Navigating the Maze of Student Loan Forgiveness

The Department of Education announced a short-term opportunity for expanded loan forgiveness in an effort to remedy the past administrative failures and inaccuracies of the federal forgiveness program. The changes, which will impact the Public Service Loan Forgiveness (PSLF) and Income-Driven Repayment (IDR) or long-term forgiveness programs, are expected to bring millions of borrowers closer to student loan forgiveness. However, deciphering the eligibility requirements can be very confusing for borrowers.

Below is a guide to understanding PSLF and IDR forgiveness, the waivers, next steps for borrowers, and the tax implications of each program.

Public Service Loan Forgiveness (PSLF)

The Public Service Loan Forgiveness (PSLF) Program, established in 2007, is a federal program designed to forgive student loan debt for borrowers who are employed by government (i.e., federal, state, local or tribal) and non-profit organizations (i.e., 501(c)(3)), such as teaching, firefighting, nursing, public interest law, military members and other public service workers.

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How does PSLF work?

PSLF erases or forgives the remaining balance on federal Direct Loans after a borrower has made 120 qualifying monthly payments while working full time (or a minimum of 30 hours per week) for a qualifying employer. In addition, borrowers must be on an Income-Driven Repayment (IDR) plan in order to benefit from PSLF (we’ll talk more about this later).

Private student loans are not eligible for Public Service Loan Forgiveness. Parent PLUS loans are also ineligible unless the borrower has the ability to do a double consolidation. Federal Family Education Loans (FFEL) (typically loans made prior to July 1, 2010) and Federal Perkins Loans do not qualify either, but may become eligible if they are consolidated into a Direct Consolidation Loan by Oct. 31, 2022.

In summary, as long as a borrower has met the following PSLF requirements, the remaining balance on the loan will be forgiven:

1. Work full time for a qualifying employer
2. Made 120 qualifying payments
3. Have federal Direct Loans
4. Enrolled in an Income-Driven Repayment plan

What is the Limited PSLF Waiver?

Public Service Loan Forgiveness (PSLF) has undergone temporary changes due to the COVID-19 national emergency, which are highlighted below.

• First, all federal student loan payments have been put into forbearance and interest waived for a total of six times since March 2020 (thanks to the passing of the CARES Act by Congress) and currently no payments are due through Aug. 31, 2022.
• Second, Congress created the Temporary Expanded Public Service Loan (TEPSLF), which allows payments made under the graduated and extended repayment plans to count toward forgiveness, provided that the payments made during the last 12 months were at least as much as they would have been under an income-driven repayment plan.
• Third, on Oct. 6, 2021, the U.S. Department of Education issued a limited waiver through Oct. 31, 2022, during which borrowers may receive credit for payments that previously did not qualify for PSLF. The Limited PSLF Waiver qualification expands which payments will count toward forgiveness, as long as the borrower has worked full time for a qualified employer.

What do borrowers need to know about the Limited PSLF Waiver?

Under the Limited PSLF Waiver, the following types of payments now count toward PSLF (or TEPSLF) if certified before the waiver expires, as long as the borrower worked for a qualifying employer during the review period:

• Late payments and partial payments: Payments made in the past that were rejected because they weren’t considered on time or only partial payments now receive credit.
• Payments made under any repayment plan. Any payments made toward federal loans, regardless of the payment plan the borrower was on, now count (previously in order for borrowers to be eligible for forgiveness, they had to repay their loans under an IDR plan).
• Consolidated non-Direct Loans. Payments made on a Federal Family Education Loan (FFEL) or Perkins loan prior to the consolidation will also count toward PSLF.

In addition, the Department of Education will review PSLF applications that were previously rejected or denied. The department will also reach out to borrows who are now eligible to receive PSLF but haven’t applied to make them aware of the temporary changes.

Limited PSLF Waiver: Who does it impact, and what do borrowers need to do next?

The waiver impacts borrowers with Direct Loans, those who have consolidated into the Direct Loan Program, and those who plan to consolidate into the Direct Loan Program (because they currently have a FFEL Program loan, Perkins loan, or other federal student loan) by the Oct. 31, 2022, deadline.

Next Steps:

1. Verify loan types. If the borrower has at least one FFEL Program loan, Perkins loan or other federal student loan, they must consolidate those loans into a Direct Consolidation Loan by the October deadline to benefit from the waiver. Borrowers can log in to studentaid.gov to verify their loan type and to consolidate their loans if applicable. Please note: While consolidation is required to receive credits under the waiver, it may not be the right choice for all borrowers. For example, borrowers with incomes that exceed the amount of student loan debt they have may lose the ability to cap their payments at the standard 10 year plan level. Thus, it’s important to learn what consolidation will mean for you, as you cannot undo a consolidation. Contact your servicer to determine if this is the right option for you.
2. Select an Income-Driven Repayment plan. Once the loans are consolidated, the borrower must select an IDR Plan (discussed in the next section).
3. Certify eligible employment. Once the borrower consolidates into a Direct Loan if they haven’t already done so or if they already have a Direct Loan, complete the PSLF Employer Certification Form to receive credit toward PSLF. If they have multiple periods of qualifying employment, they must complete the form for each qualified employer. Use the PSLF Help Tool to generate a pre-populated form by logging in to studentaid.gov. They should have their employer sign the certification and submit the completed form to MOHELA by the Oct. 31 deadline.
4. Track payments. Borrowers should keep proof of their payments and make sure their servicer has the correct number of payments. Also, set a reminder to submit an updated PSLF form certifying their full-time qualifying employment each year. This aids in verifying their progress toward PSLF.
5. Apply for forgiveness. Once the borrower has met all of the requirements, submit the Public Service Loan Forgiveness application.

What are the tax implications of PSLF?

Generally speaking, any debt that is canceled or forgiven is taxable to the borrower. This means that the canceled or reduced debt would be reported on the borrower’s tax return as if it were earned income, which could result in a substantially high tax bill for large balances that are forgiven. However, student loan debt that is forgiven under PSLF is an exception to the rule – the forgiven amount is not taxable on the federal tax return. But, some states treat student loan forgiveness differently. Although most conform to the federal tax laws, borrowers who obtain student loan forgiveness are strongly encouraged to consult with their tax adviser regarding any potential tax liability.

Alternatives to PSLF

Not everyone will qualify for Public Service Loan Forgiveness (PSLF) and fortunately, it’s not the only federal student loan forgiveness program. Examples of other common forgiveness programs include the Teacher Loan Forgiveness Program, other profession specific forgiveness programs (i.e., attorneys, dentists, medical doctors, nurses, etc.), and military member forgiveness programs.

If borrowers don’t qualify for any of these programs, they may qualify for forgiveness under an Income-Driven Repayment Plan, which is discussed below.

Income-Driven Repayment (IDR) Plans

Income-Driven Repayment (IDR) plans are designed to make student loan debt more manageable, as it results in a lower required monthly payment.

How does an IDR plan work?

When borrowers take out a student loan, the federal government will automatically set them up on the Standard Repayment Plan, which consists of 10 years of fixed monthly payments. While this repayment plan is often the most efficient, it can also require a higher monthly payment than IDR plans.

IDR payments reduce the borrower’s payment because they are based on the borrower’s income and family size. Depending on those factors, a borrower’s monthly payment will be a percentage of their discretionary income, ranging from 10%-20%, and their repayment terms are extended to 20 or 25 years. Qualifying IDR plans include:

• Income-Based Repayment Plan (IBR)
• Income-Contingent Repayment Plan (ICR)
• Pay As You Earn Repayment Plan (PAYE)
• Revised Pay As You Earn Repayment Plan (REPAYE)

Once the repayment term has ended, borrowers will be eligible for student loan forgiveness for the remaining balance, if any.

What is the Income-Driven Repayment Waiver?

As discussed above, the Department of Education enacted the Limited PSLF Waiver, which enables borrowers to receive credit for payments that previously did not qualify for PSLF, provided the borrower worked full time for a qualifying employer during the period under review.

Similarly, on April 19, 2022, the department also implemented the IDR Waiver Program, which broadens or extends help to a larger group of borrowers by granting credit toward IDR forgiveness for certain types of deferments, long-term forbearances and any repayment plan.

What do borrowers need to know about the IDR Waiver?

Below are the changes that borrowers on an IDR plan need to be aware of:

• The Department of Education will make a one-time adjustment to count certain long-term forbearances toward IDR and PSLF. Long-term forbearances are defined as forbearance periods of 12 consecutive months or longer and forbearances of 36 cumulative months or longer (Note: Forbearance periods provided by the COVID-19 Emergency Relief do not count toward these months).
• The department will also make a one-time revision of payments made on any loan toward IDR forgiveness, regardless of loan type or payment plan, including payments made prior to consolidation.
• Also, months spent in deferment prior to 2013 will count toward IDR forgiveness (with the exception of an in-school deferment).
• Additionally, borrowers who have accumulated time in repayment of 20 or 25 years will see automatic forgiveness, even if they are not on an IDR plan.

In short, borrowers who have already made significant progress on an IDR plan could see an automatic loan cancellation after the payment-count revision is completed.

IDR Waiver: Who does it impact, and what do borrowers need to do next?

As with the Limited PSLF Waiver, the IDR Waiver impacts borrowers with Direct Loans, those who have consolidated into the Direct Loan Program, and those who plan to consolidate into the Direct Loan Program.

Next Steps:

These borrowers need to consolidate into the Direct Loan Program before Jan. 1, 2023, (not by Oct. 31, 2022, like for those pursuing PSLF) and select an IDR plan. Again, it’s important to contact your servicer to determine if a consolidation is the right option for you.

Once enrolled in an IDR plan, borrowers won’t need to take any further action to qualify for the waiver. However, it’s important to keep in mind that borrowers who are impacted by the one-time revisions most likely won’t see the impact of these changes reflected in their accounts until fall 2022.

In the meantime, it is imperative that borrowers keep an eye out for any new information or account changes with their loan servicers.

What are the tax implications for IDR Forgiveness?

Unlike those pursuing forgiveness under the PSLF program, any remaining balance that is forgiven under an IDR plan is considered taxable income. This means that the amount forgiven will be treated as if the borrower earned that sum of income during the previous tax year, which results in additional income tax. As one can imagine, this “tax bomb” can create quite a hefty tax bill for those with a large amount of debt forgiveness. Thus, it is important to discuss how to adequately prepare for the tax hit with a tax and/or financial professional.

However, there is one caveat – thanks to a provision in the American Rescue Plan Act, any amount forgiven under an IDR plan between Dec. 31, 2020, and Jan. 1, 2026, will not be subject to taxation.

Final Words

Don’t delay! Borrowers should give themselves plenty of time to consolidate their loans and to complete the PSLF form, if applicable. Remember, the deadline to consolidate and submit the PSLF form is Oct. 31, 2022, unless the borrower is pursuing forgiveness under an IDR plan – in this case, borrowers should consolidate before Jan. 1, 2023. The processing of the consolidations and employer certifications (if applicable) take time – so, don’t wait until the last minute!

For more information, the borrower should reach out to their loan servicer with any questions or concerns, check the studentaid.gov website for updates, review the resources below, and/or consider consulting with a Certified Student Loan Specialist or a financial professional who specializes in providing student loan repayment assistance.

Public Service Loan Forgiveness (PSLF)

Public Service Loan Forgiveness FAQ

Income-Driven Repayment and Public Service Loan Forgiveness Program Account Adjustment