What is Public Service Loan Forgiveness?
Public Service Loan Forgiveness (PSLF) is a new loan forgiveness program designed by the Federal Government which forgives loan balances after 120 qualifying payments. The program does have some requirements, of which the most important is the requirement to work at a private or public non profit employer. The other important requirements include:
- Work for a tax exempt (501c3) employer during the time you make qualifying payments.
- Work full time for the above organization (30hours per week or more per the Federal Student Aid website).
- The loan must be a Direct Federal loan. Some of your loans (such as Perkins and FFEL loans) may not qualify but if you consolidate, that changes the loan type and you may now qualify!
- Qualifying payments includes payments made on direct loans after 10/1/2007, under a qualifying payment plan, for the full amount due on your bill, and no later than 15 days after due date.
- You make the payments while actually employed by a qualifying employer.
Remember that payments made during in-school status, grace period, a deferment, a forbearance or default DO NOT count. Another nice feature of Public Service Loan Forgiveness is that payments DO NOT need to be made consecutively. This lets you, for example, work for a non profit employer for a few years, go to another organization that is for profit for a few years and then come back (or go to another) non profit employer and continue to make qualifying payments there. Lastly, the beauty of making loan payments during residency is two fold. One, you have lower monthly payments as your salary is generally lower than post residency. And two, nearly every residency program (I’m sure there are some that don’t qualify) is at a hospital that is a 501c3 non profit institution which means that your payments qualify! Thus, if you were to start paying during the first month of residency you could have 3-4 years (depending on the length of your program) of qualified payments under your belt!
Qualifying repayment plans include those in the income driven repayment section such as IBR, ICR, PAYE and REPAYE. You can read our Medical School Debt Part Two article for more information about each of these repayment plans. You’ll need 120 (or in essence 10 years) qualifying payments. You can submit an Employee Certification Form as much as annually (recommended by the Student Aid website) which the Federal Government will use to let you know if you are making qualified PSLF payments.
So it’s 10 years later, and you think you’ve made 120 qualifying payments. What now? You’ll need to submit a PSLF application to receive loan forgiveness which also must be submitted while working for a 501c3 nonprofit agency that qualifies. Don’t worry about that now, the application isn’t ready yet since the earliest anyone will qualify is 2017.
Should I use Public Service Loan Forgiveness?
This is really the most important question. Let’s create two possible paths for you. Both paths have $180,000 in student loans, earn $50,000 yearly during a 3 year EM residency, and both paths start paying back loans during residency utilizing the IBR program. Path A works at a non profit institution that qualifies for PSLF and earns $200,000 after residency. Path B works for a private for profit institution and earns $280,000 after residency and does not qualify for PSLF. Both receive a 3% yearly salary increase.
|PATH A||PATH B|
|Salary During Residency||$50,000||$50,000|
|Length of Residency||3||3|
|Salary After Residency||$200,000||$280,000|
|% increase in Salary Yearly after Residency||3%||3%|
|Total Amount of Loan Paid Utilizing PSLF||$189,415.00||N/A|
|Number of Years of Loan Payments w/ PSLF||10 Years||N/A|
|Total Amount of Loan Paid NOT Utilizing PSLF||$308,434.56||$308,434.56|
|Number of Years of Loan Payments w/o PSLF||14.8 Years||14.8 Years|
As you can see above, if you were to take PATH A you’d be forgiven about $100,000 and save about $120,000 compared to paying the loans without PSLF. But what’s really the key question is how does the overall income over equal time periods compare between these two paths. Check out this chart below to help explain:
|Year of Payment||PATH B - Income of $200,000||Yearly Difference Between Income and Loan Payments||PATH B - Income of $280,000||Yearly Difference Between Income and Loan Payments|
|Total Earned Income Over 15 Years||2,798,990.56||3,815,333.14|
So, while it looks like you may have saved about $100,000 from Public Service Loan Forgiveness, you do lose about $1 million by working somewhere with a lower income to gain the Public Service Loan Forgiveness option over a 15 year time period. Now despite what may be a common example, everyone’s situation is somewhat different. Some people may not have such a difference between salaries at for profit and non profit institutions. Some people may have a substantially higher loan burden which may gain a greater benefit for loan forgiveness.
The last thing to mention about Public Service Loan Forgiveness, which may likely affect your decision to go down that path, is whether it will still even be available by the time you’re ready to take advantage of it. There have been discussions that one of two options may happen when the government realizes that they’re forgiving such high loan amounts. One option is that the program may be discontinued. The second option, and more likely of the two, is that the Federal Government will cap how much can actually be forgiven. Hopefully neither of these two options happen but they are possible.
What do you think about PSLF? Do you think you’ll take advantage of it? Do you know of other forgiveness programs that you’d like us to possibly write about? Drop a comment below and let us know!