July 6, 2018

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.

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