College affordability and student loan forgiveness are frequent topics of public concern. Two weeks ago, I discussed Public Service Loan Forgiveness (PSLF) qualification standards. There are very specific guidelines that must be followed in order to qualify for this program. However, it is not enough to just qualify — specific action steps need to be followed in order to benefit from PSLF. Borrowers who wish to pursue Public Service Loan Forgiveness need to carefully manage both their loan repayment terms and their loan documentation.
Let’s discuss the key actions for both.
Choose the right repayment plan. When borrowers graduate, they are given many choices for loan repayment plans. The default option is the standard repayment plan. Under this plan, loan payments are calculated for a 10-year, or 120-month, fixed payment. You must make 120 qualified payments toward your loans before qualifying for PSLF, so there is no benefit to this repayment plan.
A borrower who wishes to qualify for PSLF should select an income-driven repayment plan, or IDR. Income based payment plans were introduced to ease the burden of loan repayment, especially during the early earning years. Under these terms, your payment is calculated using a formula that is based on a percentage of your income, with payments stretched over 20-25 years.
Caution! Beware of loan consolidation! It is not unusual to leave school with multiple loans, with different servicers and different due dates. Tracking payments can be challenging. A federal consolidation loan with a single payment can be a good option, however, this will affect progress toward Public Service Loan Forgiveness. A consolidation loan is considered a new loan, and re-starts the counter toward the required 120 payments needed for loan forgiveness. If you’ve already been making progress toward PSLF, those payments will no longer count toward the 120 under consolidation.
Document carefully and frequently. Qualifying for PSLF requires that your employment is with a qualified employer. The federal government provides a form to document your employment. It must be signed by you AND your employer and filed with the Department of Education. Directions are on the form. It can be mailed, faxed, or uploaded depending on your loan servicer, but it cannot be completed online. It is recommended that you file the form annually, or at a minimum, whenever you change employers. Otherwise, it becomes more difficult to verify qualifying employment.
Be mindful of on-time payments. There are other important actions for maintaining PLSF qualification. You must make payments every month, on time. You can’t double-up or skip months. You do not lose the benefit of payments made during qualified employment if you leave that job for non-qualified work. The counter resumes if you once again work for a qualified employer.