Our clients often express concern about the debt that they, their kids or their grandkids are saddled with straight out of college. In the last several years, news about the possibility of student loan forgiveness has surfaced. If ever there were a program that fully embodied the nuance, complication and confusion that often accompanies government initiatives, the Public Service Loan Forgiveness Program (PSLF) might be it. Here’s our attempt at cutting through the noise and make this complicated subject a little easier to understand.
The Basics: Federal vs. Private Loans
Federal student loans offer more flexibility and lower rates than private loans. Undergraduates can expect to pay around 4.45% in interest; graduate students about 6% and parents PLUS loans have an interest rate of around 7% – all numbers that increased slightly from their July rates. Private loans often start out lower to entice borrowers, but increase exponentially over a short period of time. Federal lenders allow consolidation and are keen to work with their borrowers, adjusting payment requirements if needed. Private lenders are more likely to hold their borrowers’ feet to the fire, requiring quicker repayment at higher rates, even bringing on lawsuits for missed repayment in some cases. Remember, student loan debt is a ‘death till you part’ arrangement – even bankruptcy won’t rid students of the financial burden (with very few exceptions).
Requirements For Forgiveness
The PSLF program was started in 2007 under the Bush administration in an effort to combat the student loan debt plaguing fresh-faced (or in this case, depressed-faced) graduates. It allows some individuals to have their student loans forgiven, tax free, after 10 years. To take advantage of PSLF, a graduate must qualify their loans, make qualifying payments and work for a qualified employer. How’s that for ambiguous? Let us translate.
Here’s how graduates can become eligible for student loan forgiveness
1. Consolidate their loans under the federal Direct Loan Program.
This rules out about 44% of federal student loan borrowers who carry loans outside this program. How to accomplish this? First, they’ll want to head to the National Student Loan Data System’s website (www.nslds.ed.gov) and assure they have a handle on every loan they’ve taken out. Next, they’ll begin the process of consolidating those loans with the help of the Federal Student Aid website (studentaid.ed.gov). Beware of bogus sites offering assistance in loan establishment or consolidation. Because PSLF is a federal program, legitimate websites should end in .gov. If they don’t, red flags should go up.
2. Make 120 qualifying payments.
A qualifying payment is:
a. Made through a qualified repayment plan (e.g. income-driven repayment).
b. Made after October 1, 2007 for the full amount due within 15 days of the due date.
c. Made while employed by a qualifying organization.
3. Work for a qualified organization.
PSLF is available to employees of the government, a nonprofit organization or a company that provides public service. If you’re a graduate who is weighing your options on employment, check that the employer will fall under one of these categories. You will also need to complete a PSLF employment certification form to keep track of the years you work for a qualified organization.
The Future of PSLF
This fall will mark the first time students see the impact of this program as PSLF will celebrate its 10th birthday October 1, 2017. When that happens, we expect to see new studies and analysis on its projected longevity and effectiveness. There are several proposals that would impact the program as it stands today. In some, graduate students would be hit hardest as opportunities for income-based repayment and the length of repayment are changed (forgiveness pushed out from 20 to 30 years). Undergraduate students may see a bit of a break, with repayment plans based on 12.5% of their discretionary income (vs. the current 10%), but similarly their window for forgiveness may be pushed out from 10 to 20 years. Subsidies for low and moderate income students may go away. These often come in the form of interest payments covered by the lender while the student is in school or temporarily out of work (the cumulative interest may be tacked to the end of the loan instead). Like many of the initiatives before our administration, these are all proposals that would require approval of Congress before any changes are made. One thing that is clear is that at this point, any loans made before July 1, 2018 would still be eligible for the PSLF program. To learn more, visit pslf.org.