Darcy decided to work toward public service loan forgiveness ("PSLF") of her graduate school debt right after graduation. After a little more than 10 years of employment with a government employer, she had over $90,000 in student loans forgiven.
It is a long, arduous process that is not for everyone, BUT if you think that you will work for a government or non-profit organization for 10 years or more, this program can be a FANTASTIC way to get rid of student loan debt and get one step closer to financial independence!!
What is it?
The public service loan forgiveness program is a federal program that allows you to have your loans forgiven after you make 120 payments while employed full-time with a qualifying employer.
What is a qualifying employer?
A government or a not-for-profit agency that is tax exempt under Section 501(c)(3) of the Internal Revenue Code.
Does it really work?
Yes, but not always well. Darcy applied for forgiveness under the program in early 2022 and received notification several months later that her graduate school loans had been forgiven. However, the program has been notorious for its high denial rate. The United States Government Accountability Office has noted that at times the denial rate has been in excess of 99%. Reasons for denials have included applicants filling out paperwork incorrectly, having the wrong kind of loan, having the wrong kind of repayment plan, and not working for a qualifying employer. Thus anyone who is considering taking advantage of this plan would be well-advised to read extensively about the program and make sure that they are complying with all of the rules.
Are all loans eligible for forgiveness?
No. Direct loans are eligible for forgiveness. Private loans are not eligible for forgiveness.
For example, Darcy's graduate school loans were Direct Loans and therefore eligible for forgiveness. However, she also had some private loans from undergrad, so those loans were not eligible for forgiveness when her graduate school loans were forgiven.
If you are considering forgiveness, it is very important that you make sure that your kind of loan is eligible for forgiveness.
As always, you will want to know as soon as possible what loans of yours, if any, qualify. No one wants to work for 10 years and then learn that they're not actually eligible for forgiveness after all.
Does it matter what payment plan I'm making payments under?
Historically, yes. Plenty of applicants were denied forgiveness because they had made monthly payments while on plans that were not eligible for public service loan forgiveness.
The government recently announced a temporary waiver that counts certain payments toward forgiveness, even if those payments would not normally count because they were not made under a traditionally qualifying repayment plan.
Because this area is in flux, if you are planning on applying for forgiveness at some point, you should consult with your student loan provider to ensure that you are participating in a repayment plan that is most likely to help you qualify for forgiveness in the future.
I'm married. Does my tax status effect my student loans?
YES!! If you are married and are making income-based repayments, your tax status will likely affect your monthly payments.
If you file taxes as married filing jointly, then the government will likely consider your spouse's income in determining your monthly student loan payment. Conversely, if you file as married filing separately, the government will likely not consider your spouse's income in calculating your monthly payment.
If you have a spouse who earns significantly more than you and you are planning on applying for student loan forgiveness, then it may decrease your monthly student loan payments significantly to file taxes separately from your spouse.
Keep in mind that filing separately may come with certain tax consequences, including loss of certain deductions, such as the student loan interested deduction. It is always advantageous to consult with your student loan provider and with a tax professional to determine what tax filing status will ultimately be more financially advantageous to you, based on your unique situation.
For us, we filed as married filing separately for many years. It always cost us more in taxes, but ultimately saved us a lot more money in student loan payments. Because it lowered Darcy's student loan payments significantly, it also meant that more of her overall student loan debt was forgiven.
Is the forgiven student loan debt treated as income?
No. One of the advantages of the program is that student loan debt forgiven under the program is not treated as income the year that the debt is forgiven.
The bottom line is that the PSLF program can be a life-changing program, but it can also be complicated and confusing to navigate. If you are planning on trying to use the program, the single best thing you can do is educate yourself as early as possible. Make sure that you are making decisions throughout the years that will help you, including consulting with your student loan provider and your financial advisors.
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