The dog days of summer have hit hard. Hopefully you have a place to cool off.
In this month's Mailbag Express, we have many questions about Public Service Loan Forgiveness (PSLF). As always, our responses are not meant to provide specific legal or financial advice. Your situation is unique, and we encourage you to reflect carefully on your options and to consult a financial adviser.
Dear Student Loan Ranger: I'm a little confused about PSLF. In order to be eligible for loan forgiveness, you have to make 120 payments. By the time you've been made enough payments to be eligible you will have already paid off your loans. Am I missing something?
Dear Missing Something: We are glad you asked. This is question a lot of people have!
The only repayment plans eligible for Public Service Loan Forgiveness are:
• Income-Contingent Repayment;
• Income-Based Repayment (IBR);
• Standard Repayment based on a 10-year repayment schedule; or
• A repayment plan where you're paying at least as much as you would under a 10-year standard plan.
Obviously, if you are in a 10-year repayment plan (or an equivalent thereof) you will have paid off your loans by the time you qualify for forgiveness. This is why for most people who are working towards PSLF it makes sense to switch to IBR as a repayment plan.
IBR limits your monthly payments to 15 percent of your discretionary income. As a result, your monthly payments will almost certainly be more affordable and you will maximize the amount forgiven after you complete your 120 payments.
One cautionary note: because you pay less under IBR, interest will accrue faster on your principal loan balance. You should keep this in mind if you think you may not make the 120 payment threshold necessary to earn PSLF. (We will cover exciting topics like interest accrual and tax implications in detail during our August webinars.)
You can use calculators to compare a variety of plans and see which works best for you. (Keep in mind, of course, that extended plans such as the 30-year plan are not eligible for PSLF and a 10-year plan will leave you with nothing to forgive.)
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Dear Student Loan Ranger: I currently hold a contract position at the State Department. Do contract positions with federal agencies qualify for loan forgiveness under the Public Service Loan Forgiveness Program? If so, how would I verify that I worked in public service when on paper I am employed by a company?
Dear Contractor: A contract position with the government is not qualifying employment because the government is not paying you. The relevant question is always if the organization that actually employs you qualifies.
If you are employed by a 501(c)(3) nonprofit, that is a qualifying employer. (Unfortunately, I gather from your description of your employer as a company that this is not the case.) A few private organizations are also qualifying employers. For example, an organization providing public interest law services that are funded in whole or in part by the government and that is not a business organized for profit, a labor union, a partisan political organization, or an organization engaged in religious activities would be a qualifying employer.
Dear Student Loan Ranger: I am currently eligible for PSLF but worry about the risk of the program being retracted by Congress (due to budget cuts) before I make 120 payments. Is this something that has a high probability of happening? If so, would debt forgiveness be honored to those who have already begun payments? Thanks!
Dear Worried: There are reasons to be hopeful that PSLF will survive the current (and future) budget cuts. First, unlike many government programs, it is not subject to appropriations or the budgetary process. When a borrower qualifies, the federal government simply writes off the debt owed and the United States Department of Treasury does not expend revenue.
Second, PSLF brings loan revenue into the Federal Direct lending program because many borrowers will still need to consolidate into Federal Direct to qualify.
Third, if a future Congress does abolish PSLF, we believe there is a good chance that borrowers who are already well along the path to forgiveness will be permitted to complete the forgiveness process.
Of course, there are few guarantees in life. But since you have to pay back your student loans anyway, it seems sensible to hedge your bets and do so in a way that will ensure you qualify for forgiveness if it is available.
PSLF can be complicated. If you want to learn more, feel free to sign up for our upcoming webinars on August 10 and August 24. Or E-mail your question to firstname.lastname@example.org.
Isaac Bowers is the senior program manager for Educational Debt Relief and Outreach at Equal Justice Works. He was previously an attorney at Shute, Mihaly & Weinberger LLP in San Francisco, where he focused on environmental, land use, and planning issues. A graduate of the New York University School of Law, Bowers also has extensive experience in nonprofit advocacy and outreach.