Since 2007, the Public Service Loan Forgiveness (PSLF) Program has offered borrowers with Federal student loans the opportunity to have those loan balances canceled after making 120 qualifying monthly payments while working in public service. In practice, the program’s strict requirements for loan forgiveness have been confusing for borrowers and poorly administered by service providers, which has led to frustrating disqualifications for borrowers who thought they were on the path to forgiveness. To address these issues, the U.S. Education Department announced an overhaul of the PSLF program on October 6, 2021, that will expand the types of loans and repayment plans that will be eligible for forgiveness under the PSLF program.
The overhaul includes a waiver that will give borrowers who work for a qualifying employer the ability to apply their repayment history towards 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. Importantly, the waiver only runs through October 31, 2022, so advisors with eligible clients can help them ensure the proper paperwork is filed in time.
One of the key changes in the overhaul expands the type of loan payments that will be eligible for PSLF, and will now permit the inclusion of Federal Family Education Loans (FFEL) and Perkins Loan repayments toward the PSLF requirement of 120 qualifying monthly payments. Previously, only Federal Direct Loan repayments were eligible for this requirement. Importantly, borrowers with FFEL and Perkins loans will need to consolidate their loans into a Federal Direct Consolidation Loan and submit the PSLF employer certification form to the Education Department by the October 31, 2022 deadline in order to be eligible for forgiveness under the PSLF program.
Another key change in the PSLF program overhaul expands the type of repayment plans that will be eligible for PSLF, and will now permit Federal Loan payments under any repayment plan made prior to October 2021 to be eligible for PSLF. Previously, a borrower must have used an Income-Driven Repayment (IDR) plan to be eligible for PSLF.
Notably, some borrowers that the PSLF overhaul does not help are those with private student loans or those who consolidated their loans with a private lender. Even if a borrower made payments for several years under a Federal student loan before opting for private student loan refinancing (perhaps upon finding out their payments did not qualify for PSLF), there would be no relief for them from the PSLF waiver. Which underscores the importance for advisors to consider whether clients with Federal student loans will qualify for relief under the new PSLF guidelines before making the irrevocable decision to refinance into private loans.
Ultimately, the key point is that while the PSLF overhaul creates opportunities for more Federal student loan borrowers to take advantage of the program, there is a limited period for eligible borrowers to act to ensure they qualify. Advisors can review clients’ student loan records, employment, and payment histories to assess whether they might benefit from the waiver, and then support submission of required paperwork before the October 31, 2022, deadline. With potential savings from PSLF forgiveness in the hundreds of thousands of dollars, reviewing PSLF eligibility could be one of the most valuable services advisors can offer clients over the coming months!
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 (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 U.S. Education Department announced an overhaul of the PSLF program on October 6, 2021. The program overhaul includes a temporary waiver for borrowers who were previously deemed ineligible to gain access to the program if they apply for benefits by October 31, 2022. Those who don’t apply before that date will not get credit for payments that had previously been deemed ineligible.
More specifically, the waiver will give borrowers who work for a qualifying employer the ability to apply their repayment history towards 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 of 2021. Accordingly, many questions remain about how the transition to a new service provider will be implemented. That challenge is compounded by the resumption in February 2022 of payments after the CARES Act student loan payment and interest freeze that has been in place since March of 2020.
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 October 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 Public Service Loan Forgiveness (PSLF) Program
While the Public Service Loan Forgiveness (PSLF) program was designed to fully forgive the student loan debt of public servants after ten 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 4 years since then, just over 16,000 borrowers have ever received forgiveness under PSLF. Which is not to say that borrowers aren’t trying to take advantage of PSLF; on the contrary, hundreds of thousands of applicants have applied for forgiveness… yet only a small fraction are being approved, while many more are being declined for a wide range of ‘errors’ in their PSLF applications.
While early headlines about the PSLF program often made claims that “99% of borrowers are being denied for PSLF”, many were based on a limited data set that does not tell the full story. The actual acceptance rate for individuals has grown substantially as more borrowers have the proper (Direct) loan type for the program. However, it remains true that there are still many borrowers who had previously applied for PSLF, building their financial lives around the idea of loan forgiveness after fulfilling their 10 years of public service, who were denied for a myriad of reasons, many of which the recently announced waiver aims to rectify.
Some of the errors that have been made were due to incorrect advice and bad service from student loan servicers, who have been repeatedly sued for processing payments incorrectly, giving borrowers wrong information about which types of employment qualify for PSLF, giving bad recommendations around requesting loan forbearance versus using IDR plans, and improperly reporting missed payments to credit scoring agencies during the CARES Act payment and interest freeze. 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!
Understanding The PSLF Application Process And The Impact Of The Program 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 United States Education Department website, to qualify for Public Service Loan Forgiveness (PSLF), borrowers must meet the following requirements:
- 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 a Direct Loan);
- Repay loans under an income-driven repayment plan; and
- Make 120 qualifying monthly payments.
Requirement 1: Be employed by a U.S. Federal, state, local, or tribal government or not-for-profit organization, including U.S. military service.
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. This resulted in a lawsuit, as borrowers had built their lives around a promise that their employer qualified only to later be told otherwise. The lawsuit was settled, and most of the plaintiffs were awarded PSLF credits for their employment with the 501(c)(6) organization.
Requirement 2: Work full-time for that agency or organization.
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 Direct Loans (or consolidate other Federal student loans into a Direct Loan).
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 – not the Federal government – issued student loans, which were insured by guaranty 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 more money than he originally took out!
Alex is now faced with a terrible choice to make 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 6 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 0 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 mid-way 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: Repay loans under an Income-Driven Repayment (IDR) plan.
There are 5 different Income-Driven Repayment (IDR) plans for Federal student loans, each of which ties the borrower’s required payment to a percentage of discretionary income. To be eligible for PSLF, a borrower must use one of these plans.
When a borrower graduates, they have a 6-month grace period before being automatically placed into the 10-year Standard Repayment plan. This is a straightforward amortization of their debt over 10 years, with equal monthly payments. Payments made under the default 10-year standard plan for Direct/FFEL borrowers also qualify, but few borrowers pursuing PSLF would choose to stay on the 10-year plan, as the required payments would have the loans fully paid off after 10 years, thereby negating the forgiveness benefit (which forgives the remaining balance after 10 years of public service!).
Notably, the government also offers non-IDR plans, which, as noted above, are not eligible for PSLF. These include standard repayment plans for consolidation loans with repayment periods ranging from 10-30 years; graduated repayment plans, which allow a borrower to start with a low payment amount that gradually increases over time; and Extended Repayment plans, which give borrowers with any loan type a 25-year repayment period.
Example 2: Sarah is a speech pathologist who works at a public elementary school. Upon graduation from her master’s program, she had $90k 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 Temporary Expanded Public Service Loan Forgiveness (TEPSLF) Program, which expanded the list of qualifying repayment plans that would be considered for forgiveness. However, this program is only available for borrowers who have applied for forgiveness after making 120 qualifying payments but who were rejected (i.e., it was necessary to go through the entire PSLF application process – even though applicants knew they would be rejected – just so they could subsequently request additional support from TEPSLF).
Additionally, the TEPSLF Program has a limited pool of funds available; as of April 2021, TEPSLF helped 2,962 borrowers have 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: Make 120 qualifying payments.
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 paying too much in a given month or for paying just a penny less than the required amount. Or for paying the proper amount but a day late.
In some instances, borrowers have been denied credit for qualifying payments because of bad advice offered by service providers. For example, a borrower who lost their job with $0 income was advised by a customer service representative to take a temporary forbearance. However, getting forbearance on payments means not making a payment… such that the months of payment forbearance wouldn’t count towards the requisite 10-year (120-month) repayment period.
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 Public Service Loan Forgiveness (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 October 31, 2022, which is the deadline to submit a PSLF form. This applies not only to those who may already have 120 (potentially) qualifying payments for PSLF, but also to anyone who has had payments which were previously unqualified, but that may now qualify toward their PSLF requirement.
Payments Made By Borrowers Who Have Already Consolidated FFEL 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 Education Department has stated that they “will start automatically adjusting payment counts for borrowers who have already consolidated their loans into the Direct Loan Program and certified some employment for PSLF.”
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 Loans
If a borrower has met all other PSLF program requirements but was paying on PSLF-ineligible FFEL (or Perkins) loans, they should consolidate their loans into a Direct Consolidation loan before 10/31/2022. (Important Note: in order to qualify, it is necessary to obtain a Direct Consolidation loan, and not a consolidation loan with a private lender!)
Once the consolidation is complete, they should submit the PSLF employer certification form to the Education Department. Once that form is submitted, the payment count will be updated to include the pre-consolidation payments they had made on their FFEL loans. Borrowers will need to review whatever correspondence comes back from FedLoan to confirm they have received credit for all the months they believe they are eligible for.
Example 4: Jessica is a nonprofit worker who has been consistently paying her FFEL loans since March 2014. Because her loan type was not a Direct loan, though, none of her payments were eligible for PSLF.
Jessica can take advantage of the PSLF overhaul waiver if she consolidates her loans before October 31, 2022, and then certifies her employment from 2014 to the present once her loans are consolidated.
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 10/31/2021, 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 switch to a qualifying repayment plan that is PSLF-eligible once student loan payments resume in February of 2022.
Borrowers can do so by filing for an Income-Driven-Repayment Plan on the Federal Student Aid website. Note that payments made under an ineligible plan after October 2021 will not be eligible for this waiver! Which means for those not under an eligible repayment plan, prior payments may still receive favorable PSLF treatment, but changing repayment plans is necessary for future payments to count as well!
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 7 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 3 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 3 years, he should confirm he is on a qualifying (IDR) repayment plan prior to payments resuming in February of 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 negotiated rulemaking committee, which began meeting in October 2021 to review and rewrite the regulations around PSLF and other related student loan processes. While no details on this are final, it’s clear the Department is working to simplify the process of becoming eligible for and accessing PSLF.
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.
What Questions Are Currently Unanswered?
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 3 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 2 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 Teacher Loan Forgiveness (TLF) Program offers forgiveness for either $5,000 or $17,500 of student loans after 5 consecutive years of teaching in a low-income school. Previously, any payments made for this forgiveness could not be credited as qualifying payments for PSLF. For example, if a teacher worked for 5 years and applied for TLF, they would have effectively disqualified any payments made during those 5 years from counting toward PSLF.
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 Can Advisors 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 Public Service Loan Forgiveness (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 (which often involves minimizing the monthly payment) will have a lower total cost.
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 $200k 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 9 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 Income-Based Repayment (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 October 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 10/31/2022, 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 not renew their contract past December 2021. And as of now, it is still unclear which servicer will be in charge of PSLF in the future.
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 of 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.
Public Service Loan Forgiveness (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. Education Department 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.