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Navigating the Public Service Loan Forgiveness (PSLF) Program

Dec 16, 2019
Cole W. Cheney, MD

Cole W. Cheney, MD
University of Utah PM&R Program

History

The Public Service Loan Forgiveness (PSLF) program was created under the College Cost Reduction and Access Act (CCRAA) in 2007, with the earliest borrowers eligible for forgiveness in 2017. The program allows a person’s federal student loan balance to be forgiven after 120 qualifying monthly payments. To be eligible, the borrower’s employer must be a government agency, 501(c)(3)s or other designated not-for-profit organization. Luckily, many large academic and state hospitals meet these criteria. Eligible loans for the program include Direct Subsidized, Direct Unsubsidized, Direct PLUS, and Direct Consolidation. Private loans are not eligible for the PSLF program.

Nuts and Bolts

A borrower attempting to receive loan forgiveness must complete a very strict set of tasks to be considered eligible during their repayment time. Not only must the borrower have one of the eligible loan types described above, but the loans must remain with the federal Direct Loan Program in which the U.S. Department of Education is the direct lender[1]. The borrower also cannot re-finance these loans (i.e., through a private insurer). 

Every year while employed at a qualifying organization, the borrower must submit an “Employment Certification Form,” which confirms full-time status, organization eligibility and nature of employment. During this time the borrower must be on an income-based repayment plan (IRB, PAYE, REPAYE)[2]. After 120 monthly payments that comply with these criteria, the loans will be forgiven.

Months spent in deferment or forbearance do not count toward the required 120 months. Payments made more than 15 days late will not count toward this required total. Payments do not need to be consecutive. A borrower can work for a non-qualified employer or go into deferment for a period before re-starting qualifying payments where she left off. Unlike other student loan forgiveness plans, PSLF is not counted as income by the IRS and does not incur a large tax burden. For example, Pay As You Earn Repayment Plan (PAYE), Revised Pay As You Earn (REPAYE), Income-based Repayment (IBR), and Income-Contingent Repayment Plan (ICR) retire loans at 20-25 years regardless of balance, but incur a large tax burden[3].

Failure to Deliver

Though appearing appealing, the PSLF program has received widespread criticism for its failure to provide loan forgiveness to a majority of its applicants. As of March 31, 2019, 894 PSLF applications were approved, 56,353 were denied for not meeting program requirements, and 18,785 were denied for missing information[4]. The program has paid out $30.6 million in loan forgiveness since the first borrowers could apply for forgiveness in October 2017.

The likelihood of receiving loan forgiveness through PSLF based on these figures is 1.2%, however some predict that the PSLF success rate will approach 50% by 2024[5]. The referenced author theorizes that improved payment methods, media scrutiny, and borrower awareness will encourage this improvement. Whether the odds are less than 1% or approaching 50%, this is a gamble that many would be unwilling to take.

Attempts at Reformation

Three main issues associated with PSLF have prompted reform attempts: program cost to taxpayers, outsized debt loads on high earners, and application rejections. These concerns arose from a trillion-dollar student loan crisis, well-paid professionals (including physicians) receiving hundreds of thousands of dollars in debt relief, and a 99% rejection rate, respectively.  

All attempts to reform public student loan forgiveness have failed except for the Temporary Expanded Public Student Loan Forgiveness (TEPSLF)[6]. This program earmarked $700 million to provide a second chance at forgiveness for applicants who were previously rejected. So far, only 661 borrowers have qualified for this back-up plan.

President Barack Obama’s failed proposal tried to cap PSLF at $57,500. A 2016 congressional budget proposal tried to eliminate the program altogether. This proposal did not pass. President Donald Trump’s 2018 and 2019 budget proposal attempted (and failed to pass) similar PSLF elimination.

Final Thoughts

For those who welcome risk: PSLF may be the best financial option. If done successfully, nothing will outperform a student loan forgiveness (though don’t forget to save for incurred taxes as forgiveness is considered “income”).

For those that are risk adverse: buckle down, cut spending, and start paying while in residency if possible. This will be the quickest, least expensive route out of debt. A nice trick is to remind yourself of the amount of interest you’re saving per $1,000 of principal paid down. For example: for every $1,000 of principal paid down at 5%, $50 less per year goes to interest. Whether that money goes toward paying down principal or personal expenses, it’s better than sending it to the bank.

For those who are moderately comfortable with risk: create a “pseudo” loan repayment account.  This is account that you can diligently contribute toward as if you are paying down debt. You would continue to make minimum payments on your loans. At the end of the PSLF term, those that do not qualify can repay their loans with this account. Those that do qualify now have can buy their first house with cash.

Remember, the only people that default on loans are people that have loans. Student loans are not eligible for bankruptcy. There is no way out but payment, disability, or death.