, though, none of her payments were eligible for PSLF.
Jessica can take advantage of the PSLF overhaul waiver if she
If she consolidates her loan in October 2021, she should be eligible to receive credit for the payments made between January 2014 and October 2021, prior to consolidation, bringing her qualifying monthly payment count to 92 and putting her on track for forgiveness in about 2.5 more years.
On the other hand, if Jessica consolidates her loans now but waits until early 2024 to actually apply for PSLF, she will be past the waiver window, and her payments prior to October of 2021 will not be treated as qualifying payments towards her 10-year PSLF requirement!
Payments made by borrowers on the wrong repayment plan will be automatically adjusted
For borrowers who have already applied for PSLF, the Education Department will automatically adjust PSLF qualifying payment counts to include those made on or before Oct. 31, 2021, even if they were made under the wrong repayment plan. Some borrowers have already received emails showing an unofficial estimate of their updated payment count.
With the passage of the CARES Act in March 2020, student loan payments and interest accrual were suspended for many student loan borrowers. Borrowers with repayment plans who previously applied for PSLF, only to learn their repayment plans were not eligible for PSLF, can now
Borrowers can do so by filing for an Income-driven Repayment Plan on the
Example 5: Dan has been repaying his Direct Consolidation loans while on the extended repayment plan since 2015. Because he was unaware that his repayment plan was not eligible for PSLF, he filled out his first PSLF employment certification form in 2021, at which point he was told his payments did not qualify for PSLF because he was on the wrong repayment plan.
Thus, Dan realizes he would need to continue working in public service for 10 more years from here to benefit from PSLF. He’s not sure he will stay in public service for that long, and so begins to consider refinancing his student loans privately in order to reduce his overall interest expense (even though doing so would remove him from PSLF eligibility altogether by leaving the Federal student loan system).
However, with the PSLF waiver, the monthly loan payments that Dan made between 2015 and 2021 will now be counted as qualifying monthly payments for PSLF, which means that Dan would have seven years of qualifying monthly payments for PSLF. Thus, he may want to reconsider privately refinancing if he thinks he will still be in public service for three more years (which would be all he needs to get to the required 120 qualifying monthly payments for PSLF).
If Dan decides to keep his Direct Consolidation loans and pursue PSLF in three years, he should confirm he is on a qualifying (IDR) repayment plan prior to payments resuming in February 2022.
Processes for active military duty borrowers with loans on deferment or forbearance are still undetermined
Many military members may have put their student loans in deferment or forbearance while on active duty only to later find out those months in deferment or forbearance did not qualify for PSLF. For these borrowers, details on how the PSLF waiver would impact borrowers in these instances are not yet clear.
The Education Department does say that “Federal Student Aid will develop and implement a process to address periods of student loan deferments and forbearance for active-duty service members and will update affected borrowers to let them know what they need to do to take advantage of this change
Other challenges addressed by the PSLF overhaul
While the situations discussed above will be the most broadly applicable to most borrowers, there are other provisions included in the PSLF overhaul. For example, all previously denied PSLF applications will automatically be reviewed to identify and address errors, and the Education Department will automatically give PSLF credit to eligible employees of Federal government agencies for their qualifying monthly payments.
Looking further down the road, the Education Department plans to continue simplifying the PSLF application process and has created a
Who the PSLF overhaul waiver does not help
Anytime there are headlines about PSLF, many student loan borrowers get their hopes up for the promised forgiveness finally coming to fruition. While these changes significantly expand who is going to be eligible for forgiveness, there are several groups currently ineligible for PSLF that are not impacted.
For borrowers who already have privately refinanced student loans, there is no mechanism to go back to the federal student loan system. Even if a borrower made payments for several years under a federal student loan before opting for private student loan refinancing upon finding out those payments did not qualify for PSLF, there is no relief from the PSLF waiver.
Payments made by borrowers while working as a contractor for a government agency do not count.
If a borrower worked in public service prior to taking out student loans, that service still would not count. Some applicants mistakenly assume prior public service work can count toward PSLF, but the rules require 120 months of concurrent qualifying employment and loan payments.
Still unclear
Do forbearances that were not for military deployment now count as qualifying months for PSLF?
The department’s announcement does not indicate if a borrower who works at a qualifying employer but who had loans in forbearance for a period of time will now get credit for those months. But, since this is a known issue with servicers having wrongly recommended forbearances to many borrowers, it’s possible those months will be counted. We just don’t know yet.
If a consolidation loan includes loans with different qualifying payment counts, how is the proper number of payments determined?
It is not yet clear how the number of qualifying payments would be determined if a borrower has loans with different numbers of payments due. For example, consider someone who took a loan to pay for their undergraduate education, and worked for three years at a nonprofit organization while paying those loans. They later decide to go back to school for graduate work, taking out more loans to pay for their graduate degree expenses, and then work for two more years at another nonprofit. At this point, they realized some of their loans are FFEL loans (i.e., not eligible for PSLF), and decided to consolidate all their student debt into a Direct Consolidation Loan. At this stage, this borrower has yet to determine how many qualifying payments have been made, given that their consolidation loan would have some loans with 5 years of qualifying payments (i.e., those used for undergraduate expenses), and others with just 2 (i.e., those for graduate work).
If someone previously applied for the Teacher Loan Forgiveness program and received forgiveness for a portion of their loans, can they count the same time period now for PSLF?
The
It is not yet clear whether this waiver will change that rule. But it seems odd that someone who would otherwise qualify for full forgiveness now should not qualify for that full forgiveness because in the past they had a small piece of their loans forgiven.
How advisors can help clients with student loans
Given the potential impact on their clients’ finances, financial advisors should conduct an audit of all their clients with federal student loans to determine how the PSLF overhaul waiver may affect their clients’ student loan repayment strategies.
To start, advisors can pull a CRM report of any student loan borrowers they have as clients and make sure those individuals are aware of the changes. Since these changes are going to go back over a decade, it may require reviewing all prior employment to see if they have periods they could now certify for and receive qualifying payments.
If advisors have clients who were recently advised to refinance to private loans for a lower interest rate and/or to pay off lump sums on their loans, they should hold up a gigantic STOP sign as soon as possible for those who have not yet followed through on the advice. It could be worth waiting a few months to update their qualifying monthly payment counts and then to determine the best strategy going forward.
Since privately refinancing or entirely paying off loans eliminates PSLF eligibility and is irrevocable, any small amount of additional interest they may pay once the payment and interest freeze ends in February will be tiny compared to the potential benefits they may be entitled to if they become suddenly much closer to PSLF than they were before.
Once advisors determine which clients may be impacted, it’s time to review their student loan repayment plans to determine if they still make the most sense. For clients who are already pursuing PSLF, changes made by the PSLF overhaul may bring forgiveness dates much closer than previously planned. For those who had abandoned PSLF and started paying their federal loans down to $0, it may make sense to evaluate whether their current strategy is still the right one, or if resuming the path to PSLF (
Audits of my own clients have revealed some of the following situations:
One client with FFEL loans has been working for qualifying employers since 2007. He will immediately be eligible for student loan forgiveness, as he has made more than the requisite number of qualifying monthly payments for PSLF. Thus, he is consolidating his loans now and will later fill out the PSLF Form for his employer to sign. He should not need to make any future student loan payments.
One client with nearly $200,000 of debt had previously worked for a qualifying employer, but due to consolidating her loans in 2015 (after taking her loan servicer’s advice), she lost those years of qualifying monthly payment credits. Since 2015, she has worked in a mixture of private and public jobs. While she had been on the verge of privately refinancing the debt to substantially lower her interest rate, we are now pausing on that strategy until we determine exactly how many monthly payments she will receive retroactive credit for. The expectation is that she will be credited with approximately 90 qualifying payments. If this is the case, she may consider returning to the public sector for 2.5 years of employment to achieve forgiveness. Even if she takes a significant pay cut to go back to the public sector, the forgiveness amount is large enough in her case that it would make even a temporary 40% pay cut worthwhile.
One client has been a public school teacher for nine years and will be eligible for PSLF at the end of this school year. He had been considering dropping a lump sum payoff on the remaining $7,000 of his loans, but he can now resume his IBR loan payments in February and apply for full forgiveness of his loans in the summer. This will save him approximately $6,200.
Again, the key date to bear in mind is Oct 31, 2022. This applies both to borrowers who need to update their qualifying payment count, as well as to those who may immediately be at the point of having 120 qualifying monthly payments.
If a borrower does not consolidate their FFEL or Perkins loans and apply for PSLF prior to Oct. 31, 2022, they will not be eligible for this waiver!
FedLoan’s departure brings uncertainty of future PSLF service providers
In addition to the already complex PSLF application process (and understanding its eligibility requirements), FedLoan, the service provider that services PSLF loans, adds another layer of complexity to determining the best strategies for navigating student loan debt with their recent announcement that they will
For borrowers with FFEL loans who consolidate and then apply for PSLF, this may mean their loans first get sent to FedLoan, and then FedLoan will transfer them to whoever is chosen to service PSLF borrowers in the future.
Accordingly, borrowers who decide to wait a couple of months to see which company will service the PSLF program before consolidating previously ineligible loans may benefit by avoiding multiple switches between multiple loan servicers. However, the caveat is that this will bump them right into the current timeline of payments resuming for all student loan borrowers in February 2022.
Which means that there are potential risks involved with pursuing consolidation as soon as possible (e.g., multiple transfers of loan servicers and the legwork and oversight necessary for borrowers to deal with those transfers), as there are with waiting until 2022 in hopes of knowing more about who will actually service the loans (but then having to deal with the resumption of payments and a new servicer onboarding millions of new borrowers, facing potentially challenging customer service issues) and applying for consolidation and PSLF then.
PSLF has provided a frustrating experience for many public servants who built their financial lives around receiving forgiveness, only to learn that they were not eligible late in the process. The changes proposed by the PSLF overhaul aim to bring eligible borrowers much closer to that promised forgiveness and, in some cases, to help make them eligible for forgiveness without requiring any additional student loan payments. This is the first step towards making this program function better.
Importantly, with negotiated rulemaking underway to improve the program in the future, advisors with clients who have substantial student loan debt can help those clients by keeping abreast of those discussions. Many advisors have mistakenly guided borrowers away from the program in the past.The PSLF overhaul is a clear signal from the U.S. Department of Education that they intend to make the PSLF program more accessible. Accordingly, it’s imperative that advisors who have clients with student-loan-planning needs be able to determine the value of the various loan and payment plan options available, so that they can guide their clients to make the best decisions based on the new rules.
