June 10, 2019

What is Public Service Loan Forgiveness?

Public Service Loan Forgiveness (PSLF) is a federal student loan forgiveness program that allows public servants to have their student loan balance forgiven after 120 qualifying payments.

While, in general, I’d prefer you to pay down your student loans as quickly as possible, PSLF is one of the few federal repayment programs that may be worth pursuing. It comes with some amazing benefits. But there’s also some fine print that could trip you up. Here’s everything you need to know about Public Service Loan Forgiveness.

Why Public Service Loan Forgiveness is Such a Big Deal

Currently, there are four federal income-driven plans.

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

All of these plans will forgive the remainder of your balance at the end of your repayment period. But PSLF is far-and-away a better deal than the standard forgiveness that comes with each of these plans. Here’s why.

PSLF Could Cut Your Repayment Period in Half (or More)

If you decided to go on any of the repayment plans listed above, here’s how long it would take you to qualify for forgiveness.

Income-Driven Repayment Plan Repayment Period
REPAYE Plan 20 years if all loans you’re repaying under the plan were received for undergraduate study 25 years if any loans you’re repaying under the plan were received for graduate or professional study
PAYE Plan 20 years
IBR Plan 20 years if you’re a new borrower on or after July 1, 201425 years if you’re not a new borrower on or after July 1, 2014
ICR Plan 25 years

Twenty to twenty-five years is a long time to be shackled to your student loans.

And even with the amount forgiven taken into account, you’ll typically pay more overall with these plans (due to the added interest) than you would if you just paid your loans as agreed.

But with Public Service Loan Forgiveness, you could be eligible for forgiveness in 10 years (120 qualifying payments). That’s a huge difference!

PSLF Doesn’t Require You to Pay Income Tax on the Forgiven Amount

One of the things that’s easily overlooked when it comes to the forgiveness benefits that come with income-driven repayment plans is that borrowers are required to pay income tax on the forgiven amount.

Let’s say for example, that you have $50,000 of student loans forgiven. Here’s how much you’ll owe in income tax depending on your tax bracket.

Tax Bracket Income Tax Owed
22% Bracket $11,000
24% Bracket $12,000
32% Bracket $16,000
35% Bracket $17,500
37% Bracket $18,500

This income tax owed on forgiven loans is often referred to as the “tax bomb.” And if borrowers who are pursuing income-driven forgiveness options don’t save up for it, it could present a real financial emergency.

But here’s what’s so awesome about Public Service Loan Forgiveness. Loan amounts forgiven under the PSLF Program are not considered income by the IRS.

Therefore, you don’t have to pay federal income tax on whatever loans are forgiven after your 120 qualifying payments.

Who Is Eligible for Public Service Loan Forgiveness?

To qualify for PSLF, you must:

  • Work for a government agency or for certain types of nonprofit organizations
  • Work full-time for that agency or organization;
  • Have Direct Loans (or consolidate other federal students loans to qualify);
  • Repay your loans on an income-driven repayment plan; and
  • Make 120 qualifying payments.

Let’s dig a little deeper into each of these guidelines and restrictions.

What Type of Employment Qualifies?

Qualifying employment for Public Service Loan Forgiveness is not about the specific job that you do for your employer. Instead, it has everything to do with who your employer is.

If you are employed by any of the following types of organizations, you could be eligible for PSLF.

  • Government organizations at any level (federal, state, local, or tribal)
  • Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
  • Other types of not-for-profit organizations that are not tax-exempt under Section 501(c)(3) of the Internal Revenue Code, if their primary purpose is to provide certain types of qualifying public services
  • Serving as a full-time AmeriCorps or Peace Corps volunteer also counts as qualifying employment for the PSLF Program.

One important thing to mention is that non-profit or public hospitals do count for Public Service Loan Forgiveness. That’s a big deal because medical students tend to have crazy high student debt totals.

But as a former pastor, I’m bummed to have to say that religious jobs do not qualify for Public Service Loan Forgiveness. However, if you work for a church in a “non-religious” capacity, like maintenance, accounting, or clerical, you may be eligible for PSLF.

What is Considered Full-Time Employment?

You’ll need to work at least 30 hours per week or whatever your employer deems “full-time” — whichever is greater.

It’s important to note that you can combine two part-time jobs with qualifying employers as long as your work reaches at least 30 hours a week in total.

Again, if you work at a church or parachurch organization, time spent on religious instruction, worship services, or any form of proselytizing will not count toward the full-time employment requirement.

What Counts as a Qualifying Payment?

A qualifying monthly payment is a payment that you make:

  • 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; and
  • While you are employed full-time by a qualifying employer.

You’re also only allowed to make qualifying monthly payments during time that you’re required to make a payment. That means payments that you make during the following periods would not count.

  • You have an in-school status.
  • You are still in your grace period.
  • Your loans are in deferment or forbearance.

It’s unlikely that you’d be making payments during these times anyway, but it’s worth mentioning.

One more important thing to note — unlike the Teacher Loan Forgiveness program, your payments for PSLF do not have to be consecutive.

So if you end up leaving a qualifying employer, you don’t lose credit for the qualifying payments that you made while you worked there. And if you decide to work for a different qualifying employer in the future, your qualifying payments can pick right up where you left off.

What are the Qualifying Repayment Plans?

Qualifying repayment plans include all of the income-driven repayment plans mentioned earlier.

The 10-Standard Repayment Plan technically qualifies as well, but after 10 years you wouldn’t have any loans left to forgive. So if you want to pursue PSLF, you’ll want to switch to an income-driven repayment plan.

What Type of Loans Qualify?

Only Direct Loans are eligible for PSLF. If you borrowed under the old Federal Family Education Loan (FFEL) Program, your loans do not qualify.

However, you could consolidate them into a Direct Consolidation Loan to make them eligible. Do keep in mind, though, that any payments you made before your consolidation will not count toward the 120 payments that you need for Public Service Loan Forgiveness.

How to Apply for Public Service Loan Forgiveness

Think Public Service Loan Forgiveness could be the right move for you? Here’s how to apply.

Submit the Employment Certification Form

In order to apply for PSLF, you’ll need to complete and submit the Employment Certification for Public Service Loan Forgiveness form (Employment Certification Form). You’ll also need to continue to submit this form annually or whenever you change employers.

You can use the PSLF Help Tool to assist you in starting the Employment Certification Form or download the form and complete all sections on your own before submitting.

Conflict of Interest

If the Department of Education determines that your employer qualifies for Public Service Loan Forgiveness, they will instruct for your loans to be transferred to FedLoan Servicing (if they aren’t already your loan servicers). FedLoan Servicing is the exclusive servicer for the Public Service Loan Forgiveness program.

Keep in mind that federal student loan servicers lose the associated fees that come with servicing your loans whenever they are transferred to FedLoan Servicing.

This presents a conflict of interest and could make your servicer customer service team a bad source of information about PSLF.

Navient Lawsuit

As a matter of fact, Navient is currently being sued by 9 teachers (who are being backed by the 2nd-largest teachers union in the world), for allegedly steering borrowers away from Public Service Loan Forgiveness by giving bad information.

One teacher said that she was told that she would become ineligible for PSLF if she missed one payment. This, of course, isn’t true, since the 120 qualifying payments don’t have to be consecutive.

The point? Make sure you are looking in the right places when you’re doing research on PSLF. And whether intentionally or not, your loan servicer may not be the best source of information about the program.

Apply for Public Service Loan Forgiveness

Once you’ve made 120 qualifying payments, you should fill out and submit the PSLF application. If FedLoan Servicing is already your servicer, you can upload your application on their site.

If not, you can send your completed form to:

U.S. Department of Education
FedLoan Servicing
P.O. Box 69184
Harrisburg, PA 17106-9184

This is also the address that you’ll send your Employer Certification Form to.

You can also fax (Yes, I know. Sometimes I think the federal government is single-handedly keeping fax machines on the earth) either form to 717-720-1628.

Public Service Loan Forgiveness Resources

If you have questions, check out some of these resources from StudentAid.gov.

You can also contact FedLoan Servicing at 1-855-265-4038.

Conclusion:

Public Service Loan Forgiveness is one of the few forgiveness programs that I would recommend considering. Still, if you think that you could realistically pay off your loans in less than 5 years, I’d say forget PSLF.

But if your payoff timeline is any longer than that and you work for a qualifying employer, you may be wiser to pursue Public Service Loan Forgiveness. At most, you’d only have to make a few extra years of payments. And in the meantime, your cash flow situation would be much better.

And if you use that extra cash towards other financial goals (like paying off other debt or investing for retirement), I’d say that’s a pretty nice win-win.

Related: How to Graduate Without Student Loans

About the author 

Clint Proctor

Hi, I'm Clint! I love writing about everything personal finance. In addition to this site, my work has been featured on several major publications including Business Insider, Forbes, Credit Karma, and U.S. News and World Report. My hope is that you'll be able to find plenty of helpful information and inspiration on this site to help you reach your financial goals. Thanks for visiting!

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