Public Service Loan Forgiveness or “PSLF” is a federal program that promises to discharge your federal student loan balance after making 120 qualifying payments while working for a qualifying not-for-profit, government, state, or tribal organization.
It’s a fantastic program; unfortunately, very few people get approved. According to the Department of Education, 97.5% of PSLF applicants were denied throughout COVID-19 (2020-2022 Q2). Imagine giving up the potential for higher income to work in the public sector, under the promise of getting your student loans forgiven. And after ten years of making on-time monthly payments, you find out that your application for forgiveness was denied.
That’s the reality that many doctors, public defender attorneys, and teachers have to face.
With the rising cost of college, today’s medical professionals have a lot more riding on their student loan strategy than any other generation.
We know that keeping your fingers crossed is not a financial strategy. Let’s look at the eligibility criteria to help you earn forgiveness (and maximize how much you get forgiven) through the Public Service Loan Forgiveness program.
Earning Forgiveness through Public Service Loan Forgiveness (PSLF)
It’s mind-blowing how many applicants are denied forgiveness because of all the strict requirements of the program. PSLF isn’t a program where you can “set it and forget it.” You need to continually assess how your ever-changing finances affect your ability to earn forgiveness.
Here’s a checklist approach that will help make sure earn your forgiveness:
- Work for the right employer
- Have the right kind of student loans
- Make the right kind of payments
- You need to prove it
- Apply for PSLF forgiveness
Work for the right employer
To earn forgiveness through the Public Service Loan Forgiveness program, you need to be working for the right kind of employer. It’s not the type of work that you do that makes you eligible for forgiveness through the Public Service Loan Forgiveness program.
FederalStudentAid.org, an office of the Department of Education, gives us some guidance on what employment qualifies for forgiveness through the Public Service Loan Forgiveness (PSLF) program.
Here’s what they say:
Employment with the following types of organizations qualifies 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 nonprofit organizations that are not tax-exempt under Section 501(c)(3) of the Internal Revenue Code are to provide certain types of qualifying public services
It’s important to note that sometimes whom you work for can be confusing. Physicians and other healthcare professionals often work for a qualifying entity but are paid by a non-qualifying entity.
For example, healthcare professionals working for the University of Washington Physicians (UW Physicians) are paid through the University of Washington. UW Physicians is a government organization, but the University of Washington is not. Neither is it a 501(c)(3) nonprofit organization.
It’s pretty easy to determine if your employer is a state, federal, municipal, or tribal organization. However, to check if they’re a qualifying 501(c)(3) organization, you’ll check with your human resources department, use the Tax Exempt Organization search tool, and fill out an annual Public Service Loan Forgiveness Employment Certification Form.
Have the right kind of student loans
Having the right kind of student loans may seem straightforward. But apparently, it’s not.
In 2017, the first wave of eligible applicants filed for forgiveness through the Public Service Loan Forgiveness program. Out of 30,000 people that applied for forgiveness, only 96 were initially approved.
That’s roughly 29,900 people that worked in public service for ten years under the promise that the government would forgive their student loan balance.
Why didn’t they get approved? They didn’t have the right kinds of loans.
Only Direct Loans qualify for forgiveness, whether through the Public Service Loan Forgiveness (PSLF) program or an Income-Driven Repayment (IDR) plan.
Direct Loans that qualify for Public Service Loan Forgiveness consist of:
- Subsidized Direct Loans
- Unsubsidized Direct Loans
- Direct Graduate PLUS Loans
- Direct Consolidation Loans
What kind of federal student loans do you have?
You most likely have a mix of different kinds of loans. And depending on who your loan servicer is, the types of loans you have might be detailed on your monthly statement. However, with some loan servicers, it might not be clear what kinds of loans you have.
If that’s you, you might need to do some digging.
It’s also important to note that each loan has its forgiveness timeline. If you have six federal student loans, that’s a potential of six different schedules.
Do you have non-qualifying loans? Direct Consolidation is a student loan management technique designed to help borrowers turn a federal student loan that doesn’t qualify for forgiveness (e.g., FFEL loans) into one that does.
A word of warning: Adding existing Direct Loans into a direct consolidation will reset any progress towards forgiveness on those loans. Private student loans are not federal student loans. Private student loans are not eligible for forgiveness.
Make the right kind of payments
Only payments made on income-driven repayment plans and the Standard repayment plan count towards PSLF. Payments made on the Standard plan will erode your ability to maximize forgiveness due to the higher payments.
Qualifying repayment plans include:
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE), and the
- Standard, 10- year repayment plan
Next, you need to make 120 qualifying monthly payments on these plans. You don’t necessarily need to be on the same repayment plan for the entire time.
Qualifying payments are defined as:
- On-time, within 15 days of your due date
- Payment made in full. Partial payments don’t count.
- On a qualifying repayment plan
- While working for a qualified employer
What’s also great about the Public Service Loan Forgiveness program is that these qualifying payments don’t need to be made consecutively or with the same employer. You don’t have to make the full 120 qualifying payments in one consecutive stretch.
The ability to pause payments through forbearance, change jobs, and pick back up where you left off makes the PSLF program very flexible.
It’s comforting knowing that if you wanted to acquire valuable skills only offered in private sector jobs or simply start a family, you could do that.
You need to prove it
Your loan servicer will do their best to track all of your qualifying payments made. However, the burden is on you to prove you caused your 120 qualifying payments and are now eligible to apply for forgiveness.
How you do this is by filling out the Public Service Loan Forgiveness (PSLF) Employment Certification Form annually.
Avoid this, and you’ll leave it up to your loan servicer to determine how many qualifying payments you’ve made. You may find their definition of what qualifies for forgiveness much stricter.
Here’s a real-life case. Jane is a client of ours (not her real name) and works as a pediatrician for a qualifying 501(c)(3) medical center. She works 40 hours per week. Of that, she spends 30 hours per week seeing patients, and 10 hours a week performing administrative tasks.
Jane meets her employer’s definition of full-time. She works 40 hours a week (often more) and is entitled to paid time off and healthcare and retirement benefits.
However, from an accounting perspective, she only works what’s equivalent to 0.75 FTE hours. That lets accounting know that Jane is working 75 percent of what’s considered a max full-time equivalency before starting to earn overtime pay. It’s an accounting term and has nothing to do with Public Service Loan Forgiveness.
There are no requirements to meet any “FTE” criteria to qualify for forgiveness. However, her loan servicer sees 0.75 FTE and quickly assumes that she doesn’t meet her employer’s definition of “full time.” And because of that, her loan servicer told her that 50 of her payments don’t qualify.
That’s 50 of the 120 payments that would have qualified if she only filled out that PSLF Employment Certification Form.
Will she qualify? I don’t know. She’ll have to battle this out.
However, the point is that if you don’t prove you made your payments, you leave it up to your loan servicer to determine what counts and what doesn’t. They’ll always go the stricter route because they don’t want to get in trouble.
Apply for Forgiveness
Forgiveness through the Public Service Loan Forgiveness (PSLF) program doesn’t happen automatically.
Once you’ve met all the (strict) requirements of the PSLF program, you need to submit a Public Service Loan Forgiveness: Application for Forgiveness. You also need to be working full-time for a qualifying employer at the time you apply.
If you haven’t been filling out those PSLF Employment Certification forms, you’ll need to do so with this application. You’ll need an employment certification form for each employer you’ve worked for while making the 120 payments.
However, if you’ve been filling out these forms, all you need to do is fill out an employment certification form for your current employer.
By submitting the Application for Forgiveness form, your student loans will be transferred from your loan service to FedLoan Servicing. The Department of Education may contact your employer to verify your current employment.
You’re not required to make payments of loans to be forgiven while your application is being processed. These payments will be treated as an overpayment. However, you do need to continue to make payments on your other loans.
If you’re not eligible for forgiveness, you will be notified as to why you were denied. Your forbearance will end, and any unpaid interest may be capitalized (added to your principal balance).
Get Your PSLF Questions Answered. Ask A Financial Advisor
Many life events affect your student loan payments and your ability to benefit from forgiveness.
Weddings are one of them. When you invite Uncle Sam to the wedding, funny things can happen to your student loan payments —even your ability to earn forgiveness.
Keeping your fingers crossed is not a financial plan. Let us take a look under the hood of your student loans. If there’s a problem, we’ll let you know about it and how to fix it.
Remember, personal finances are just that, personal. You’re not going to get your best student loan strategy from reading a blog. Let’s start planning.
For Educational Purposes Only – Not to be relied upon as financial, tax, or legal advice. The views expressed are those of the presenting party and all data is derived from sources believed to be accurate.
Neither Independent Financial Group (IFG) nor any of its affiliates offer lending or repayment advice. The views expressed are those of the presenting party and may not express those of IFG or its affiliates. The information presented is for educational purposes only and is derived from sources assumed to be reliable. It is not to be relied upon as tax, legal, or financial advice, nor used for the purpose of avoiding any tax obligations. Please contact a qualified professional regarding your individual circumstances.