Public Service Loan Forgiveness: Everything You Need to Know About PSLF

The Public Service Loan Forgiveness (or PSLF) program forgives any of your student loans remaining after making 120 qualifying payments while working full time for a qualifying employer. While the income driven repayment options also offer forgiveness after 20 or 25 years of qualifying payments, forgiveness under these plans is counted as taxable income. Forgiveness under PSLF is completely tax free. Win-win!

Qualifying Employment

Contrary to popular opinion, employment qualifying for PSLF has nothing to do with what you do. It only matters who you work for. If you work full time for any of the following employers (defined as 30 hours per week or more), your employment will qualify for PSLF:

Any government organizations. This includes state, federal, and local governments.
Non-profit organizations that qualify for tax exempt treatment under 501(c)(3).
Other types of non-profit organizations that provide certain types of public services.

There are a few exceptions too. Labor unions and political organizations do not qualify for PSLF. But, qualifying employment reaches much farther than only teachers and social workers. Anyone working full time for the government or a 501(c)(3) non-profit can qualify:

Lawyers working as prosecutors and public defenders
Physicians working in teaching hospitals & medical schools
Firemen & Police Officers
Soldiers

Some estimates count 33 million public service employees who could qualify for PSLF. As of June, 2015, only 335,520 people were enrolled in the program, or barely more than 1%.

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Federal Student Loan Consolidation: What It Is & When You Should Use It

Financing college and grad school these days is no small task. With tuition costs rising every single year, graduates today are exiting school with laundry lists of student loans. Each one with a different rate, a different servicer, and often with different terms. Sounds confusing, no?

The Federal Direct Consolidation Loan repays your existing federal student loans and replaces them with one loan at a fixed rate. This can be beneficial for a few reasons. It reduces the number of loan servicers you’ll need to deal with, replaces variable interest rates with fixed, and helps you qualify for flexible repayment options your original loans may not have been eligible for.

How it Works

The direct consolidation loan replaces your outstanding federal loans with one combined loan at a fixed rate. This can be very convenient. Loan servicers are prone to making clerical errors, so dealing with only one will probably make your life a whole heck of a lot easier.

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REPAYE: Revised Pay As You Earn Student Loan Repayment

What is REPAYE Student Loan Repayment?

After making the Pay As You Earn (PAYE) student loan repayment system available to borrowers in 2012, President Obama expanded the program by enacting the Revised Pay As You Earn (REPAYE) repayment plan in December of 2015.

While REPAYE has many of the same features as PAYE, the updated plan has several key improvements. Not the least of which is that it’s available to any borrower with qualifying loans – which opens the plan up to an estimated 5 million additional borrowers. This is a huge step up from PAYE, which is essentially only available to the class of 2012 and later.

How it Works:

Monthly payments under REPAYE work basically the same as Pay As You Earn and Income Based Repayment. Your monthly payments are 10% of your discretionary income, which is calculated using the difference between your AGI and 150% of the poverty line in your area. There are also a few key improvements and differences though.

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PAYE: Pay As You Earn Student Loan Repayment

What is Pay As You Earn Student Loan Repayment?

The Pay As You Earn (or PAYE) student loan repayment program was passed in December of 2012, and is President Obama’s spin on income driven repayment. Understanding that student borrowers faced significant challenges once they entered repayment, the President used PAYE to improve on the preexisting Income Based Repayment in several different ways.

Although it has rather strict qualification standards (only the classes of 2012 and later qualify), PAYE is a terrific option for those who can use it.

How it Works

Pay As You Earn is just like Income Based Repayment in how your monthly payments are calculated. Monthly payments under PAYE are 10% of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty line in your area.

Again, poverty guidelines are set by the Department of Health and Human Services, and are updated annually. You can look up the poverty line in your area here.

Like IBR, PAYE has an interest subsidy component and forgiveness of any remaining balances after 20 years of qualifying payments. But, remember that any amount forgiven is taxable as income unless under the public service loan forgiveness program. If you’re counting on forgiveness outside of PSLF, it’s best to plan for the resulting tax bill.

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ICR: Income Contingent Student Loan Repayment

What is Income Contingent Student Loan Repayment?

Income contingent repayment (or ICR) is the oldest of the four income driven student loan repayment options. Originally passed by Congress in 1994, ICR was the government’s first attempt to reduce the burden of student loans by tying monthly payments to borrowers’ adjusted gross income.

While helpful when it was first introduced, ICR has been overshadowed by the other four options rolled out since then. Today, ICR is all but obsolete unless there is a Parent PLUS Loan involved.

How it Works

ICR gives borrowers another option if the monthly payments from the 10 year standard repayment plan are too costly. When borrowers enter ICR, their monthly payment is calculated based on their adjusted gross income and the amount they’d otherwise pay over a 12 year repayment plan.

More specifically, monthly payments under ICR are the lower of:

20% of your discretionary income, or
the amount you’d pay under a standard 12-year repayment plan, multiplied by an income percentage factor

This income percentage factor ranges from 55% to 200% based on adjusted gross income: the lower your AGI, the lower the income factor and the lower the output. It’s updated each July 1st by the Department of Education, and can be found with a quick Google search.

An interesting point to note here is that the income percentage factor ranges all the way up to 200%. It’s possible (whether using 20% of discretionary income or the second calculation) for your monthly payment under ICR to exceed what it would be under a standard 10 year repayment plan. This differs from IBR and PAYE, where your payment is capped when this happens (at what it would have been under the standard 10-year plan).

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IBR: Income Based Student Loan Repayment

Income based student loan repayment (or IBR) is one of the four income based repayment options that the federal government offers to help borrowers reduce monthly payments on their debt. IBR is a great option if you don’t qualify for the Pay as You Earn (PAYE) program, and aren’t a good fit for the Revised Pay as You Earn (REPAYE) program. While only available on certain federal student loans, the program is a wonderful benefit to many lower income borrowers.

What is Income Based Student Loan Repayment?

The income based repayment option (IBR) was originally passed by Congress in 2007, but didn’t become effective until 2009. It’s objective was to provide a more affordable student loan repayment option to low income borrowers. The plan improved on the preexisting income contingent repayment option (ICR) by lowering minimum monthly payments from 20% of discretionary income to 15%.

Then in 2014, IBR was revised. For new borrowers as of July 1st, 2014, monthly minimum payments were reduced from 15% of discretionary income to 10%, and the forgiveness period was shortened from 25 years to 20.

IBR was a significant improvement over the ICR repayment option. But today, there are two additional income driven repayment options (REPAYE and PAYE) that are a better choice for most borrowers. But due to PAYE‘s qualification standards and REPAYE’s mandatory inclusion of spousal income, IBR remains a viable option for many others.

How it Works

Like all income based repayment options, IBR gives borrowers an alternative if the minimum monthly payment on the 10 year repayment plan is too much. For example, let’s say you’re a new graduate and have accumulated $100,000 in federal student loan debt. You’re about to start work at job that pays $50,000 per year, and the interest rate on your loans is 6%.

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