Understanding Public Service Loan Forgiveness

Will it be there when I need it? How do I get set up? What if I don’t know if I’m going to be working in the public sector for the next 10 years?

If you’re considering Public Service Loan Forgiveness (PSLF), you’ve probably asked yourself all of these questions.

Here’s a quick primer on the key things you need to know about PSLF.

What is it?

PSLF is a federal loan forgiveness program that rewards people for working with nonprofit organizations. More specifically, the US government will forgive any outstanding federal loans after you make 120 qualifying payments while working for a qualifying employer.  Let’s look at an example:

Mary has $76,500 of federal student loans and $8,900 of private student loans.
  • First, only the $76,500 in federal loans are eligible.
  • Second, Mary’s employer, Acme Hospital, is a qualifying nonprofit (she asked HR).
  • Mary calls her loan servicer and puts herself on Income Based Repayment. She now pays $224/month for her federal student loans.
  • After 120 months (10 years), Mary has made $34,000 of student loan payments but still owes $104,000. The reason she owes more than the original balance is because of that pesky thing called interest.
  • Since she has made 120 qualifying payments while working for Acme (a qualifying nonprofit), the federal government will forgive the remaining $104,000 balance.
  • With PSLF, Mary has no tax consequences and is DONE paying her federal student loans.

So how do you make ‘qualifying payments’ and find a ‘qualifying employer’?

Qualifying Payments: A qualifying payment is a payment you make while on an Income Driven Repayment plan ((e.g., IBR, PAYE, REPAYE) and while you’re working at a qualified employer. The payment must be in full and on time. The 120 payments do not need to be consecutive. You can track your qualifying payments by logging in to NSLDS.

Qualifying Employer: Nonprofits, government organizations, and organizations whose primary purpose is to provide a qualifying public service are all qualifying employers. One way to check is to visit the PSLF Help Tool to verify your employer is eligible. To certify your employment, submit this form annually when you complete your annual update with your servicer.

How do you get set up?

Even if you’re not 110% sure you’re going to work for a qualifying employer, it’s smart to take the following steps as you graduate:

  1. Consolidate your loans into a Direct Consolidation Loan to end the grace period. Here's Why you want to intentionally end your grace period.
  2. Call your loan servicer and sign up for an Income-Driven Repayment Plan.
  3. Make sure you schedule your annual update with your servicer to stay on track.

To qualify for PSLF you must be on an Income-Driven Repayment Plan, even if you’re making $0 payments, they count as qualifying payments!

What if I don’t know?

It’s hard to know if you’ll be at the same job for 10 years or know if you’re going to use public service loan forgiveness. In fact, on average, Millennials change jobs every 2-3 years. Here are some tips to help you decide on a strategy:

I’m not sure I’m going to use PSLF

Hedge yourself by saving your extra fuel in a savings account. If you decide not to use PSLF, you can apply those funds to your loans as a lump sum.

I’m not sure my organization qualifies

Ask HR if they qualify as a public service organization for loan forgiveness. You can also use the PSLF Help Tool to verify employment eligibility.

I have a small loan balance

Sometimes it’s better to just pay off your loans quickly if they’re small enough. In some cases, you’ll save money by not using PSLF.

If you’re working in the public or nonprofit sector, Public Service Loan Forgiveness can save you tens of thousands of dollars. Still, it should be a strategic choice and something you consider alongside other strategies to pay off your student loans.