Is There Really a Huge Loophole in the Public Service Loan Forgiveness Program?

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captuitionThe Brookings Institution came out with an interesting report titled The coming Public Service Loan Forgiveness bonanza. Here are the highlights of the paper:

  • The Public Service Loan Forgiveness (PSLF) Program limits your payments to 10% of your discretionary income. After 10 years (120 monthly payments), any remaining loan balance is forgiven (principal + interest). This is significantly shorter than the 20-25 year period required by the Revised Pay As You Earn Repayment Plan (REPAYE Plan) available to all workers with eligible federal student loans.
  • The employment requirements allow 25% of the workforce to be eligible for PSLF. Qualifying employers includes government organizations at any level (federal, state, local, or tribal), 501(c)(3) not-for-profit organizations, and other not-for-profit organizations that provide certain types of qualifying public services.
  • If you can estimate your future income and you plan to work in a qualifying job, an individual can also estimate the maximum amount of federal student loan payments they will have to pay back. Anything borrowed over that number can eventually be forgiven. This may encourage some people to borrow large amounts ($100,000+) for graduate or professional school, because they know they won’t have to pay it back.
  • The Congressional Budget Office estimates that two features of Income-Based Repayment and PSLF that favor those with the largest loans and incomes will cost taxpayers over $12 billion in forgiven loan repayments over the next 10 years.

Here is the report’s conclusion:

Policymakers appear to know little about the Income-Based Repayment program and the Public Service Loan Forgiveness benefit for federal student loans. That lack of awareness is troubling, as these programs are a major force in how students are financing their educations. It is fair to wonder then whether lawmakers really intended for PSLF to be an open-ended loan forgiveness program for a quarter of the jobs in the economy.

Qualifying public service employment details. I knew there was some sort of program out there for public service jobs, but I did not know that the 25% of all jobs qualified. Here’s some information taken from the PSFL certification form [pdf]:

  • Governmental organizations including any Federal, State, local, or Tribal government organization, agency, or entity, a public child or family service agency, a Tribal college or university, or the Peace Corps or AmeriCorps.
  • Any not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code.
  • Other types of not-for-profit organizations that provide certain types of qualifying public services, including:

    Emergency management
    Military service
    Public safety
    Law enforcement
    Public interest legal services
    Early childhood education
    Public service for individuals with disabilities
    Public service for the elderly
    Public health
    Public education
    Public library services
    School library services
    Other school-based services

  • “Public health” above includes nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health support occupations, as such terms are defined by the Bureau of Labor Statistics.

Let’s crunch some numbers. How much money are we talking? Here’s an example from the report:

For example, we found that a student who pursues a Master of Education or a Master of Social Work, who accumulated a loan balance of $28,000 during his undergraduate studies, is likely to have all of the money he borrows for his graduate education forgiven under PSLF. Graduate school would be free for him, financed entirely through loan forgiveness, so long as he borrows to pay the full cost of his education and works in qualifying job. This example is not an outlier. In fact, it will be a common scenario for those professions and many others with similar earnings profiles.

With an adjusted gross income of $45,000, under PSLF any federal student loan balance above roughly $30,000 would be forgiven. Let’s say an individual has a total gross income of $50,000 and an adjusted gross income (AGI) of $45,000. Under REPAYE and PSLF, your maximum monthly payments will be limited to 10% of your discretionary income (the difference between your adjusted gross income and 150 percent of the poverty guideline amount for your state of residence and family size, divided by 12).

Using this repayment calculator, I found that monthly max to be $227 a month starting payment ($2,724 a year) for the first year. If you assume that both your income and the poverty guidelines grow with inflation, your total payments over 10 years will be roughly $30,000. If you had a $100,000 student loan balance at 4% interest, that could be a $120,000 of forgiven debt (principal and interest) after a decade ($150,000 total, you paid $30,000).

If your income is high, you’d have to accumulate some serious loan balances to count on any significant portion being forgiven. Let’s run the same numbers for someone earning $100,000 gross total income, or $95,000 AGI. The monthly payment calculator shows me the max monthly payment would be $643 a month ($7,716 a year). Times 10 years and you’ll have already paid roughly $90,000.

Nearly 30% of people registered for PSFL have loan balances over $100,000.


Final thoughts. PSLF definitely offers the most benefits to those with huge student loan balances and low-to-modest incomes. Student loan balances of over $100,000 can be wiped out. If you are working in a field where public sector workers earn close to the same amount as private workers (accounting for pension and health benefits in retirement), then this PSFL program may tilt your decision. For example, a healthcare worker may choose to work for a non-profit hospital over a private for-profit hospital.

Is this a loophole? How many people first look at their huge student loan balances and then choose to go into the public sector over the private sector because of this program? How many people were already planning to go into the public sector and then decide to use this program for free grad school?

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  1. This is a huge dilemma for our broken education system. We spend years encouraging kids to get a college education that’s unaffordable, then we incentize them through the forgiveness program to earn far less than they are otherwise capable.

    What good is that overall for our economy?

    Jonathan, have you seen any information about what happens if someone is unable to continue? For example, if someone is 5 years in to the 10-yr forgiveness program and their monthly loan payments have ballooned to $1,500, would they be able to revert to the 20-25 year REPAYE, or would they need to refinance their loan (subject to then-current interest rates) in order to reduce their monthly?

    Also, If they miss a month or two of the reduced monthly payment, would they need to re-qualify for a new 10-yr period in order to continue the forgiveness?

    • Just read the application you attached, and the details answer the latter question (at least partially). The payments don’t need to be consecutive, so long as 120 qualifying payments are made and the loan is not in default, the payments still qualify.
      So what happens if someone has defaulted?

  2. Well, one important point that you don’t mention that affects the calculation (specially for those that owe 100k+) is that for that last year in which the loan is forgiven, you have to pay taxes on the amount that was forgiven. So if you owe 300k you’ll still be on the hook for like 100k to the IRS…

  3. Doesn’t the forgiven loan debt become taxable income realized, so now the IRS gets their hands in the action?

  4. I’m curious if I am going to qualify for this. I started public service (law enforcement) shortly after the program began (Jan 2008). I don’t have much in loans, however, I consolidated my loans shortly after graduating in 2005 and didn’t do it based on my income. I just wanted a low rate (I think I got around 2.25%). My savings accounts were paying more than that back then! Anyway, come Jan 2018, I will have been in public service for 10 years and made nearly 12 years worth of payments. If I am eligible, I might have around $4,000 or so forgiven at that point. If I had to bet money on it, I would guess that they won’t consider me eligible because I didn’t sign up for their income based repayment. Oh well, we’ll see. I would have paid my loans off in a lump sum to save the couple hundred in interest each year by now if this program didn’t exist, but since I’m so close to 10 years of public service, I figure I might as well wait it out and see if I can get the forgiveness, which will just about make up for all the interested I’ve paid in 12 years.

  5. And who said the U.S is not a Socialist country?

    • “And who said the U.S. Is not a Socialist country?” Everybody who knows the definition of the word “Socialist”.

      The US has a mixed economy with very limited socialist features. Not even Denmark is fully socialist, but their mix leans that way more than ours does. An example of a not-socialist US program is the disasterous ACA, designed by lobbyists and operated by for-profit insurance companies.

    • And thank goodness it is, or you wouldn’t have the services of all those people in the 25% of jobs that are largely there to provide good in a society where they wouldn’t otherwise be provided by trickle down economics and rampant capitalism.

      • @ Matt and Jon. I suppose watching what was once such a great and powerful country becoming one of government and media-driven corruption and lies is fine with you. I love the way you all think capitalism is horrible and welfare-style programs are how we become stronger. So much backward thinking. Let the 25% of those who choose their jobs do it because that is what they would like to do with their lives, not because someone else will pay their bills for them.

        BTW, Jon, this president (and his fellow Democrats) owns the ACA…lock, stock, and barrel. I love the way you try to spin it into a problem of lobbyists and insurance (although I detest lobbyists). I railed against Obamacare on this blogsite years ago against you and your kind. This president manipulated the people of this country (against the will of most) and pushed this pathetic program off on the people with only the help of his fellow Democrats. Well done!

  6. @Chris – you should look further at the details of your loans and the terms of the program. I believe PSLF allows you to submit the supporting documentation at any point during your ten year repayment program. The wrinkle, based on my knowledge of the program and what you outlined, is that your refinancing suggests you may have financed into private student loans for the lower rate, which would render any formerly eligible loans ineligible.

    The big benefit for PSLF goes toward those with graduate loans – graduate borrowing is not subject to the same hard caps as undergraduate loan programs.

    For instance, my brother-in-law is in his medical residency with over $300k in student loans – after the completion of his residency, he will be halfway towards PSLF eligibility (medical residents generally are paid $45-$55k a year). Even if he comes out of his 4 year residency making $200k, he will still receive a substantial amount of debt relief on the back end, as long he works at a non-profit hospital for the remaining years.

  7. I’m OK with loan forgiveness for government jobs. Its basically a job benefit for working with the govt. and a way to attract highly educated professionals to take government work.

    I don’t see why a nurse working at a non-profit hospital should get loan forgiveness over a nurse working at a profit hospital. And does not-for profit providing public education include Harvard? Or is public education specific to k-12 or free education or something? I think they should tighten who qualifies some.

    $12 billion over 10 years is a fairly small amount compared to the $1 trillion in student loan debt.

  8. My (then) fiancee looked at this and even switched to an income based repayment plan as a result. However, when we started looking at our incomes after we were married, our required monthly payments would have been jacked through the roof.

    Even looking at married-filing-separately wasn’t an option considering it would have saved the PSLF eligibility but at an enormously larger tax bill for my side.

  9. It should be clarified that the PSLF program and the IBR and REPAYE programs are separate programs. PSLF doesn’t limit your payments to 10% of your income. It is the revised IBR and REPAYE programs that limit your payment to 10% of discretionary income. Although most people wanting to use PSLF are in IBR or REPAYE since if you used the standard 10 year repayment plan there wouldn’t be anything left to forgive at the end of 10 years.

    Also, I’m on IBR and pay 15% of my discretionary income since I signed up for the program before they changed the cap to 10%. So not everyone who qualifies for PSLF will have only been paying 10% of their discretionary income. There are also other scenarios where it is possible for someone to pay more than 10% of their discretionary income, such as someone who was on the standard plan for a couple of years while working in public service and then switched to IBR or REPAYE.

    I don’t work in public service and don’t foresee that changing so I doubt I’ll ever qualify for PSLF. I am planning to change my repayment plan from IBR to REPAYE. Amounts forgiven under IBR and REPAYE are taxable so I’ll have a large tax bill when the repayment period ends.

  10. In order to consciously take advantage of this program – your 10 year plan needs to include you not making much money in the non-profit sector – so I think that really eliminates most kinds of people that are looking to defraud or even legally “game” the system. It’s just not appealing to them.

    That leaves people who know their profession won’t get them high salaries even after 5, 7, 10 years of working – teachers for example – which I don’t think many people would find problematic or disturbing.

  11. The real loophole is that IF you qualify, they tell you that you do not. Then, they set you up with a repayment plan through which You pay off your student loans in 10 years. Ummm… I have over $50,000 in debt and my husband has $60,000. That’s after paying them off for 15 years while working in public service. There is no way we could pay the rest off in 10 years. If we could afford $950 a month in student loan repayments, we wouldn’t be applying for forgiveness.

    That’s what you get for being a teacher in a school district that’s poor, but not poor enough to count. 🙁 As a result, my loans will be paid off in 2034. His are expected in 2041. It’s 2018 right now. We will be nearing retirement age with no retirement savings because of this.

    And I got zero student loan counseling. I was given a form my first day of school and told, “If you don’t sign this, you can’t go to school here.” I wish I could go back and tell my 18 year-old self what she was getting into.

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