The Public Service Loan Forgiveness (PSLF) program was created in 2007 to provide student debt relief to a wide range of community and public sector workers. Despite best intentions and a large number of eligible recipients, PSLF was extremely under-utilized and criticized for its complexity and high rejection rate. By 2019, only 661 public service workers had received student loan forgiveness out 54,000 applications. In recent years, efforts have been made to improve education and awareness for the program.
In October 2021, the Education Department announced a Limited PSLF Waiver which temporarily relaxes certain restrictions on qualifying loan payments. Borrowers need to have made 120 payments in order to qualify for debt forgiveness under the program. It is estimated this new waiver will affect over 550,000 borrowers and add an average of 23 payments to their qualifying payment counts.
Basic Requirements for the PSLF Program
Employment must be with a government, 501(c)(3) not-for-profit, or other not-for-profit or religious organization that provides a qualifying service.
Employment with a qualifying organization does not need to be consecutive.
Qualifying employment must be certified by submission of a simple form.
Employment must be full-time (combined 30 hours per week).
Student loan must be a federal Direct Loan.
Private student loans do not qualify.
Federal Family Education Loan (FEEL) loans or Perkins loans must be consolidated under a federal Direct Loan to qualify.
While working (full time) for a qualifying and certified organization, a borrower must make a total of 120 qualifying payments (on a Direct Loan).
Qualifying payments must have been made under one of the income-driven repayment plans (IDR). Payments made under some other payment plans did not qualify.
Qualifying payments must have been made after October 2007.
What's Changed
The Limited PSLF Waiver addresses a number of restrictions governing the required 120 payment count threshold.
Loan Type: Loans must still be consolidated into a Direct Loan, however past payments made on FEEL, Perkins loans, or Graduate PLUS loans before consolidation will now count as qualifying payments towards the 120 payment threshold.
Payment Plan: In addition to IDR and standard plans, payments made under extended repayment plans, graduated repayment plans, and other plans with terms greater than 10 years will now count as qualifying payments towards the 120 payment threshold.
Military Service: Payments that were in deferment or forbearance while a borrower was in active military services will now count as qualifying payments towards the 120 payment threshold.
Late Payments: Certain late payments or payments with incorrect amounts will now count as qualifying payments towards the 120 payment threshold.
The Department of Education is reviewing all identifiable payments for borrowers with Direct Loans who have certified some employment on file for PSLF. Any payments that were previously disqualified under the old rules will be updated automatically and will be reflected on the borrower's Federal Student Aid account. An estimated 22,000 borrowers will be immediately eligible for student loan forgiveness once these updates are made.
This is a limited opportunity. Borrowers who have not consolidated FEEL and Perkins loans under a federal Direct Loan will need to do so by October 31, 2022 to have those prior payments on those loans to count towards PSLF.
Next Steps
The best place to start is the Federal Student Aid website and the Limited PSLF Waiver FAQs. The Department of Education has also released an informative Fact Sheet on the PSLF overhaul. If PSLF is new to you, College Loan Freedom has an excellent introductory video.
Note: Student loan forgiveness under PSLF is not taxable income for federal returns. However, it may be taxable income for some state returns. Consult with your tax professional.
As always at Monadnock Tax Services we are happy to help individuals and families with friendly tax advice and services. Give us a call at (603) 722-0184 or email info@monadnocktax.com