The following is a guest post about the Public Service Loan Forgiveness Program from Dave at Gen Y Finances, where he writes about investing, personal finance, and anything else on his mind.
I recently wrote an article about the tax saver’s credit that I wasn’t aware of until doing my girlfriend’s taxes for 2011. Well, I recently found out about another program that I wanted to share with everyone.
My girlfriend has a Masters in Social Work and currently works in the mental health field. One of her colleague’s at work told her that she should look into loan forgiveness programs. When my girlfriend has any type of finance related question, she always comes to me. After she first mentioned the loan forgiveness program to me, I told her I doubt that something like that exists, but that I would look into it for her. However, to my surprise, congress passed the College Cost Reduction Act of 2007, which included a program known as Public Service Loan Forgiveness Program (PSLF).
This is a program that is often overlooked and I want to bring attention to the Public Service Loan Forgiveness Program. If you work full-time in a public service job, you may qualify for the public service loan forgiveness program without knowing it. This program was designed to encourage people to enter the workforce in a public service career and remain in a public service job for an extended period.
How do you qualify for loan forgiveness?
- Your student loans must be Direct Loans
- You must make 120 monthly payments on your Direct Loans
- The 120 payments must be made under repayment plan that qualifies for forgiveness
- Standard Repayment Plan (10-year maximum repayment plan)
- Income Based Repayment Plan
- Income Contingent Repayment Plan
- You must be working full-time at a qualifying public service organization when you make each of the 120 monthly payments.
If your loans are not Direct Loans, you can find more about consolidating your loans into Direct Loans at http://www.loanconsolidation.ed.gov.
What kind of employment qualified?
- Employment with a federal, state, or local government agency, entity or organization that is tax exempt per Internal Revenue Code Section 501(c)(3). The IRS has a database of organizations that have received the 501(c)(3) designation at http://www.irs.gov/app/pub-78/.
- A private non-profit employer that isn’t tax-exempt may qualify if the organization provides services that include: emergency management, military service, public safety, law enforcement services, public health services, public education, public library services; school library services, public interest law services, early childhood education, and public service for individuals with disabilities and the elderly.
How to take advantage of the PSLF
My next piece of advice to anyone that qualifies for the loan forgiveness program is going to sound counter to everything you read on personal finance blogs. If you qualify for the program, you want to pick a repayment plan that minimizes your student loan payment and lengthens the repayment period of your loan as long as possible! If you do this, it will ensure that you maximize the amount of the loan that will be forgiven at the end of the 10-year period.
If you read above about the repayment plans that qualify, you will see that the standard repayment plan only qualifies for loan forgiveness if it is a 10-year repayment plan. Thus, that plan would be useless to anyone actually trying to get loan forgiveness since the entire loan would be paid off in 10 years. This is probably the most important part of this entire article, so read carefully.
Before you consider consolidating your loans into direct loans, make sure that you qualify for either the income based or income contingent repayment plans. If you qualify for either of these two repayment plans, you can extend your student loans out to a 25 year repayment plan and would maximize the amount of loan that will be forgiven after the 120 qualifying payment are made. One other important thing to know, loan amounts forgiven under PSLF are not considered income by the IRS. But as always, you should consult a CPA or tax professional for more information on this.
If you are planning on working in a public service field and have a significant amount in student loans left to pay, I encourage you to look into this loan forgiveness program. I’m sure that that many people in public service are not even aware that this program exists and I want to help spread the word. 10-years might seem like a long time, but this is a program that can help improve your personal balance sheet.
Here is an additional resource with very detailed information on the Public Service Loan Forgiveness Program.
Q&A Link: http://studentaid.ed.gov/students/attachments/siteresources/PSLF_QAs_final_02%2012%2010.pdf
Have you heard of this?
I have a friend who graduated from a top-tier law school with over $200K in loans (and that’s with her living on rice and beans for three years!). She has a great job in the federal government, so I’m sure she knows about this loan program. I’ll be sure to mention it to her just in case though. Thanks for spreading the word.
This is a great program and something people should take advantage of!
The only downer is that you have to wait 10 years!! 10 years is a long time to slowly pay off debt and that will certainly be a lot of interest you’ll be paying if you spread the loan out over 25 years. Yikes.
I still think it’s sound advice though. I didn’t do the math but it’s probably certain to work out in your favor if they pay everything else off after the 10-year period.
The other downer is that you may end up paying more in interest than you have forgiven, depending on the interest rates. 10 years waiting for repayment seems like a bit of a gamble to me, especially if you end up not caring for your job after 3 or 4 years…
I think this is a great program! Just because they have it doesn’t mean you have to get advantage of it – if you can pay off your loans before 10 years is up, great! Otherwise, this is a wonderful option. I wish they had loan forgiveness in the field I’m in but I can understand why they gear it more towards non-profit/education.
I’m also an LMSW and have a few social workers working for me who are planning to take advantage of programs similar to this (check with your local NASW chapter for local loan forgiveness programs). The only thing I warn them of is burnout. Social work (especially in the mental health sector) has an incredibly high burnout rate. Combine that with not so great pay, a lot of regulations and mega stress and you might be better of getting a job in the for profit sector, or setting up a private practice for a few years.
Also, if you leave your job, you have to be sure to find another placement that qualifies, otherwise you may have wasted a lot of time paying the minimums only to find out your employer doesn’t qualify.
Good program to look into though, if you have a ton of debt and a lot of patience.
The amount eliminated under loan forgiveness or repayment programs may be considered taxable income in the year received. In other words, if you have $5,000 in loans forgiven next year, that may increase your taxable income in the eyes of the IRS by an equivalent amount. While that’s never fun, it shouldn’t discourage you from using one of these programs since the benefit far outweighs the cost.
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