Going Back to School and PSLF: What Happens to Your Payment History?

The Public Service Loan Forgiveness (PSLF) program is designed for borrowers who pursue careers in public service.

It’s a big commitment. Borrowers must work for a school, nonprofit organization or government for a minimum of 10 years while making qualifying student loan payments. The result is tax-free forgiveness for the entire remaining loan balance.

But what happens if you go back to school? Is a graduate degree worth it if you’re already several years closer to forgiveness? We think so.

PSLF program rules: What it takes to achieve forgiveness

As a review, there are four rules required for Public Service Loan Forgiveness:

1. You must have Direct Loans. Look for the word “Direct” in your loan description.
2. You must be on an income-driven repayment plan, like Pay as You Earn (PAYE) or Income Based Repayment (IBR).
3. You must work full-time for a qualifying employer, or a combined average of 30 hours per week if you work part-time jobs.
4. You must make 120 qualifying payments. Payments don’t have to be consecutive.

The PSLF Waiver waives the first and second rules through October 31st, 2022. If you have FFEL loans, for example, you can consolidate your loans into the Direct system. Or if you were on a graduated or extended repayment plan rather than an income driven plan, all of those payments actually count in this brief window.

Editor’s note: Changes to prior PSLF payment eligibility through the PSLF Waiver and IDR Adjustment have positively impacted many borrowers. Even though the PSLF Waiver is expired, the IDR Adjustment offers many of the same benefits. The IDR Waiver, or IDR Adjustment, is a one-time account adjustment to give credit for qualifying payments to borrowers on income-driven repayment plans and under PSLF.

Common PSLF misconceptions

There’s a common fear that the PSLF program doesn’t work or isn’t real. The rejection rate has historically been very high.

The landmark PSLF Waiver is the first effort to dramatically reduce this rejection rate. It addresses and makes exceptions to the first two rules to give millions of borrowers access to PSLF.

What about the other two rules?

You must work full-time for a qualifying employer.

• Most people consider full-time a 40-hour work week.
• PSLF requires 30 hours per week or the employer’s definition of full-time, whichever is greater.
• If you work a 36-hour shift, for example, that qualifies as long as your employer will sign off that you are full-time.

You must make 120 qualifying payments.

• A common misconception is that this is equivalent to ten consecutive years.
• You can actually work for multiple employers to make your 120 payments.
• The payments don’t have to be consecutive. If you work on and off for 10 years for a qualifying employer in a 20-year period, you are still eligible for Public Service Loan Forgiveness.
• This circuitous route might take longer, but you won’t have to save for or worry about the tax bomb.

Related: 5 Myths About the New SAVE Plan, Demystified

How does PSLF work if you decide to go back to graduate school?

If a borrower finishes her undergraduate degree, works for a couple of years, and goes back to school, her loans will automatically go into what’s called in-school deferment. There are many types of deferment, but StudentAid.gov defines in-school deferment as follows:

You are eligible for this deferment if you’re enrolled at least half-time at an eligible college or career school. If you’re a graduate or professional student who received a Direct PLUS Loan, you qualify for an additional six months of deferment after you cease to be enrolled at least half-time.

Any PSLF qualifying payments made before graduate school are hers to keep.

Remember, your 120 qualifying payments don’t have to be consecutive.

If a borrower continues to work full-time during graduate school, can she get PSLF credit while in school?

This is a very common question in our consultant calls. The Department of Education answers this question as follows:

Yes. You can decline an in-school deferment on your loans that are in repayment status and make qualifying payments on those loans while you are in school. Remember, in order for your payments to qualify for PSLF, you must be employed full-time by a qualifying employer while you attend school.

It’s important to note that you can only get PSLF credit on your loans currently in repayment. If you receive new Direct Loans when you return to school, you won’t be able to make qualifying PSLF payments on those loans until you graduate.

Your new loans will be in deferment until you graduate from your graduate program. You’ll then receive a six-month grace period on those loans. This creates two separate timelines for PSLF.

Will my PSLF payments made on my undergraduate loans transfer to my graduate school loans?

Think of your 120 payments toward PSLF forgiveness as your timeline, or your clock. If you have 36 payments or three years towards PSLF forgiveness when you return to graduate school, those payments will only count toward your undergraduate loans.

You’ll start a new timeline when you graduate from grad school, meaning that you could potentially pay on your student loans for more than 10 years total.

After 120 payments on your undergraduate loans, those loans will be forgiven tax-free, but you will continue to make payments on your graduate loans until that clock hits 120. You cannot combine the two.

Should I go back to graduate school if I’m pursuing PSLF?

Student loan planning is not just about the numbers and what costs the least. Believe it or not, PSLF shouldn’t take the top priority when considering graduate school. It’s important to consider the ideal trajectory of your career and your life.

Here are some things to consider:

• Why do I want to return to graduate school?
• Will going to graduate school increase my earning potential and future job prospects?
• Do I want to make a career change?
• Will my job after graduate school be in the nonprofit sector, or will I leave the PSLF program completely?

Most of the time, graduate school results in better pay and better job prospects. It could accelerate your career timeline. It could allow you to save more for retirement and family goals, resulting in financial independence sooner than expected.

Let’s walk through a couple of examples.

PSLF for Nurses thinking about Graduate School

The Master's degree opportunities are plentiful for nurses. Let’s consider the case of Jasmine. She finished nursing school in June of 2018 and has worked at a nonprofit hospital since then. She has sent in her employment certification forms diligently, and with COVID forbearance, she’s gotten months and months of free credit.

Now she’d like to further her education, but she doesn’t want to jeopardize her 50 months of PSLF credit. She’s trying to decide between becoming a Nurse Practitioner or moving into a more administrative position using a Master of Health Administration.

She makes about $75,000 per year with a couple of overtime shifts. She thinks she will make about $100,000 to $125,000 with either of the Master’s degree programs.

Her current loan balance is $85,000, and she’s thinking about borrowing an additional $100,000 for graduate school. The idea is scary, so she’s wondering if it’s worth it.

How will payments change after graduate school?

Jasmine is currently on the Pay As You Earn plan, which is 10% of her discretionary income. The monthly payment is $455.

If she decides to stop working while in school, all of her loans will go into deferment, and she won’t owe anything on the debt until she finishes.

Once she exits school and achieves her higher starting salary of $100,000, her monthly payment will climb to $663.

Despite an increase in salary of $25,000 and almost doubling her student loan balance, her payment will only increase by about $200 per month.

She’ll make six years of additional payments on her undergraduate loans, and 10 years of payments on her new graduate school loans.

Additional life changes that decrease monthly payment

There are other things Jasmine can think about as she expands her education. Let’s say she gets married while in school, and her spouse is in medical school when they meet.

Her new family size of 2 will decrease her payment to $604 per month.

She can also max her retirement savings and max her HSA out with her new job. Let’s say her pre-tax savings reduces her salary back to $75,000 of taxable income.

Her family size of 2 and her pre-tax savings will reduce her payment to $396 per month, lower than she was paying before graduate school!

She can even file taxes separately once her spouse is working as a physician, excluding his income from her student loan payment calculation to lower payments even more.

PSLF for doctors considering private practice

Let’s imagine a doctor taking a longer path to “MD.” Scott spends his four summers during undergrad working 30 hours per week for a hospital that will sign off that he is full-time.

He then elects to work as a medical assistant for two years to save some money before going to medical school. He works at a nonprofit hospital.

Once he enters medical school, he’s amassed 36 months of PSLF credit. After medical school, he has four years of residency and another two of fellowship.

Once he starts as an attending, he has one more year on his undergraduate loans before forgiveness and four more years on his med school loans.

I’m a physician pursuing PSLF but considering private practice. Should I forget about PSLF?

This is a difficult concept to explain, but don’t completely forget about PSLF if a private practice offer comes your way.

As long as you certify your employment during residency, fellowship, and any other time periods, you get to keep that credit.

Remember, income driven repayment plans are either 20 years or 25 years long. If you already have six years of credit certified, you still have well over a decade to get your remaining four years of credit.

You might hate the private practice you join or take a few years to work for a 501(c)3 serving as their medical director. The hospital where your practice operates may be able to pay you directly. Check with your business manager to see if this is possible.

If you are a parent who stays home with kids until they go to school, you can return to a nonprofit job a decade after fellowship and get your remaining years of credit.

We haven’t considered potential future waivers made by the Department of Education. The PSLF waiver announced in 2021 was unheard of, but it might not be the last.

Is it worth going to graduate school if I’ve already started pursuing PSLF?

Take a step back and remember why you want to go to graduate school in the first place. If graduate school will further your career and your earning prospects, it’s worth it.

The beauty of income driven repayment plans is that they don’t care about the balance of your loans. Income driven plans are based on your income, your pre-tax retirement savings and your family size.

Let me say that again, your student loan balance can quadruple (or worse) in graduate school, but your monthly payment will only increase as your income increases.

The combination of better work prospects and better earnings potential usually makes grad school worth it. If you still aren’t sure, consider a pre-debt call with us.

We’re here to help, but remember, do what’s right for you, and we can help with the loan side of things.