Why Public Service Student Loan Forgiveness Might Not Work for You
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Public service student loan forgiveness sounds like a promising solution to some borrowers who don’t know how they’re going to pay back their student loan debt.
However, over the years I’ve heard so much misinformation about student loan forgiveness that I don’t think it’s all it’s cracked up to be.
Back when I was in college and talking to a co-worker about struggling to pay for my classes and a study abroad program, her response was “Don’t worry, just take out student loans and have them forgiven.” I’m so happy I didn’t listen to that blind advice because, in all honesty, public service student loan forgiveness won’t work for most people.
What Public Service student Loan Forgiveness Is
There are different student loan forgiveness programs but the most common one is the Public Service Loan Forgiveness (PSLF) program.
According to StudentAid.gov, the PSLF program forgives the remaining balance on your Direct loans after you have made at least 120 qualifying monthly payments under a qualifying repayment plan while working for a qualifying employer. That sounds like quite a few qualifications, and it is; I’ll share some details on them later.
PSLF was first implemented in 2007 and the 20-year forgiveness term for income-based repayment plans began in 2014. That said, while people think they are a way to pay off student loans faster, few if any borrowers have been able to take advantage of these programs.
Public service student loan forgiveness is not just for anyone and you may not qualify, so you shouldn’t assume it will be there to pay off loans you are considering taking.
Here are four situations where public service student loan forgiveness might not work for you.
1. You’re Not Willing to Wait a Decade or Longer For Forgiveness to Kick In
In order to qualify for PSLF, you’ll need to make at least 120 qualifying monthly payments under an income-driven repayment plan which adds up to about 10 years worth of payments.
The 120 payments must be made when you’re working full-time (at least 30 hours a week) for a qualified employer including:
- Government organizations (federal, state, local)
- 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
Ten years is a long time, and anything can happen. If you sign up for deferment or forbearance, you won’t be able to make qualifying payments and while you can always pick back up where you left off if you land full-time work again with a qualifying employer, it will take you longer to become eligible for forgiveness.
Not to mention, with the Pay as You Earn (PAYE) student loan repayment plan, you’ll need to make qualifying payments for at least 20 years before becoming eligible for student loan forgiveness.
Over that length of time, your student loan balance could grow while you continue to make the minimum payment and wait around for forgiveness to hopefully kick in. This could affect your debt-to-income ratio if you choose to look into buying a house one day, or any other situation where you might need to borrow money.
If you could save more money by paying off your debt faster, it may make more sense financially not to wait around for loan forgiveness options, especially if you don’t want to be mired in student loan debt for the next 10-20 years.
2. You Can’t Afford to Make Student Loan Payments
For some reason, many people believe that student loan forgiveness is a great escape route to take if you don’t want to pay back your loans or can’t afford to.
This myth couldn’t be further from the truth. Not being able to afford to pay back your student loans won’t automatically qualify you for forgiveness.
You must meet all the other requirements first and have taken out Direct student loans to qualify for PSLF. Plus, student loan forgiveness is not a quick “solution.” If you can’t afford to make payments now, thinking about forgiveness 10 years later is pretty irrelevant.
If you’re experiencing extreme financial hardship and you have federal student loans, you could change your repayment plan to lower your minimum payment or you could apply for deferment or forbearance to pause your student loan payment requirements while you get back on your feet financially.
If you have private student loans, you can consider consolidation or refinancing, or talk to your lender to see if they can provide you with any other relief options like lowering your minimum payment or interest rate.
If you tell your lender that you’re thinking about refinancing with another lender, they may be willing to compromise on your interest rate so you can continue paying them.
3. You Want to Switch Career Fields
In order for your loan payments to qualify you for forgiveness, they need to be made while you’re working for an approved employer.
If you choose to switch careers (to an disqualifying field) or start a business, you won’t be eligible for forgiveness anymore. According to the Bureau of Labor Statistics, people tend to change jobs at least 11 times throughout their career.
This is why it’s so important to really consider whether you want to work in the public service field for 10-20+ years. Ten years is a long time to spend at a job that you’re not happy with, which is why if you have to leave and start working with an disqualified employer, you won’t be able to count on student loan forgiveness to pay off your student loan debt.
All of this points out the larger need to think through what you can afford to pay toward your student loans before, during and after you take them out and what your future employment situation will be as they are important questions to ask when paying off debt.
4. You Can’t Afford the Big Tax Bill
Let’s say you really don’t mind making the 120 qualifying payments and you’re happy in your career with a job that qualifies for PSLF.
If your loans are forgiven years down the road, the remaining balance will be counted as taxable income and you’ll need to pay up promptly.
Over time, you’re bound to earn more money, which could put you in a higher tax bracket. If you have a remaining loan balance of $30,000 that gets forgiven and that balance being counted as income bumps you up to the 28 percent tax bracket, you’ll have to pay an additional $8,400 in taxes that year.
Yes, that’s much better than having to pay back $30,000 in student loans, but the IRS doesn’t have super flexible payment plans like the Department of Education. Plus, that’s still a lot of money to pay in one year. That money may be better spent saving, investing in retirement, funding a vacation or wedding or on house updates.
If you pay your student loans off at a steady rate and avoid stretching out your payments, you can avoid such a huge tax bill and possibly save some money on interest as well.
At the end of the day, student loan forgiveness is not a quick fix and it won’t be a promising option for most people. Even if you are considering the Public Service Student Loan Forgiveness program, realize that the rules can change and that program can be wiped out completely before you’re able to have your student loans forgiven.
This is why it’s great to have a backup plan. If you can’t pay back your student loans super fast, just stick with a standard repayment plan and lower your expenses or earn extra money to ensure you’ll be able to pay back your loans and avoid some of the drawbacks of loan forgiveness.
What methods have you used to try and pay off student loans faster? Have you looked in to public service student loan forgiveness and, if so, have you been successful? Are you working to pay off your loans fast, or are you taking the slow and steady approach?