I started giving advice to friends and family about student loans after our horrible experience with the Public Service Loan Forgiveness (PSLF) program and FedLoan Servicing.
My wife and I could have saved tens, if not hundreds of thousands of dollars on my wife’s student loans if we had only understood how the Public Service Loan Forgiveness program really works. I seriously wish this list of 40 tips existed back when we made all our mistakes.
Editor’s Note: In response to the economic challenges posed by the COVID-19 outbreak, the CARES Act suspended all auto-debit payments on federally held student loans automatically around early April. Any suspended payments between March 13, 2020 and December 30, 2020 count towards any loan forgiveness program you would have otherwise qualified for. For PSLF purposes, that means you needed to have been enrolled in an IDR plan on Direct loans as of March 13. If you made payments after that date, you can call your servicer and request a refund with no negative impact on your PSLF payment count! All $0 forbearance payments during this period count for PSLF as long as you have Direct loans and work full time for a qualifying employer. We recommend not making payments until September 30, 2020. President Trump issued a student loan order in early August offering economic hardship deferment until December 31, 2020. We will monitor the situation but as of now PSLF eligible borrowers would want to begin making payments in October unless Congress extends the benefits present in the CARES Act.
Where things went wrong
The first thing we didn’t know? Apparently, only Direct loans qualify. Because of this, we lost four years of credit while she worked at a not-for-profit hospital. Then, we filed the PSLF form and had her loans transferred to FedLoan Servicing.
Despite her payments for over 3 years on Income-Based Repayment, half of her loans only showed 1 month of payment credit. We ran the numbers, and rather than fight FedLoan Servicing any longer, we just decided to refinance student loans and pay it back as fast as possible.
I don’t want anyone else to become a PSLF program horror story like us. I started Student Loan Planner to help clients with huge student debt burdens come up with a plan to pay back their loans and save every dollar possible throughout the process.
Find out the facts
These tips below have allowed me to help clients save millions on their student loans. To see how much the PSLF program could save you, make sure to pick up your own copy of my PSLF spreadsheet.
Public Service Loan Forgiveness Gives You So Many Ways to Save Money
Public Service Loan Forgiveness program is always in the headlines. A couple years ago, a number of borrowers at the American Bar Association were retroactively told they didn’t qualify. The ensuing panic and media coverage from this lawsuit inspired me to write this article.
Recently, the media made a ton of noise over the 99% rejection rate for the PSLF program.
How to avoid PSLF headaches
You’ll want to become an expert in Public Service Loan Forgiveness if you have an obligation of over $50,000 in student debt so you can be fully educated about this option.
Our PSLF calculator can help too. Also, consider listening to episode 2 of the Student Loan Planner podcast where I go over in detail why the program is not broken, despite what many in the media portray.
Perhaps you’d rather not be an expert in Public Service Loan Forgiveness and would rather hire someone to help you instead.
If so, see how we help clients who owe between 50k and $1 million. Feel free to take the “do it yourself” approach with these top 40 tips. Just make sure you don’t mess anything up because it’s easy to do.
What Jobs Qualify for Public Service Loan Forgiveness?
1. Work at a 501(c)(3) employer? Good:
This is the first kind of qualifying Public Service Loan Forgiveness job. Most doctors and pharmacists qualify for PSLF through working at a 501c3 hospital. The government has an obligation to determine eligibility by who your employer is, not what kind of job you do.
A 501(c)(3) is a tax-exempt charity that could receive a big check from a rich person who would get to deduct that donation from their taxes.
Think major academic hospitals, the Red Cross, foundations, private not for profit universities, etc.
You can literally look up if your employer is a 501(c)(3) online by Googling a site like Guidestar with extensive not-for-profit listings.
2. Work for the Government? Very Good:
If you work for a local, state, or federal government or government agency, your work should qualify for the PSLF program.
If you’re an assistant district attorney, teacher, city employee, professor at a public university, public health official, etc., you qualify.
Make sure you actually work for the governmental employer directly and not through an independent contractor arrangement. Also, don’t run for Congress thinking you can take advantage of loan forgiveness. They explicitly excluded themselves from this benefit.
3. Public Service Organizations. Less certain, and nobody knows what it means:
If I were dependent on the forgiveness of student loans for my financial health, the only employer I’d work for would be a 501(c)(3) or government.
The form for Public Service Loan Forgiveness lists another category of qualifying employment with a “not for profit public service organization.” It’s unclear why Congress included this category and what they meant by it. Perhaps they wanted to cover employers who provide service to the public but are not 501(c)(3) or government.
There’s big disagreement over what qualifies right now. As you might have heard, the American Bar Association sued the Department of Education after their lawyers were denied. Basically, the law seems open to interpretation here.
If I owed over $100,000, I’d only work for an employer that definitely qualified for PSLF.
4. Some Jobs Don’t Qualify:
There are a lot of people doing good work at not for profits in these categories. Unfortunately, none of them qualify for Public Service Loan Forgiveness.
So if you’re writing memos at the Republican or Democratic National Committee or reparing policy briefs for the AFL-CIO, PSLF doesn’t apply.
In the past, faith leaders were also ineligible for PSLF. However, a 2020 policy change has opened the door for faith leaders to become eligible for PSLF starting July 1, 2021. More details are due to be released.
There’s also a loophole for folks working for tax-exempt faith-based ministries whose primary work isn’t proselytizing. That means if you’re the full-time cook at the Catholic soup kitchen you qualify, but if you’re the priest, you don’t.
Sign Up for an Income-Driven Repayment Plan
5. PSLF gives you four choices to pay based on income:
Here are your four repayment options to qualify for a PSLF program.
All four programs ask you to pay a percentage of your income towards your student loans in order to qualify. This explains why they’re called income-driven repayment plans. But don’t worry, we’ll help you with the math.
The percent of your income required under each plan is 15%, 10%, 10%, and 20%.
Calculation based on percentage of Annual Gross Income (AGI) minus 150% of the federal poverty line for your family size
- Income-Based Repayment (IBR)- 15%
- Pay As You Earn (PAYE)- 10%
- Revised Pay As You Earn (REPAYE)-10%
Calculation based on percentage of AGI minus 100% of the federal poverty line for your family size
- Income Contingent Repayment (ICR)- 20%
The percentage you are asked to pay doesn’t change. No matter how high the total balance is. Although some payment plans are capped with a maximum required payment.
For IBR, PAYE, and REPAYE, you get a deduction of 150% of the Federal Poverty Line before they multiply by that respective percentage to determine the payment.
For ICR, they use 100% of the federal poverty line as the deduction. The only reason to use ICR is if you’re going for PSLF with Parent PLUS loans.
6. Most people should choose between PAYE and REPAYE:
PAYE and REPAYE both ask you to pay 10% of your discretionary income to your student loans. Remember that discretionary income is generally your AGI less 150% of the poverty line.
If you’re going for forgiveness, then obviously you want to pay as little as possible to maximize the amount forgiven.
Choosing between PAYE and REPAYE depends on your marital status, joint income, and how certain you are that you’ll pursue the program.
If you’re single, uncertain you want to do a PSLF program, and don’t make a ton of money, I’d choose REPAYE.
If you are married, make a significantly different income from your spouse, and are fairly certain about pursuing Public Service Loan Forgiveness for 10 years, I’d choose PAYE. Either plan is likely a good decision.
7. If you aren’t eligible for PAYE, then it’s probably REPAYE, then IBR:
Some folks do not meet PAYE eligibility requirements. If you had loans before 2007 or didn’t take out any loans after 2011, then you aren’t eligible.
The only reason to choose IBR over REPAYE is if you are married, or you make a very high income and already have several years of PSLF payments. In that case, it might make sense to use IBR while filing taxes separately or because of the Public Service Loan Forgiveness cap in payments.
There are also some rare situations for married borrowers living in community property states such as California and Texas who might be better off using IBR instead of REPAYE. This is due to equal division of community income on federal returns in community property states. However, most people going for PSLF should be using PAYE. If that’s not an option, then go with REPAYE.
8. Don’t forget that IBR and PAYE have payment caps even if you’re a high-income earner:
Again, if you’re single, uncertain you want to do PSLF, and don’t make a ton of money, I’d recommend choosing REPAYE. If you are married, make a significantly higher or lower income than your spouse, and are fairly certain about pursuing PSLF for 10 years, I’d recommend choosing PAYE. Either plan is likely a good decision.
The impacts of earning more on an IBR plan
Way too many high income professionals make a huge mistake with PSLF when their incomes increase. They incorrectly believe that they will not meet eligibility requirements for an income based repayment program and refinance.
I’ve seen this cost borrowers over $400,000 before. If you’ve already built up more than five years of PSLF program credit, be extremely careful before refinancing. I’d highly suggest getting a second opinion before you do something irreversible like sell your loan to a private lender.
Payment caps to be aware of
IBR and PAYE have a cap equal to the 10 Year Standard Plan when you entered repayment for the first time. REPAYE has no payment cap. Hence, if your combined marital income is $500,000, but you owe $100,000, you could pay around $1,000 a month on IBR or PAYE but you’d pay more than four times that under REPAYE.
When a lower income spouse marries a higher income spouse, you need to be careful not to give up on Public Service Loan Forgiveness when you could take advantage of repayment caps.
*Update on FedLoan mistakes impacting high income earners
FedLoan has been messing up lately by sending out letters to high-income borrowers telling them they’re no longer eligible to make payments based on income. That causes panic and borrowers will call and ask what to do now that they aren’t eligible.
The clueless phone rep tells them to switch onto something else. That is a mistake.
You never get kicked off of IBR or PAYE. You merely have your payments capped. Ignore the letter, and your payments should be capped. If they aren’t, then you need to escalate to a supervisor.
9. No one except Parent PLUS borrowers should be using Income Contingent Repayment (ICR):
This plan is the worst option for someone pursuing Public Service Loan Forgiveness. Income Contingent Repayment requires you to pay 20% of your income with only a 100% federal poverty line deduction.
Sometimes ICR shows up with the lowest payment on the federal repayment estimator. I can’t really figure out why, since in most every case I’ve seen (and I’ve seen thousands), ICR shows up poorly for those with Direct Loans.
Remember the goal is to pay as little as possible to maximize the loan forgiveness benefit. If anyone is on ICR, please send us an email at [email protected] and take a look at switching.
One huge exception
If you have Parent Plus loans, then your only option to receive PSLF is to consolidate into a Direct Consolidation loan. After that, you need 10 years of qualifying service while on ICR. That plan requires you to pay 20% of your discretionary income. Hence, it probably only helps if you owe more than $50,000 of Parent PLUS loans.
Know that when consolidating Parent PLUS, you need to keep the loans separate from any in your own name.
There’s a huge gap in the number of parents eligible for Public Service Loan Forgiveness and those actually receiving it. If you’re working for a government or not for profit employer and have Parent Plus loans over $50,000, definitely contact me.
I’ve worked with several clients who were incorrectly placed on ICR. Clearly, the people they used for student loan help didn’t know what they were doing. If you’re convinced that ICR is the best plan available and you have Direct loans originated in your name only, I want to write a blog post about you.
Filing the Public Service Loan Forgiveness Form and Moving to FedLoan Servicing
10. Certify your employment status right away to create a paper trail for PSLF from the beginning:
If you’re going for the PSLF program, you want to get this process started ASAP:
- Fill out the free Public Service Loan Forgiveness form. This is also known as the Employment Certification Form (ECF).
- Send it in and wait a couple months to hear back.
- Don’t put this off. There is everything to gain and nothing to lose except a few hours of your time
I’ve heard stories that some loan servicers will tell borrowers to leave their loans with them for the full 10 years then apply with FedLoan. That’s terrible advice (and constitutes a clear conflict of interest).
After all, servicers only get paid if you leave your loans with them. If everyone who could qualify for PSLF applied, the other servicers would lose millions in revenue from servicing fees.
Why you need to move to FedLoan ASAP
To give the servicers the benefit of the doubt, I don’t think this is some grand profit hungry strategy. I just think that most phone reps give bad advice in general. Move your loans over to FedLoan ASAP if you plan to get PSLF since they’re the only servicer set up to track PSLF program credits.
Should you just give up on Public Service Loan Forgiveness because it’s hard to get? Only if your hourly wage is above $1,000. In that case, it might be irrational to spend your time dealing with FedLoan.
However, if you owe over $50,000 and plan to work in a qualifying job anyway, it’d be a poor decision to let bureaucratic incompetence get you down. Especially when folks like us are here to help answer your questions in the comments section below.
11. Send in the employment certification form at least annually, but preferably semiannually because it’s free:
Once you begin tracking your progress towards the 10 years needed for student loan forgiveness, you’ll want an extensive, documented paper trail. I anticipate a lot of folks will have trouble at the end of their 10-year employment verifying their status. We lost three years of credit towards PSLF thanks to FedLoan Servicing. Hence, I hold their competence in very low esteem.
To avoid problems, send in the ECF annually at the minimum. FedLoan sucks and the PSLF program form is free, so send it in every 6 months to create a solid paper trail. It forces the folks tracking the loan program to communicate often with you about your growing progress towards the 120 months needed for loan forgiveness.
*Update: FedLoan now allows you to complete and upload the Public Service Loan Forgiveness certification form online. Borrowers tell me it’s a vastly better option than mailing in the paper form.
12. Explicitly tracking progress towards PSLF automatically moves your loans to FedLoan Servicing, so you might as well get it over with:
Loan servicers are pretty bad as a group. Unfortunately, the federal government gave a monopoly to FedLoan Servicing for managing accounts for borrowers working towards Public Service Loan Forgiveness. That means if you’re happy with your loan servicer, you’ll lose that when you send in your employment certification form.
The benefits of tracking your progress toward PSLF sooner outweigh the inconveniences of a slightly more annoying loan servicer. No servicer is worth having an inaccurate paper trail when applying for PSLF.
How do you Qualify for the PSLF Program?
13. You have to have only Federal Direct loans if you want them forgiven:
If you work at a qualifying employer but your application for Public Service Loan Forgiveness is rejected, the reason is probably that you have non-qualifying loans.
If you took out loans in 2010 or earlier, you need to pay extra close attention to the type of loans you actually have. Most loans after 2010 will be made under the Federal Direct program. Loans from 2010 or earlier are likely on the old FFEL loan program, which doesn’t qualify for PSLF. You can fix this with a loan consolidation that converts everything into a Direct Consolidation loan. However, this resets the PSLF payment time clock since legally, it’s a new loan.
Loans that qualify for forgiveness
There are actually 17 different types of federal student loans that qualify for PSLF. Most need to be put into a Direct Consolidation loan. Some of the ones run through the Department of Health and Human Services don’t even show up on the NSLDS database. You have to request that they manually get added. In that case, the new Direct loan would qualify for PSLF.
Here’s a few types of loans that could be consolidated to meet eligibility requirements for PSLF that most people miss:
Examples of Health Resources & Services Administration Loans that don’t show up on NSLDS:
- Nursing Student Loans
- Health Education Assistance Loans (HEAL)
- Health Professions Student Loans (HPSL)
- Loans for Disadvantaged Students (LDS)
- Primary Care Loans
Institutional Loans that Do Show up on NSLDS that Must Be Consolidated for a PSLF program
- Federal Perkins (need to be manually included in consolidations)
If you didn’t know that these loans could be made PSLF eligible, you might accidentally view them as private loans and pay them off when they could be forgiven. One of the dead giveaways of potential PSLF eligible loans is a flat 5% interest rate. Heartland ECSI oftens services many of these kind of loans.
One example I had recently was a couple with $25,000 of HPSL and $25,000 of Perkins that were eligible for forgiveness, but only if they consolidated them into Direct Loan status.
Other possible forgiveness options
Student loans may also be eligible for forgiveness through Total and Permanent Disability (TPD) Program. If you become totally disabled while repaying your loan, your remaining balance can be forgiven through this program.
Eligibility requirements and repayment details vary from federal to private loans, but it is an option worth considering if you find yourself no longer able to work.
Borrower defense to repayment can make you eligible for forgiveness if you received misleading information by your school. If your school engaged in fraud or misconduct, you can apply for forgiveness under this plan with an online form.
14. Everything else doesn’t qualify, but sometimes you can turn it into a Direct loan that does qualify:
Federal student loans on the Federal Family Education Loan program (FFEL) do not qualify for PSLF. Neither do private loans, loans made to you by grandma, Health Professions loans, Perkins loans, or any other kind of loan.
If you have a Direct student loan, it will say “Direct” in the name and will qualify for Public Service Loan Forgiveness.
If the loan description just says “Stafford Unsubsidized” or “Perkins” without “Direct” in the front of the name, it almost certainly isn’t eligible for Public Service Loan Forgiveness.
Remember that consolidation is a remedy for many kinds of ineligible loans. You just don’t get to carry over any credit.
15. 120 Qualifying Monthly Payments on income-driven repayment, and no you can’t rush it:
You need 10 years of credit towards the PSLF program to have all your debt forgiven tax-free. The more precise definition is you need 120 months of income-driven payments at a qualifying employer. Those 120 qualifying monthly payments have to be made monthly, and you can’t make extra payments and speed up the clock.
Sometimes when you make extra payments, it puts your loans into paid ahead status. We often have to work with folks in this situation, so pay the minimum and no more.
In 2020, the Trump administration enacted a stimulus bill that suspended payments for six months on qualifying student loans. If you were working toward forgiveness at the time, the suspended payments will count toward the 120 you need.
16. PSLF payments are cumulative, not consecutive:
Luckily, the 120 qualifying monthly payments do not need to occur at one employer or consecutively. You could work 3 years at a not-for-profit then work in the private sector for a couple of years, and then work in government for 7 years, after which you’d finally qualify for PSLF. That feature encourages mobility of the labor force but only within the not for profit and government sector.
Remember that the PSLF program is not a payment plan. REPAYE, PAYE, and IBR are payment plans. You could continue payments and move between part-time and full-time status, all while slowly building credit towards the 10 years of full-time credit needed. If you don’t end up qualifying for Public Service Loan Forgiveness, you could get the 20 to 25 year IDR forgiveness on the same payment plan. Of course, if you’re not doing PSLF, you’ll owe taxes on the forgiven balance.
With PSLF, you owe no taxes at forgiveness.
17. You can get credit while on Maternity Leave or other Family Leave:
Under the terms of the Public Service Loan Forgiveness program, you can take up to three months of leave from your job per year. The technical term is the Family and Medical Leave Act (FMLA). If you’re taking time away from your job, ask your HR person if that qualifies as FMLA leave. If it does, then you’ll want to continue income-driven payments as it will cut down the time needed until your loans are gone. Please do not use forbearance or deferment.
How the Public Service Loan Forgiveness Program Affects Taxes
18. You need to minimize Adjusted Gross Income (AGI):
Your income-driven repayments depend on how much money you make for tax purposes. Minimize your taxable income with pre-tax contributions to get more PSLF forgiveness. The easiest way to do this is to max out all pre-tax accounts. If you’re married, you can also have you spouse do the same. This will lower your AGI as a joint economic unit. The most common pre-tax accounts I’m referencing are the 401k and Health Savings Account.
Here’s a list of more account types that reduce your AGI for PSLF:
- 457 (can do in addition to 403b)
- Solo 401k (for any income earned while side hustling)
- Traditional IRA (can usually only deduct if no retirement plan is offered. Can use spousal IRA if spouse doesn’t work)
If you have more than a $3,000 loss on investments, you can write that off against ordinary income. There are other write offs as well available for real estate investing that I’ve seen borrowers utilize if they have side hustles or other business income outside their main job.
19. Calculate your tax penalty before filing taxes separately if you’re married:
If you have a spouse with a high income and little or no student loans, you might be tempted to file taxes separately. This subjects you to a tax penalty in most cases. Instead of doing this, a borrower could switch to another income-driven repayment plan. Additionally, they could max their pre-tax accounts. This switch and save strategy often eliminates the need to file separately.
However, sometimes filing separately gives you huge savings. Make sure to run the numbers yourself or hire someone like us to figure out if it’s worth it.
If you have loans and your spouse does not, filing separate might save you significant money. However, you should almost never file taxes separately if you both have significant federal student loans. I want to make a note that one of the most common and expensive mistakes we see is borrowers filing with the wrong tax status as married couples.
That’s one of our strong suits is helping you decide what filing status is best for your student loans. Your CPA is likely to be clueless about this. We’ll give you the exact info and questions to ask so you can figure out which choice is better. In some cases, you can even amend returns to get money back if you made a filing mistake. We’ll alert you if we think that’s something you need to talk about with your CPA.
20. Public Service Loan Forgiveness is the greatest tax-free student loan forgiveness benefit available today:
Remember that unlike private sector IDR student loan forgiveness, the PSLF program is a tax-free benefit. Private sector employees with big loans must save for the future tax penalty. In contrast, not-for-profit or government employees don’t have to cover this extra cost.
Many borrowers love the idea of working for 10 years and being totally finished without the worry of a big lump sum payment to the IRS. I sympathize.
You need a PSLF side account where you put money into a brokerage. That’s to make sure you have asset growth while you’re waiting around for loan forgiveness. However, you very likely will get to keep this money once you receive PSLF.
21. PSLF program is equivalent to a phantom pre-tax annual bonus for 10 years:
If you have $250,000 in med school loans and would pay back $300,000 with private lender refinancing, but only $100,000 with PSLF, then that’s a $200,000 benefit over 10 years. Adjust this benefit for taxes at a high marginal rate such as 40%. After the adjustment, you’ve saved over $330,000 in pre-tax compensation over that 10 year period, or $33,000 per year.
You should add this pre tax salary equivalent to any compensation you earn for a qualifying job to compare it to a position in the private sector. For example, in the case above if you earned $200,000 at a 501c3 hospital, you’d add $33,000. That $233,000 salary is what you’d need to earn in the private sector just for those two jobs to be equivalent financially.
In many cases, the non profit or government job has better hours and/or benefits. So you might need to earn significantly more in the private sector to make the two jobs at a break even level.
22. Use the annual tax adjusted Public service loan forgiveness benefit to compare job offers:
When comparing opportunities in the public and private sector, it’s important to adjust for the indirect PSLF program bonus for taxes so you can compare job offers. Take a med student with the $330,000 pre-tax Public Service Loan Forgiveness bonus from tip #21. That’s worth $33,000 per year over 10 years. Add the yearly value of PSLF into annual salary before comparing them to their private sector counterparts.
For lower earning jobs, I find the bonus can sometimes be greater than a borrower’s entire salary. Obviously PSLF is critical in that case. For higher-earning positions like Big Law associates or high earning medical specialties, you’re generally better giving up the PSLF program for greater income and refinancing with private lenders.
After helping thousands of borrowers, I’ve learned Public Service Loan Forgiveness is not good enough to pursue a public service job unless you’d do that anyway. Borrowers without a passion for public service should work in a higher paying role to maximize their income.
How PSLF Impacts Investment Strategy
23. Put $19,500 per year into your 403b, 401k, or Thrift Savings Plan:
If you’re an employee, max out your traditional pre-tax retirement account. The current max for 2020 is $19,500. For most public sector or not for profit employees, you will use a 403b. For federal employees, the Thrift Savings Plan (TSP) is the account to use. Sometimes you might actually have a 401k and still be in a qualifying job.
I suggest choosing index funds with rock-bottom expenses of 0.2% per year or less. Consider putting in 120 minus your age in stock index funds and the rest in a bond index fund. So if you’re 30, you’d put 90% in stocks and 10% in bonds. For the stock funds, I’d suggest a 50/50 split between something like US Total Stock Index Fund and International Total Stock Index Fund. Two Vanguard funds that correspond to these options are VTSAX and VTIAX.
If you have an option like a target retirement fund, I’d keep things simple and just go with that.
24. If you’re eligible for a 457, put another $19,500 in that:
I’ve had clients who worked as employees at a state or municipal employer or hospital system that had both a 457 and a 403b. In that case, you can put up to $19,500 per year in both accounts. That’s a max of $39,000 in pre-tax income you can remove from your AGI. That amounts to $3,900 in savings per year for those pursuing Public Service Loan Forgiveness using PAYE or REPAYE.
If your spouse has access to a 403b and 457, you could have him or her max their account as well. That’ll save you money if you file jointly.
The highest amount of money you can put into pretax investments as an employee married to another employee with the same eligibility is $39,000 times 2 + $7,000 for your health savings account. Truly if you can afford to contribute $84,000 a year pre tax, you will be very well off one day.
If you don’t have access to all these accounts, don’t sweat. Focus on maxing what you can and putting the excess in a brokerage account for general purposes.
25. By going for PSLF, you get an indirect matching contribution for your retirement:
Most people save in their retirement accounts because they receive an employer match. However, that match does not go any higher if they choose to contribute more. In contrast, the Public Service Loan Forgiveness match is 10 cents on every $1 of contributions all the way up to the maximum.
What I mean is that these contributions reduce your taxable income, which reduces the required Public Service Loan Forgiveness payments since REPAYE, IBR, and PAYE require less in monthly payments with lower taxable income. The government doesn’t directly contribute money to your retirement account if you contribute the max pre-tax amount. Rather, it just takes less out of your pocket in mandatory student loan payments.
26. Don’t forget about Health Savings Accounts (HSAs).
They can also reduce AGI: If you’re single, you can contribute $3,500 to an HSA. Married people can contribute $7,000 to the family HSA. If there aren’t already enough reasons to love a triple tax-exempt account like an HSA, you also receive an indirect match from the federal government of 10 cents for every dollar contributed. To make the math easy, say you put in $5,000 to an HSA for your family and your income after adjustments for the federal poverty line is $100,000.
PAYE or REPAYE would require yearly payments of $10,000 towards your federal student loans. After saving $5,000 in an HSA, your income is $95,000 and you have to pay $9,500 on your student loans. Because you eventually get forgiveness tax-free, this balance doesn’t matter so HSAs are pure savings.
This might be one of the coolest and most overlooked areas where someone going for Public Service Loan Forgiveness can save money.
Protect Yourself from Changes to Public Service Loan Forgiveness in the Future
27. Create a sizable non-retirement investment account as PSLF insurance:
Even those who express doubt about the PSLF program must acknowledge the large chance that the program will not be repealed for those who currently have outstanding student debt. That means you should not be paying extra for loans that might be forgiven.
However, many clients of mine express deep concern about carrying six figures of debt. They worry this burden might eventually come back to haunt them. You can cure this worry.
Place these savings in a taxable mutual fund or brokerage account. Over time you’ll build savings at a faster rate than inflation. Assume for a moment Public Service Loan Forgiveness repeal does happen. You’d be able to cash in the savings and start paying down the debt aggressively.
28. Choose a low-cost index fund provider to implement this side investment account:
Make sure your investment account charges less than 0.5% per year in total fees for investment expenses and advice. Low fees have a powerful wealth-building effect.
I suggest Vanguard for do-it-yourself investors. Most Vanguard investors pay between 0.05% and 0.2% per year in fees (I get $0 if you click on that link and set up an account).
For folks who want sophisticated portfolio and investment management and don’t like the idea of investing themselves, I suggest Betterment (referral link). If you set up an account through that link, you get a month to one year managed free.
Most Betterment customers will pay between 0.30% to 0.45% per year total. Since they use mostly Vanguard funds, their fee is essentially 0.25% per year over the cost of Vanguard.
Choose the right investing account for you
It really comes down to how much you want to be involved in managing your investments. Both places will leave you thousands of dollars richer in the long term compared to going with a typical investment company that charges at least five times more.
Realistically, 0.25% of a small amount of money is a very small fee. You could try them out to learn how they invest and then cancel in the future if you decide you know enough to manage your own investments.
29. Consolidating your loans could be a dangerous step if you’re going for PSLF:
There are a ton of fly-by-night student loan consolidation factories and even law firms on the internet that charge gobs of money to complete student loan consolidation forms as their one-size-fits-all solution. That could be a horrible decision. Current loans have Public Service Loan Forgiveness in the promissory note. There are two reasons someone going for the PSLF program should consolidate their loans.
- You have non-Direct loans that don’t qualify for PSLF. These non-Direct loans include FFEL, Health Professions, Perkins loans, and some others.
- If borrowers want to start qualifying PSLF payments faster, they could consolidate right after graduation. By consolidating the day after you graduate, you can shorten the normal grace period.
Do not consolidate loans for which you have already made PSLF qualifying payments.
Doing this will eliminate any existing progress towards forgiveness.
Could Public Service Loan Forgiveness be Repealed?
30. Some Democrats want to see PSLF means tested:
This is the single most realistic threat to the program’s use by current borrowers. This is especially true for individuals with six-figure student debt burdens. President Obama proposed a $57,500 Public Service Loan Forgiveness cap in 2015 as a max benefit. That was roughly the max amount an undergrad could borrow at the time.
The administration responded to the disproportionate benefit that the PSLF program provides to high-income earners. Of course, that proposal did not pass due to opposition from Congressional Democrats.
However, I would expect means testing to come back into the conversation eventually, but only for future borrowers. The primary threat for people using PSLF is means testing, not repeal. If a $300,000 borrower does not receive tax-free student loan forgiveness in 10 years, that’s probably going to be the reason.
To be clear, I think the risk of that is 5% to 10%, since Public Service Loan Forgiveness has shown that it has bipartisan support.
31. Republican proposals generally try to eliminate PSLF entirely, but only for future borrowers:
Folks who don’t currently have loans outstanding are always in danger of not having PSLF as an option. Once you start a graduate program though, you should be allowed to continue borrowing loans that will be eligible for PSLF so long as your promissory note includes mention of the program.
With split control of White House and Congress, it’s anybody’s guess as to what will happen with the next round of student loan reform.
Grad students just starting their programs in fall 2020 might have some legitimate worries, but will probably be safe. Borrowers with current loans and those about to finish school have very little to worry about. Any Republican plan for repeal should grandfather them into a PSLF program.
Update on attempted legislation
The Republicans have attempted to pass the PROSPER ACT, which would do away with PSLF. It would grandfather in anyone who is already graduated or enrolled in school on that date. That program is effectively dead.
House Democrats tried to pass The Aim Higher Act, which would protect and expand PSLF for future generations. That proposal is just an opening salvo.
Senator Lamar Alexander chairs the Senate HELP Committee responsible for student loans. I would expect he and future chairs will protect the program and that the final compromise legislation will look a lot more like the Aim Higher Act instead of the PROSPER Act.
32. Yes PSLF could be repealed, but it’s highly unlikely:
Could the PSLF program be repealed? Yes, it could. However, Public Service Loan Forgiveness has a diverse and powerful set of backers. We have the absurdly high cost of grad school to thank for that. Therefore, the chance that current borrowers who already have loans don’t receive PSLF at all is unlikely. This is primarily due to political reasons.
There would also be a massive number of lawsuits. There’s a very good argument that PSLF is a contract between borrowers and the federal government that can’t be broken.
The PSLF program will cause labor market distortions that are yet to be realized. It also creates a huge disparity between private and public sector employees. For those reasons, I do expect that the PSLF program’s days are numbered. However, I would put the odds that current borrowers don’t receive the full benefit at 10% or less. That number includes the risk posed by means testing PSLF.
What do Current Legal Battles over Public Service Loan Forgiveness Mean?
33. Do Not Trust FedLoan Servicing:
The Department of Education really hurt some lawyers at the American Bar Association when they overruled FedLoan Servicing that the ABA qualified for loan forgiveness. The lawyers lost two to five years of credit towards Public Service Loan Forgiveness thanks to the error. These lawyers are currently suing FedLoans, arguing that FedLoan rulings should be binding as an agent of the federal government.
Regardless of the results of that suit, you clearly should not trust FedLoan Servicing. Verify your own status yourself for Public Service Loan Forgiveness and make sure you’re taking the right steps.
Update: The lawsuit resulted in a judgment by the DC court of appeals that the government and FedLoan acted in an “arbitrary and capricious manner.” Three of the four affected borrowers will probably get credit for their PSLF service. Further proof as to how durable this program is.
34. Be aware of Government and 501(c)(3) job openings as a backup employment plan:
As I mentioned earlier, the Public Service Loan Forgiveness employment certification form explicitly lists all 501(c)(3) organizations and local, state, and federal government employers as qualifying for the PSLF program.
If you’re working at a not-for-profit employer that’s not the government or a 501(c)(3), keep track of possible job openings in case FedLoan Servicing pulls the rug out from under you and voids your progress towards PSLF.
35. The average borrower doesn’t need to worry about lawsuits over PSLF:
The media loves to blow things out of proportion. That’s exactly what happened in my view over the latest string of PSLF program lawsuits. Pay attention to the policy that matters, like whether current borrowers will be grandfathered in or if the government will impose a means-test on the PSLF benefit. Follow the tips in this article. If you do, worry a lot less about what the media says.
Here’s a few stories I’ve seen cause massive numbers of anxiety laden emails to be sent to my inbox over the past few years:
- “Government Lies About PSLF Eligibility for Public Interest Lawyers”
- “PSLF Has 99% Rejection Rate”
- “New Republican Proposal Would Repeal PSLF”
Is there any wonder borrowers don’t trust this program? Ignore the noise and stay focused.
Be Aware of Conflicts of Interest in the Student Loan Industry
36. FedLoan Servicing probably wants to hang up on you, not help:
The federal government gave FedLoan Servicing the exclusive rights to manage the PSLF program borrower accounts, so they have no incentive to help you. Put yourselves in the shoes of their executives. They earn a flat fee with no penalty for poor performance and no bonus for great customer service. Hence, FedLoan wants to keep staffing costs down at their call center.
Hence, short phone calls mean lower costs and more profit. Don’t ever let a rep from a student loan servicer rush you off the phone. Furthermore, if someone gives you odd information, call back. Speak to as many reps as you need to until you find one that sounds competent.
If you need to appeal your payment count, know that it’ll take at least 6 months. Call back semiannually to track progress, and know that your count needs to be correct when you’re finally eligible, not today. That means it’s not worth losing sleep over.
I recently discovered a secret phone number there that you should call if you’re having a ton of trouble: (717) 720-7605. Some of my readers who’ve used that FedLoan phone number instead of the generic one report getting their problems fixed in days instead of months.
37. Beware of sites that promise Obama Student Loan Forgiveness or Trump Student Loan Forgiveness.
There are a ton of sites and companies in the student loan world that just want your money. If you find a vaguely federal government looking website with words “document preparation service” and hyped up language about Trump or Obama Loan Forgiveness, don’t work with them.
These folks game the system to rank for high search volume keywords. They hire people off Craigslist and pay steep commissions, and their answer for every problem is student loan consolidation.
I’ve seen people lose over $80,000 when loans got consolidated that already had eligibility for forgiveness.
Moreover, the fee for this service is frequently over $1,000. We charge 5 to $595 and actually create a custom plan. In fact, we don’t even do any document preparation because it’s easy to do on your own and that’s not where value creation happens. That comes from having a clear plan provided by a CFA or CFP® professional.
There are reputable companies and websites out there that charge far lower, transparent fees. Additionally, they help optimize federal student loans with a rigorous, customized analysis. (Hopefully, after reading this, you feel that way about Student Loan Planner). Don’t pay 2-10 times as much money for a junk service.
38. Financial advisors usually don’t understand the details of Public Service Loan Forgiveness:
There are some exceptions to this rule, such as fiduciary Registered Investment Advisors who specialize in specific professions. However, as a general rule, financials advisors don’t know the intricate details of how these loan forgiveness programs work. A good advisor should admit what they don’t know. He or she would steer you to resources that can help you.
If the advisor does not know how to model tax filing strategies and explain what your monthly payment will be, then you need to look elsewhere for assistance. Financial advisors are generalists. Even the highly knowledgeable ones might make five student loan plans in a month. We easily do more than twenty times that.
“Fee only fiduciary” does not mean expert advice in all areas. Working with us, you’ll probably pay a lot less and get better advice because all we deal with is student loan debt.
39. Personal finance blogs make a lot of money on private refinancing:
Personal finance blogs make a ton of money from referral bonuses when people refinance their higher education student loans through affiliate links. That includes this site. However, we give away a majority of our commission back to the borrower with cash back bonuses between $200 to $1,000. I want Student Loan Planner to be known as having the highest level of integrity in the entire student loan universe.
Don’t refinance if you qualify for the PSLF program. You’ll permanently lose that option. Luckily, I have a business case for going into extreme detail about PSLF. After all, I consult with borrowers on how to maximize the value of the program.
However, other websites take a hands-off approach. Their sole revenue source is from refinancing partnerships.
Even if they are ethical, they will always have an unconscious bias towards private refinancing lenders. If you’re on track for Public Service Loan Forgiveness, you will lose that benefit forever if you refinance simply because a friend said you should do it, or you saw the Superbowl ad. Think before you click.
40. Implement these Public Service Loan Forgiveness Tips on Your Own, or Hire Us for Student Loan Help
You’ve made it to the end of my top 40 tips. Clearly, you’re going to be in far better shape than your peers. Many will save thousands of dollars from these tips.
Call FedLoan Servicing now and implement these best practices directly. If you’ve benefited tremendously from this article, please share this post with a friend or comment with questions below.
Maybe you skimmed this and are overwhelmed with the details, or you’d rather hire somebody to analyze your loans for you. We’ve advised thousands of borrowers like you. There’s a good chance I’ll catch something that even the most diligent person might miss. Read how to hire us and let’s see how much money we could save on your student loans.
Let us know your questions, we’re here to help
If you just want to share what you’re going through, use the contact button or comments section below and let me know your concerns. I founded Student Loan Planner to make your life easier, save you more money, and give you back hours of time that might’ve wasted worrying about how to pay back your student loans.