Are you a teacher, government employee or not-for-profit employee that is relying on the Public Service Loan Forgiveness Program (PSLF) to pay off student loan debt?
If that’s you then you are just one of millions of other student loan borrowers that are hoping this program will pay off their student debt. PSLF is a complicated program that sounds more appealing than what it actually has promised to do.
In this post I will go over why it’s so appealing, why it’s not working for borrowers and what you can do instead.
What is the Public Service Loan Forgiveness Program?
The Public Service Loan Forgiveness (PSLF) program is a government program that was created to incentivize individuals to work in public service by offering student loan forgiveness after a certain number of payments.
Why Public Service Loan Forgiveness is Appealing to Borrowers
Loan Forgiveness
The biggest highlight of the PSLF program is that it offers loan forgiveness. After making 120 qualifying payments while working in public service, borrowers can have the remaining balance of their Direct Loans forgiven.
But that comes with some costs, as I will explain below.
Lower Monthly Payments
The PSLF program is tied to income-driven repayment plans, which can result in lower monthly payments.
This is appealing to borrowers because, well, who wouldn’t want lower payments?
The average monthly payment for student loans is $393. That is a heavy hit for debt payments!
With an income-driven repayment plan, payments are calculated based on income and family size. It can significantly reduce the monthly payment depending on your circumstances.
Encourages Public Service
The Public Service Loan Forgiveness program was created to incentivize individuals to work in public service. This can be a benefit for society as a whole, as it encourages qualified individuals to work in areas such as education, healthcare, and government.
No Tax on Forgiven Debt
Borrowers who have their loans forgiven through the PSLF program do not have to pay taxes on the forgiven debt. Sometimes loan forgiveness can be considered taxable income but the IRS does not consider PSLF as taxable income.
Cons to Public Service Loan Forgiveness
Despite the appeal of having lower payments and loans forgiven, there are many drawbacks to the PSLF program that ultimately lead to very low eligibility rates – also meaning a very low percentage of borrowers having any loans actually forgiven.
Long Timeframe
The eligibility requirements for the PSLF program can be complex and confusing.
Borrowers must have Direct Loans, work full-time in a public service job, and make 120 qualifying payments while working in public service.
120 qualifying payments means 10 years of monthly payments, without missing or being late on a single payment. Any late or missed payment can automatically disqualify you for forgiveness.
Stuck in the Public Sector
In addition to payment requirements, borrowers must meet employment requirements. Eligible employers include Government (local, state and federal), U.S. Military, and Not-for-Profit organizations (that are tax exempt under 501(c)(3).
This means that borrowers must commit to working in public service for a long period of time before they can receive loan forgiveness. Some borrowers feel stuck in their current job because they are just there to fulfill their student loan forgiveness qualifications. Depending on the position, this may limit opportunities for growth or to pursue other careers.
If you leave your public sector position during your repayment period, you can lose eligibility for forgiveness.
Limited Eligibility
The PSLF program has a proven track record over the years of having a very small percentage of borrowers actually receiving forgiveness on their loans.
Here are some statistics from a January 2023 report for Public Service Loan Forgiveness forms submitted between November 9, 2020 and January 31, 2023:
- 4,557,261 applications were submitted (for 2,704,482 borrowers)
- 22.5% of those forms were incomplete because of missing information
- 26.5% of those forms were still being processed as of 1/31/23
- 51% of those forms were completed and processed (2,325,240)
- Of the completed forms, 4.8% of them DID NOT meet employment requirements
- 2,212,542 (95.2%) of the forms that DID meet employment requirements, 97.6% DID NOT meet loan requirements (number of payments and loan type)
As you can see, the numbers can be very complicated.
(If you really love numbers and statistics you can look at all the reports from the Public Service Loan Forgiveness Data.)
In short, only 1.1% met the requirements for PSLF! And that doesn’t include half the forms that haven’t been processed yet!
Uncertainty About Future Funding
The PSLF program has faced funding challenges in the past, and there is no guarantee that the program will continue to be funded in the future. This can create uncertainty for borrowers who are counting on the program for loan forgiveness.
What to Do Instead
If you are currently enrolled in the PSLF program that is fine. Take advantage of the low minimum payments.
BUT also make a plan to pay off your student loans as quickly as possible.
Paying off your loans early will disqualify you from the PSLF program. But is carrying 10 years of debt worth the (less than 2%) chance that your loans might be forgiven?
How much more freedom and peace of mind would you have if you weren’t stuck in a job you hated? Or didn’t have that monthly payment going to debt?
3 Steps to Paying Off Your Student Loans
- Make a zero-based budget so you know how much extra money you have to throw at your loans each month. Not sure how to do a zero-based budget? No problem! Sign up for my free mini course, Give Yourself a Raise. You will receive short videos in your inbox that will walk you through each step.
- Add an extra payment to your loans using the debt snowball method.
- Need some help along the way? Have some questions? Schedule a free call with me. We will get you on the right path to freeing yourself from student loan debt!