Tax-Free Student Loan Forgiveness for Eligible Public Servants

Certain employees of governmental and not-for-profit organizations may qualify for a program that offers student loan forgiveness with zero tax liability.   The Public Service Loan Forgiveness (PSLF) Program gives full-time employees of a qualified employer the option to have their federal direct loans forgiven after making 120 qualifying monthly payments under a qualified repayment plan.

In order to take advantage of the program, there are a few caveats we’ll explore in this article.

Qualifying Employment

To be eligible for PSLF, you must be employed by certain qualifying governmental and not-for-profit organizations that include:

  • Federal, state, local, and tribal governmental agencies and organizations.
  • All 501(c)(3) organizations and some other not-for-profit organizations that provide specific public services, such as public education or public health.

AmeriCorps and Peace Corps volunteers are also qualified.

The following employers do not qualify:

  • Labor unions
  • Partisan political organizations
  • For-profit organizations, including for-profit governmental contractors.

“Full-Time” Status

You must work full-time—defined as 30 hours per week, or your employer’s definition of full-time, whichever is greater—to qualify for PSLF.  Employees can spread the hours over multiple qualifying jobs to achieve the 30-hour minimum requirement.

Qualifying Loans

Federal direct loans are the only loans that qualify.  If your student loans are not federal direct loans, you may be able to consolidate your previous loans into a Direct Consolidation Loan.  Unfortunately, any payments made before consolidation do not count toward your 120 qualifying repayments.  If you have both direct loans and other types of federal student loans that you wish to consolidate to take advantage of the PSLF, it’s important to remember that if you consolidate your existing direct loans, you will lose your qualifying payments already made toward the loan, since it is now a new loan.  Alternatively, you could consolidate only non-direct loans so that qualifying payment credits on existing direct loans are not lost.

Qualifying Payments

You must make 120 monthly qualifying payments to be eligible for the remaining balance to be forgiven.  Payments made before October 1, 2007, do not qualify and payments must be made timely.  As a best practice, sign up for automatic debit, to ensure you are making qualifying payments.  You can only make qualifying payments when you are required to make payments.  Hence, you cannot make payments while your loans are “in-school status,” during the grace period, in deferment, or in forbearance.  However, you can call your loan servicer to remove the deferment or forbearance status.

Your payments do not have to be consecutive to achieve 120 qualifying payments.  For example, if you leave a qualifying employer for another job, you will not lose credit for the payments already made.  If you later return to work for a qualifying employer, then you can continue making qualifying payments.

An important note:  you only receive credit for one payment per month.  If you prepay and make two payments during the month, you will only get credit for one payment.  Making a monthly payment in excess of the amount due does not help you reach the 120-payment minimum any faster.

Qualifying Repayment Plans

Repayment must be on an income-driven repayment plan.  If you made payments under the standard 10-year repayment plan, you wouldn’t have a remaining balance to forgive after making 120 monthly payments.

PSLF Program Application

Complete the Employment Certification for Public Service Loan Forgiveness form annually, or when you change employers.  Once the form is completed and certified by your employer, submit the form to the U.S. Department of Education.

In a Nutshell

Full-time employees of an eligible employer who have made 120 qualifying payments under a qualifying repayment plan may apply for the PSLF Program.  If your remaining direct loan debt is forgiven under the PSLF Program, the debt forgiveness is not taxable.

If you have questions about the PSLF Program or would like to request a speaker on this topic for your organization or event, contact a PYA executive below at (800) 270-9629.

Eric Elliott

Eric Elliott


Megan Brummitte

Megan Brummitte


Related Posts
In the nonprofit world, organizations are fueled and sustained by generous contributions and grants, which are used to support the organization’s mission.  Although such funding can often be the deciding...
Read More

“Threading the Needle”—Accounting Standards Update Closes Hole in Nonprofit Grant Guidance

PYA, a national professional services firm headquartered in Knoxville, has been awarded a 2018 Top Workplaces honor by the Knoxville News Sentinel. The award is a result of employee feedback...
Read More

Knoxville News Sentinel Names PYA a Winner of the Greater Knoxville Area 2018 Top Workplaces Award

PYA has released a new white paper explaining how competing health systems may overcome antitrust obstacles to merger by formally committing to population health improvement in the communities they serve....
Read More

PYA White Paper Explains How Pro-Competitive Impacts of Hospital Consolidation Can Overcome Antitrust Concerns

The new Tax Cuts and Jobs Act (TCJA) can be confusing for many-- especially small business owners.  Although many aspects of the TCJA have been discussed, one component of the...
Read More

Government Clamps Down on “Deductible Fun” for Businesses

As businesses consider the impact of the Tax Cuts and Jobs Act (TCJA) introduced late last year, the corporate tax rate is receiving substantial attention.  However, according to a 2014...
Read More

2018 Tax Reform – The Excess Loss Limitation Likely to Squeeze Owners of Cyclical Businesses

A recent Accounting Standards Update (ASU) addresses land easements and their accounting under the new lease standards.  In January 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-01 Leases:...
Read More

Land Easements—Guidance for Implementing New Lease Accounting Standards

According to its tagline, Atlanta Business RadioX spotlights “the city’s best businesses and the people who lead them.”   PYA is pleased to share that one of its own, Consulting Principal...
Read More

PYA’s Lori Foley Shared Insight in Live Radio Interview

Many Americans have a 401(k) retirement savings plan as a benefit of employment with their employers.  They contribute a percentage of their compensation to their 401(k) each pay period with...
Read More

Taking Distributions from Your 401(k): What You Need to Know

The recent Tax Cuts and Jobs Act (TCJA) imposes a limit on deductions for business interest for taxable years beginning in 2018.  The limit, like other aspects of the law,...
Read More

IRS Sheds Light on New Limit on Business Interest Expense Deductions

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

* indicates required
Monthly eNewsletters
See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop