With all the talk of student loans in the news recently, some have raised the question of why student loan forgiveness measures are necessary if they already exist in the form of Public Service Loan Forgiveness (PSLF). Many of our clients are on track for PSLF, and seeing the news stories circulating about the low rates of forgiveness from this program can be stressful. It is important for us to address the issues being discussed, and hopefully provide some relief.
As we have mentioned before in client meetings, it is important to note that PSLF does not kick in after 10 years. It offers forgiveness after 120 qualifying payments. If you make payments for 3 years with a qualifying employer (we will get to the importance of that term later), do not make payments for 2 years, and start your payments again with another qualifying employer, you will not have forgiveness after 10 years.
Our John Doe would have had 36 qualifying payments from his first employer, and then 60 qualifying payments from his second employer. He is still missing 24 payments from his two-year hiatus. Paying however much he owed in one lump sum won’t fix the problem, either. This is all about timing.
Qualifying employer is another term that is oftentimes overlooked. For better or for worse, your profession really does not matter in the eyes of PSLF. However, where you work is extremely important. Your institution must be a nonprofit. You can be a lifesaving surgeon at Institute X, a nonprofit, and qualify for PSLF. You can be a receptionist at Institute X and qualify for PSLF. However, if our life saving surgeon left his nonprofit institution and started his own private practice, he would forfeit his ability to qualify for PSLF. So, if Jane Doe, world class surgeon, worked for Institute X for 9.5 years and then left to start her own private practice, she would have 114 qualifying payments and would not qualify for PSLF after 10 years.
PSLF allows for nonconsecutive payments. This is another extremely important aspect of the program. Going back to our Jane Doe, world class surgeon, example, she should not lose hope of achieving PSLF. Let’s say she applied after 10 years and was rejected because she did not have the correct number of qualifying payments with a qualifying employer. She wonders what in the world happened, and reviews her NLDS document. In that document, it tells you how many qualifying payments you have on each loan. She realizes her mistake, goes back to Institute X for 6 months, working full time (more on this later), and continues working part time at her private practice. After those 6 months are up, she can reapply for PSLF and will receive the remainder of her principal and interest forgiven, tax-free.
To qualify for PSLF, you must work full-time. Full-time is defined as what your employer designates as full-time or 30 hours per week, whichever is greater. You cannot work 35 hours per week as a part-time employee for a nonprofit who considers full-time to be 40 hours per week and qualify for PSLF. You could, however, work part-time for two qualifying employers. In this scenario, you must work a combined average of at least 30 hours per week to qualify for PSLF, and they must both be qualifying employers.
PSLF has many moving parts. It can be confusing. But it is not problematic. People are getting forgiveness, and if you are on the PSLF and meeting all the aforementioned requirements, you have nothing to worry about. Just remember, qualifying employer, qualifying payments, full-time.
At InsMed, we like to plan for the worst and hope for the best. We encourage you to check your NLDS document occasionally to make sure that your payments are being counted for PSLF. If you do annual loan counseling sessions with us, that is part of our meeting and your post meeting summary.
We are still monitoring what Washington is doing with student loans. One of the rumblings out there is that the government may go back to having only two servicers. In that event, your servicer may change, depending on who wins the contracts.
Not to be pessimistic, but we do not completely trust the servicers to make this transition as seamless as possible. We don’t want our clients to be the ones to fall through the cracks. Out of an abundance of caution, it is not the worst idea to file a Freedom of Information Act to have a record of your student loans (and your qualifying payments).
As always, feel free to reach out with any questions, updates, good news, etc. We’re always here to help provide some clarity.
Disclaimer: InsMed Loan Advisory Services, LLC does not provide investment or tax advice. The information is provided for educational purposes only.