What to Expect for Student Loan Forgiveness
Government analysts, charity supervisors, Peace Corps workers—most likely, these people genuinely care about serving others. But there may be another contributing factor to their career choices: the prospect of having their federal student loans forgiven.
Public service workers with federal student loans may qualify for the Public Service Loan Forgiveness (PSLF) program. As a reward for serving their communities, eligible borrowers may have the remainder of their federal student loans forgiven after they make qualifying payments for 10 years.
President Trump recently introduced his budget proposal for Fiscal Year 2021 , which runs from October 1, 2020, to September 30, 2021. He is recommending numerous changes to the ways the federal government currently spends money, and one of those changes is cutting programs from federal agencies.
Trump’s suggestion to completely eliminate the Public Student Loan Forgiveness program is one of the most controversial parts of his budget proposal.
The decision to slash this program isn’t definite. Passing a federal budget is a multi-step process, and the next step is for Congress to analyze Trump’s proposal. After they assess his recommendations, the Senate and House of Representatives will each draft their own proposed changes that will be reviewed by a conference committee.
Nixing the federal student loan forgiveness program is definitely on the table, though. So, why is Trump planning to eliminate this program, and if Congress approves this suggestion, what will it mean for the future of student loan repayment?
How the Public Student Loan Forgiveness Program Works
The Public Service Loan Forgiveness program is for college graduates who go into certain public service professions. Qualifying jobs include not-for-profits that meet certain criteria, Peace Corps, AmeriCorps, or roles at most any level of government.
To qualify for federal student loan forgiveness, people must work full-time in an eligible field while making monthly, on-time, qualifying student loan payments for 10 years, or 120 payments. A “qualifying payment” is the minimum amount due each month when someone is enrolled in an income-driven repayment (IDR) plan.
IDR plans benefit low-income borrowers, and because public service jobs often pay less than private sector positions, these plans can keep minimum payments low while borrowers work toward PSLF.
(The standard repayment plan technically qualifies for PSLF even though it isn’t an IDR plan. But it’s designed to pay off borrowers’ entire balances in 10 years—so after making 120 payments, there wouldn’t be a balance for the government to forgive.)
When people enroll in IDR plans, their loans can be forgiven after 20-25 years. However, borrowers using IDR plans to qualify for PSLF can qualify to have their loans forgiven earlier, after only 10 years.
Borrowers can choose from four types of IDR plans.
• Revised Pay As You Earn Repayment (REPAYE) Plan: Monthly payments are typically 10% of a borrower’s discretionary income.
• Pay As You Earn Repayment (PAYE) Plan: Like the REPAYE plan, PAYE payments are typically 10% of borrowers’ discretionary income. People must meet certain qualifications to enroll, such as proving financial need. Graduate and professional student loans can be forgiven earlier under the PAYE program as compared to the REPAYE program, but that doesn’t really apply for people who enroll in IDR to qualify for Public Service Loan Forgiveness. So don’t stress about the differences between the REPAYE and PAYE plans!
• Income-Based Repayment (IBR) Plan: These payments are typically 10%-15% of people’s discretionary income.
• Income-Contingent Repayment (ICR) Plan: People typically pay either 20% of their discretionary income or the amount they would pay if they spread their loan amount evenly over 12 years.
Remember, federal student loan forgiveness only applies to Direct Loans, which are federal student loans. Neither private student loans nor parent PLUS loans qualify for the program.
If borrowers qualify for PSLF and follow the guidelines for enrolling in the Public Service Loan Forgiveness program, the remainder of their federal student loans can be wiped away after 10 years.
Federal student loan borrowers can submit an Employer Certification form to FedLoan Servicing every year to make sure they’re on the right track to qualify for PSLF.
Why the Government Might Cut the Public Service Loan Forgiveness Program
Strict rules on which jobs qualify for forgiveness? Four types of IDR plans? The Public Service Loan Forgiveness program can be complicated.
Not only is the program complex, but it also appears to be quite flawed. As of September 2019, 136,473 people had applied for PSLF, and only 1,561 of those applicants had been approved for forgiveness—that’s just 1.14%. The Department of Education cites disqualifying payments, missing application information, and ineligible loans as the top reasons applications are denied.
It seems that borrowers struggle to navigate the intricate system, even with the Employment Certification form. Unsurprisingly, people who have dedicated years to qualifying for federal student loan forgiveness only to be rejected aren’t too happy about how the program works.
President Trump’s proposal aims to make student loan forgiveness—and student loan repayment in general—simpler. The proposal suggests removing the Public Service Loan Forgiveness program and the four types of IDR plans, and replacing them with one new IDR plan. This new plan would forgive undergraduate federal student loans after 15 years of qualifying payments.
Of course, President Trump is looking after the government as well as student loan borrowers. Trump’s proposed budget would cut $5.6 billion from the Department of Education to limit government spending, and the PSLF program falls under that cut.
The Good and Bad of Cutting the Public Student Loan Forgiveness Program
The Pros of Cutting PSLF
Removing the Public Service Loan Forgiveness program and the four IDR plans to replace them with one IDR plan could make the student loan repayment process easier for borrowers. If they can understand the new process, hopefully they can qualify for forgiveness and avoid penalties.
Also, many hopeful participants aren’t exactly thrilled about the low acceptance rate. What happens to people who have made minimum payments for years, only to find out their employer didn’t qualify or they missed one monthly payment and are disqualified?
Some of these people could have paid off all or most of their loans if they hadn’t been counting on forgiveness. But when they’re rejected, years of accrued interest result in a relatively high balance. Scrapping PSLF and its frequently confusing requirements and replacing it with a streamlined alternative could help eliminate these types of unfortunate incidents.
Introducing one new repayment plan might encourage borrowers to pursue a higher-paying career they’re more passionate about than public service. With higher income, some people could afford to pay off their loans in full rather than hold onto debt for 15 years while waiting for forgiveness.
Maybe a borrower takes a job in the state budget office that would qualify them for public student loan forgiveness, but they’d rather be an accountant or finance writer. If they aren’t rewarded for working in public service, they may choose a different job and still qualify for loan forgiveness in 15 years.
The Cons of Cutting PSLF
The flip side of the coin is that eliminating the PSLF program could discourage borrowers from going into public service. People have been rewarded for becoming firefighters, first responders, police officers, government employees, prosecutors, and public defenders—but now those incentives could go away. And as much as someone may care about helping others for a living, the reality is that they have bills to pay.
Eliminating the program could also discourage borrowers from staying at a job in an underserved profession or location for a long period of time—especially younger workers. Millennials change jobs at three times the rate of older generations, and millennial turnover costs the US economy around $30.5 billion per year.
Without Public Service Loan Forgiveness, a firefighter might switch to a less grueling position after two or three years rather than stay for a decade.
People who had hoped to enroll in Public Service Loan Forgiveness will have to make payments for five more years than they planned if Trump’s proposal goes through. The current program allows loans to be wiped away after 10 years, but his proposed plan forgives loans after 15 years.
However, this could be a better situation for workers enrolled in IDR plans that don’t lead to Public Service Loan Forgiveness. The four current IDR plans forgive loans after 20-25 years.
Under Trump’s proposed IDR plan, qualifying borrowers would probably have to pay taxes on their forgiven loans. Currently, borrowers pay taxes on forgiven loans under IDR plans but not under the Public Service Loan Forgiveness program. That tax benefit would likely go away if Trump’s proposal is passed.
Paying off Student Loans More Quickly
Regardless of whether Trump’s budget proposal is passed, borrowers may want to reassess their payment amounts to ensure they’re on track for their repayment goals. By using SoFi’s student loan payoff calculator, people can provide their loan amount, interest rate, and monthly payment information to get an estimate of the date they could pay off their loans.
After looking at the results, they may decide they’re happy with them, or choose to increase their payment amounts or switch repayment plans altogether.
Borrowers who have private student loans or don’t plan to enroll in a federal student loan forgiveness program might consider refinancing their student loans. By refinancing, people take out one new student loan with one interest rate.
When borrowers refinance, they can choose between reducing their monthly payments now by lengthening the term of their loan, or paying less in interest in the long run by shortening their term. However, it is important to remember that when you refinance your federal student loans with a private lender, it will make you ineligible for federal programs like PSLF and IDRs in the future.
Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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