Is PSLF Right for You? by Sim Terwilliger, FPQPTM, CSLP®

As of 3/31/19, there were 73,554 unique applications for Public Service Loan Forgiveness (PSLF)[1]. Can you guess how many of those were approved?

Only 864

This abysmal figure, coupled with the stringent requirements to actually achieve forgiveness, has caused some financial “experts” like Dave Ramsey to decry the program, and encourage borrowers to pay off their debt as quickly as possible. Is PSLF too good to be true?

What is PSLF?

PSLF was designed to provide tax-free student loan relief to full-time professionals working for a qualifying employer. It was created by the College Cost Reduction and Access Act of 2007.

Terms to Know:

Qualifying Employer: This includes 501(c)(3) organizations, government organizations, or non-profit organizations that are not 501(c)(3) but otherwise provide qualifying public service as their main objective.  AmeriCorps and the Peace Corps also qualify if you serve full time.

Full-Time: The program typically uses your employer’s definition of full time as long as you work at least 30 hours per week. If your employer defines “full time” as 40 hours, you must work 40 hours to qualify. You can work for multiple qualifying employers on a part-time basis and still be considered full time as long as the total meets the 30 hours per week criteria.

Eligible Loans: Only Direct Loans are eligible for PSLF.  This includes:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans for Parents (Direct Parent PLUS Loans)
  • Direct PLUS Loans for Graduate/Professional Students (Direct Grad PLUS Loans)
  • Direct Consolidation Loans
  • Direct PLUS Consolidation Loans

*Note that loans under the Federal Family Education Loan Program (FFEL) are not eligible. However, they are eligible if consolidated into a Direct Loan.  Be careful, though. If you consolidate into an existing Direct Loan, the clock resets and the previous payments you made are no longer qualifying payments.

16% of all PSLF rejections are due to no eligible loan type.

Qualifying Payments: Payments made under an Income-Driven Repayment (IDR) Plan. You must make 120 Qualifying Payments to receive loan forgiveness. An IDR Plan caps your payment at a percentage of your discretionary income which is based on a formula that takes into account your family size, income, and the Human Health and Services poverty line. There are currently four options under IDR:

  • Income Contingent Repayment (ICR)
  • Income Based Repayment (IBR)
  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)

Each IDR plan has its own eligibility rules. Even though they all qualify for PSLF, choosing the right one can help maximize your monthly savings.

Keep in mind, you must recertify your family size and income annually. As your income increases, so will your monthly payment. However, if your income decreases, you can recertify early for a recalculated lower payment.

Failure to recertify can result in reverting to the Standard Repayment amount (generally higher than IDR), unpaid interest can capitalize (which means it will be added to the principal balance), and you may have overdrafts if you are set up for auto pay.

In addition to choosing an IDR plan, you also must make monthly payments in full no later than 15 days after the due date. This means you must be in repayment status. Payments do not need to be consecutive, and extra payments do not count.

Standard Repayment, the default if you do not select another payment plan, qualifies for PSLF but it is amortized over 10 years, meaning the loans would be paid-off at forgiveness.

53% of PSLF applications were denied because of a lack of qualifying payments.

Employer Certification Form (ECF): A form filled out by you and your employer verifying your employment. While there is no requirement to do so, you should plan to recertify annually. Waiting to do so carries risks: for example, your employment contacts may no longer be available, or you may forget to document a prior job.

4% of PSLF applications were denied because of inconsistent employment dates or an ineligible employer.

Your ECF form will go to FedLoan Servicing, the company in charge of the PSLF program. It will be your new student loan servicer if you’re not already under their oversight.

According to a Department of Education blog, 25% of all PSLF rejections are due to lack of an Employer Identification Number (EIN) and the employer’s address on the ECF. If you omit this information, FedLoan Servicing will ask you to resubmit your ECF with the missing items.

Advantages of PSLF:

  1. Tax-free forgiveness – obviously a biggie! Borrowers must wait 20 – 25 years for forgiveness under IDR and the entire amount forgiven is treated as taxable income. So if you have $100,000 forgiven and you are in the 35% tax bracket, Uncle Sam will expect you to pay $35k in taxes. If you’re under PSLF, you’ll owe nothing else.
  2. Lower debt-to-income ratios – used by lenders when qualifying you for a mortgage. Lower DTI makes home ownership possible for some student debt holders. Of course, you can opt for Income Driven Repayment if your loans qualify without pursuing PSLF, but it is a nice perk that PSLF requires IDR.
  3. Saving for other goals – with the extra cash flow available, borrowers will have more income to allocate towards retirement savings or other personal goals. Lifetime savings under PSLF will be much higher than under IDR. For example, let’s say your payment is $200/month on a 5% loan. By the end of 10 years, you will have paid $31,056. If you are pursing forgiveness under IDR, you will have paid $82,206 after 20 years. PSLF would have saved you $51,150 – and that’s not even counting tax savings or the time value of money!

Disadvantages of PSLF:

  1. Lack of employment flexibility – you must work for a qualifying employer for 10 years. Physicians can usually earn more at a for-profit employer rather than at a non-profit.
  2. Growing debt balances – payments under IDR may never even reduce your principal. While this maximizes the amount to be forgiven, having the debt hanging over your head and wondering if you’ll change your mind years in or botch a requirement and lose your status can be stressful. Some borrowers prefer to pay off their loans quickly and move on.
  3. Uncertainty about the PSLF program – this is perhaps the biggest objection we hear about going for PSLF. It’s not unreasonable. The current presidential administration has proposed the repeal of loan forgiveness programs. Even though this one did not pass, similar policy proposals may come up again. Fortunately, even if the program is abolished, PSLF language is written into the Master Promissory Note so it is likely that current borrowers will be grandfathered in.

PSLF has worked for some, but we believe it’s still too new to consider a sure thing. If you do decide to enter for the program, one of the best tips we can give you is to build a savings account to pay off your loans should you change your mind or not qualify. Good luck with your decision!

[1] Public Service Loan Forgiveness Data. (2019, April 30). Retrieved June 3, 2019, from https://studentaid.ed.gov/sa/about/data-center/student/loan-forgiveness/pslf-data

8 thoughts on “Is PSLF Right for You? by Sim Terwilliger, FPQPTM, CSLP®

  1. Hi, does fox wealth management help make financial decisions for physicians pursuing PSLF? My colleagues and I are wondering whether you would recommend current residents to contribute to traditional or Roth IRAs while we’re in training? Our current employer does not match and does not provide 403bs to us. Any insight/ concrete examples would be beneficial. Thank you.

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  2. Hi, Rick,
    Yes, Sim Terwilliger (author of this post) is our resident student loan professional and advises clients on student loan strategies.
    Regarding retirement saving in residency, we typically recommend clients build their Roth accounts during their low-earning years. If you do a lot of moonlighting and/or have a spouse with a high income, that advice might change. And if you do a lot of moonlighting, consider funding a solo-401k.

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  3. Can you please explain why Roth? I think WCI recommended using traditional to build wealth…then rollover later…Thanks for the timely response!

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  4. Hi, Rick,
    Roth in low-earning years because the tax deduction you get for contributing to a TIRA is not very valuable when you are in residency. It is highly likely that physicians will pay higher taxes on the income (and all of the growth!) than you will at your current tax bracket. Roth IRAs are valuable in other ways – for estate planning, because they have no RMDs, and because contributions can be removed penalty-free (unless subject to the 5-yr rule) at any time. I believe if you will search this topic specifically, you will find no disagreement on the WCI blog or the forum.
    Good luck!

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    1. Heard WCI put out a new post telling PSLFers to use traditional…your thoughts please 😉

      Always did think Roth was good for residents, but i guess not for PSLF residents?

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      1. I asked Sim to weigh in here and this is what she replied:
        Here are my quick thoughts:

        • This can be a good strategy to employ if the goal is to get the lowest monthly pmt possible. After all, it’s going to be forgiven in 10 yrs anyway.
        • However, most ppl have multiple goals they are pursuing at the same time such as saving for retirement. In 10 yrs from now, will they wish they had started saving in a Roth earlier?
        • How much will this strategy actually save them per month? Imho, not much. If they do a tax-deductible contribution into a Trad IRA of $6k, this will reduce their student loan pmts by $600/yr (since most IDR plans use 10% of discretionary income.) That’s $50/mo. Maybe this makes sense for a resident for a few yrs, but then when that resident wants to start b/d Roth contributions, now they have to deal with the pro-rata rules since they have IRA balances, although they could likely roll it into a 401k at work.
        • Some experts out there have strong opinions on this include the head of Student Loan Planner but I always hesitate to give an absolute yea or nay since in financial planning we look at multiple goals and how they impact one another.

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  5. Right on! I’ll be sure to search further on the WCI blog. Thanks for all the help – last question: would the Roth IRA be a good emergency side fund for PSLFers since contributions (not distributions) can be removed penalty free? I will also share this with others – great work.

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  6. Possibly, if the $6k/yr would be adequate to supplant the gov’t pulling the rug on student loan forgiveness. Actually, this isn’t a half bad idea if you accept that you may need to pay off those debts when the market has dropped and you’re cashing in at a low point. But if the PSLF rules change retroactively, I would expect hopefuls to have a lot of warning.

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