Public Service Loan Forgiveness: Examining the Pros and Cons
The U.S. Department of Education has approved $42 billion in Public Service Loan Forgiveness (PSLF) loans for more than 615,000 borrowers since October 2021.1 This blog post discusses the pros and cons of public service loan forgiveness. Before I discuss the pros and cons of PSLF, you should first know how to qualify for this unique loan forgiveness program.
Qualify for PSLF
1) Public Service Employment: A qualifying employer must employ you full-time (at least 30 hours per week). A Qualifying employer is a government organization (federal, state, local) or 501(c) (3) nonprofit.
2) Loan Type: Only certain federal student loans are eligible for PSLF. Note that private loans are not eligible. Check out the Studentaid.gov website for the most up-to-date information on eligible loan types.
3) Repayment Plan: You must be on an eligible repayment plan. The most common repayment plan is the income-driven repayment plan. The standard ten years would also qualify, but you might not want to do this plan since, with PSLF, your remaining loan balance after ten years is forgiven.
4) Timely Payments: You must make 120 timely qualifying payments while working full-time for a public service employer. These payments must be made on time, within 15 days of the due date. Part-time employment does not count toward the 120 payments.
5) Certification: You must submit an employment certification form annually or whenever you change employers. This form verifies your employment and ensures you are on the right track to getting your loans forgiven. Keep accurate records of your employment history.
6) Must Apply: You must apply for PSLF once you have met the above criteria. Getting your loans forgiven is not an automatic process since this can be a great benefit for those with student loans; a lot of paperwork and verification needs to be done before the loans can be forgiven.
Now that you know if you qualify, I would also consider the pros and cons of PSLF. It seems like a slam dunk, but I suggest you weigh both before deciding.
Pros of PSLF
1) Debt relief: The primary benefit of PSLF is potential significant debt relief. Under the program, eligible borrowers who make 120 monthly payments or ten years of payments while working full-time for a public service organization can have the remaining balance forgiven. This can provide immense financial relief for those with substantial student loans in medicine, pharmacy, and veterinary medicine. In many of these professions, you could end up with hundreds of thousands of student loan debt that can be potentially forgiven.
2) Incentivizing Working in Public Service: If you plan to work in government or a nonprofit sector, this provides an excellent opportunity to do what you love and have your loans forgiven. The whole purpose of PSLF is to incentivize public service employment, knowing that attracting professionals to these careers can be more challenging. If your passion is public service, this program can suit you.
3) Flexible Payments: The program allows for much flexibility in payments, such as income-driven payment plans. So potentially, you could reduce your monthly payments, pay the minimum on the loans, and have the remaining balance forgiven in 10 years!
4) Tax-free Loan Forgiveness: A great benefit is the forgiven balance is not considered taxable income. For loans in the private sector that are forgiven, this is considered taxable income, so you would have to pay tax on the forgiven amount.
Along with the pros of PSLF, there are some cons.
Cons of PSLF
1) Complex Eligibility Requirements. Although the Education Department has made considerable efforts to simplify and streamline PSFL, it is still complex. Borrows must meet specific requirements for loan types, repayment plans, employment status, and timely payments. This can lead to potential disqualification if not carefully planned.
2) Only Federal Loans: PSLF only applies to federal student loans. This can impact borrowers who have a mix of federal and private loans. If you plan on working for a public service organization upon graduation, you should focus on getting federal loans if you want them to be forgiven.
3) Long Timeline for Forgiveness: Borrowers must make 120 qualifying payments equivalent to 10 years before becoming eligible for forgiveness. Your loan might be paid off in 10 years under the standard payment plan, so you would not benefit from PSLF.
4) Uncertainty and Limited Funding: PSLF is criticized for limited funding. There can be changes in government policies that can impact borrowers on the PSLF track. The future is unknown about the status of this program going forward.
5) Lack of Job Mobility: You may have more lucrative opportunities to work for the private sector but may feel that you cannot switch because of PSFL. You could work in the private sector, make more aggressive payments towards your student loans, and have them paid off faster.
PSLF is a great program for those passionate about public service who view working for the government as their desired career path. I would not suggest you work for the government just to take advantage of this program. I would also not tell you to borrow extra money on your student loans knowing that you will work for the government and potentially qualify for PSLF. There can be great opportunities available in the private sector that might be a better fit for your career aspirations.
Under these circumstances, aggressively paying off your student loans might make more sense. Essentially, don't let the PSLF program dictate your career goals. Still, if you work for public service, taking advantage of a program specifically designed to incentivize working for government and nonprofits might make sense. Contact me on the page below to learn more about how student loans fit within your personal finances.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid Federal Government tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in estate planning should work with an estate planning team, including their legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
