Public Service Loan Forgiveness – Military Service Counts, too

Serving in the US military is considered qualifying employment for the federal government’s Public Service Loan Forgiveness program. In addition to the regular PSLF program, there is a special program happening right now through October 2022. Don’t miss out on potential PSLF because you don’t know the new rules and the temporary rules!

What Is Public Service Loan Forgiveness?

The PSLF program provides student loan forgiveness on the remaining balance of “direct” federal loans, after the borrower meets the requirements. Under the usual PSLF rules, those requirements include:

• 120 qualified payments
• those 120 payments were all under a qualifying repayment plan
• those 120 payments were while working for a qualifying employer
• must work for a qualifying employer at the time the loans are forgiven

However, there are special rules in effect right now that change the requirements. Read on!

Qualifying Payments

Under the normal rules, a qualifying payment is a full payment made within 15 days of the due date. There are exceptions under Temporary and Limited programs.

Qualifying Repayment Plans

Federal student loans offer a wide range of repayment plans, but PSLF is only offered to borrowers who are using the Standard 10-year Repayment plan or certain Income-Driven Repayment (IDR) plans. PSLF is not usually available to those using Extended, Graduated, and Alternative repayment plans, though the Extended and Graduated repayment plans may qualify under the Temporary Expanded PSLF program (described below.) Income-Driven Repayment plans include:

• Income-Based Repayment (IBR)
  • Old IBR (available to anyone)
  • New IBR
• Income-Contingent Repayment (ICR)
• Pay As You Earn (PAYE)
• Revised Pay As You Earn (REPAYE)

Under any kind of IDR, it is likely that there will be a balance remaining after 120 payments. There may also be unique situations where a balance remains on a Standard 10-year plan.

Let’s dig a little deeper into some of these repayment types.

The Old Income-Based Repayment (IBR) plan is available to anyone. While the payment percentage is higher than the REPAYE plan, it can be based on separate income. This can be a big deal if your spouse has an income.

The New Income-Based Repayment (IBR) plan is available to those who had no federal loan balance on 1 July 2014. However, the PAYE plan is eligible to anyone who is eligible for the New IBR, but it has better terms because it limits the capitalization of interest. This is rarely going to be a good choice for anyone.

The Income-Contingent Repayment (ICR) plan has a higher repayment percentage and is unlikely to be a good option for, well, anyone – under normal rules. Interest on the ICR is also capitalized annually.

The Pay As You Earn (PAYE) plan is only available to those who had no federal loan balance on 1 October 2007 and had a federal loan disbursed on or after 1 October 2011. The loan disbursed on or after 2011 may be a consolidation loan – so you may be able to consolidate loans that were disbursed between 2007 and 2011. This is likely the preferred payment plan for anyone who is eligible.

The PAYE plan has a limit on the amount of capitalization (see definition and explanation below) that can accrue. Total capitalization on PAYE plans can not exceed 10% of the principal balance.

The Revised Pay As You Earn (REPAYE) plan doesn’t have an option to split income for repayment calculations. Therefore, while this is usually the most desirable repayment plan for single people, this may not be the best option for married borrowers whose spouse has income.

The REPAYE plan has a limit on the amount of interest that can accrue during periods of negative amortization. Interest is reduced to half of the usual interest rate during times when your repayment results in negative amortization. (See definition and explanation below)

Definitions

Negative Amortization: when the amount of the monthly payment is less than the interest that is accruing each month. As a result, the loan balance goes up each month instead of going down. Negative amortization can be a useful tool in some situations, but it’s a nasty surprise if you don’t realize what’s going on. Negative amortization is common on Income-Driven Repayment plans.

Capitalization: a process where accrued interest is added to the principal balance of a loan. For example, you borrow $10,000 in unsubsidized loans, and interest accrues while you are in school. For the sake of simplicity, let’s say the total interest that accrued while you were in school was $1,000. That $1,000 in interest is added to the $10,000 that you borrowed, giving you a new principal balance of $1,100. Then you pay interest on the interest that was capitalized.

Capitalization typically occurs at a change of status: a loan coming out of deferment or forbearance, changing repayment plans, or consolidation.

Qualifying Employers

Eligibility for PSFL is based on qualifying employment. Qualifying employment can be with any government organization, including federal, state, and local government, including the Department of Defense, or a tax-exempt 501(c)(3) not-for-profit organization.

In some situations, it can be a little tricky to know if your employer is qualified. For example, perhaps you work for a defense contractor.  Contractors are typically not qualified employers, unless they are 501(c)(3) non-profits (some are.) You can verify your employer’s status using the Federal Student Aid PSLF Help Tool.

Employment must be “full-time,” based on your employer’s definition or a minimum of 30 hours per week. If you’re employed by more than one eligible employer, you can add the hours to reach the 30-hour per week threshold.

Temporary Expanded PSLF

The Temporary Expanded PSLF program removes the qualifying repayment requirement. This opens up qualification to people who were on an Extended Repayment Plan, Graduated Repayment Plan, Consolidation Standard Repayment Plan, or Consolidation Graduated Repayment Plan.

There is a very specific procedure for applying for TEPSLF. Robert Farrington explains it clearly in his extensive article, The Guide to Temporary Expanded Public Service Loan Forgiveness.

There is currently no deadline for TEPSLF to end, but funds are limited.

The PSLF Limited Waiver Program Ends 31 October 2022

The Limited PSLF loan program temporarily changes many of the requirements for PSLF. Under the Limited program, you do not need to be in a qualifying repayment plan, the type of payments that count has changed, and you don’t need to be currently working for a qualified employer. Additionally, there is a way to include non-qualifying loans.

Loan types:

Under the limited waiver, federal loans that are not in the direct loan program (usually FFEL and Perkins loans) can be consolidated into the direct federal loan program, and payments previously made will count.

Parent PLUS Loans on their own do not qualify for PSLF. However, if the parent has their own student loans, under the Limited Waiver, you can consolidate PLUS Loans with pre-existing regular student loans. The rules about receiving the largest number of payment (see below) applies here, too. Borrowers should use the loan simulator to see if this works for them. There’s a potential trick for those who only have Parent PLUS loans – see below.

Payment Plans:

All payment plans count under the Limited Waiver. 

Repayment types:

Past periods of repayment can be counted under the Limited Waiver. They don’t have to be on time or even full payments. Employment requirements still apply.

Under a recent change to the Limited Waiver, periods of forbearance may be adjusted to count as payments. This includes the military service forbearance. This adjustment is supposed to happen automatically, but make sure it happens by filling out the employer certification during the Limited Waiver period. Loans in forbearance due to the COVID payment pause are eligible. You may have to submit a form to get credit for waived payments. Pre-2013 deferments (except for in-school deferments) can also be counted.

Under the Limited Waiver, there’s even a way to count payments on one loan against PSLF on another loan, or even add together the payments on separate loans. It’s a little confusing, but ultimately apply and see what happens.

Source: https://studentaid.gov/announcements-events/pslf-limited-waiver

While the payments must have been during qualifying employment, you do not need to be currently working for a qualified employer to receive PSLF under this limited program.

What If You’re Not At 120 Qualifying Payments By October 2022?

Just because you won’t be at 120 payments by October 2022 doesn’t mean that you can’t benefit from the Limited PSLF Limited Waiver program. You can use the Limited Waiver to get old payments qualified, and then continue to meet the regular PSLF rules until you hit the 120 payment mark.

Miscellaneous Public Service Loan Forgiveness Stuff To Know

There is no way to undo a consolidation.

Under the current rules, student loan forgiveness is tax-free. This could change in the future.

If you only have Parent PLUS loans, you might be able to use a strategy called double consolidation. You can learn more about it in this article: This Student Loan Loophole Could Cut Parent PLUS Debt Payments in Half.

The rules continue to change, but so far every change has been to the benefit of the borrower.

Adam Hagerman (see below) recommends this PSLF loan calculator: https://www.vin.com/studentdebtcenter/default.aspx

The PSLF Application Process

To get started in the PSLF process, log in to your Federal Student Aid account. There will you find the PSLF Help Tool. (studentaid.gov/pslf) You will need your Federal Student Aid login.

Eligible payments become qualifying payments when you submit a PSLF form, one per employer. Using the Help Tool, you can look up your employer to see if they are a qualifying employer. You can check current and previous employers. You will need your Employer Identification Number – you can find it on your W-2, it may be listed on your pay statement, or you can ask your employer.

Once you verify that the employer is qualifying, you can use the Help Tool to generate the employer certification PDF. You’ll need to take a PDF of the form to your employer to certify that you were employed. Military members can use their DD-214 in lieu of the employer certification.

The tool also lists the loans that you have, and can help you figure out if you want to consolidate any of those loans.

What You Need To Do Right Now

If you have student loans and have had any qualified employment, there are a number of steps you should take before the Limited Waiver ends in October 2022. Don’t procrastinate. You know how these things go.

1. First, log in to your Federal Student Aid account.
2. Look at your loans – are they eligible for PSLF or the PSLF Limited Waiver?
3. Confirm your employer is qualified.
4. Consolidate your loans if necessary.
5. Submit employer certification forms for any potential eligible employment so that previously unqualifying payments may qualify.

Thank you, Adam Hagerman

Almost everything I know about the Public Service Loan Forgiveness Program I have learned from Adam Hagerman, CFP ^®. Adam is super-smart and he offers a variety of personal finance content on his website. He also has some courses covering topics like basic budgeting, buying a house, paying off debt, and hiring a financial advisor. Check out his stuff!!