Monday, September 16, 2013

Public Service Loan Forgiveness Underused

The New York Times reports that Public Service Loan Forgiveness is being underutilized. More public service employees need to know that this option is at their disposal. It's what keeps my student loan payments manageable with a 10-year end in sight.

"The federal government is trying to encourage more participation in the Public Service Loan Forgiveness program, which was created in 2007. The program and other debt assistance options have been underused because of complex rules and sometimes conflicting benefits." But it's not that hard -- it's easy to consolidate most federal loans under one direct loan consolidation -- and these loans qualify for PSLF.

"There are some restrictions. Only federal direct loans — those originated by the federal government — are eligible for the public service forgiveness program. But older loans that were made by private lenders and guaranteed by the federal government — like those made under the Federal Family Educational Loan program, which ended in 2010 — may be refinanced into a new direct loan, to become eligible."

Once you have qualifying student loans and are employed at a non-profit, "[y]ou must make your loan payments on time every month for 10 years — 120 payments — to qualify. The payments don’t have to be consecutive, however. You could, for example, work at a public service job for five years, leave for two years and return for another five years." Be careful with this part -- after you consolidate your loans with a direct loan consolidation, the loans are often sold to many different companies (mine are at their third servicer since 2011). If you have signed up for automatic debit, there could be problems with the transfer and having a payment post on time. It is for this reason that I have decided to forego automatic debit and just pay with an on time, online transaction each month.

The beauty of PSLF is that the amount forgiven after 10 years is not taxed like the amount forgiven after 20 years. "The amount forgiven after 10 years of public service isn’t treated as taxable income. Debt forgiven for borrowers using income-based repayment program alone, however, is considered taxable under current law."

One thing that I would recommend is to get your non-profit employer to sign the PSLF Employment Certification Form. This allows the Department of Education to track your employment early, so if you change jobs within the 10-year repayment period, it is easy for the Dept. of Ed. to see that you've worked for a non-profit the entire time.

Now let's just hope that Congress doesn't change this before my loans are forgiven in 2021.

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