As a college graduate, getting started in your career and planning for your financial future should be top priorities. For 44 million college graduates , part of this includes repaying student loans. The average college student graduates with approximately $37,172 in student loan debt.
Repaying student loans can cost a substantial amount of money when you factor interest into the equation, but if you’re planning on working for a non-profit organization or a government agency, public service loan forgiveness could save you years’ worth of payments. But federal loan forgiveness is not necessarily for everyone.
Another option is potentially refinancing your student loans at a lower interest rate—an appealing way to save money over the life of your student loan, especially if you don’t qualify for public student loan forgiveness.
As with any loan option, there are pros and cons to the Public Service Loan Forgiveness (PSLF) program. You’ll have to decide if it’s right for you or if refinancing your loans could be a better option for your finances in the long run.
What Is Public Service Student Loan Forgiveness?
Also known as PSLF, the Public Service Student Loan Forgiveness is a federal program that may forgive or cancel the remainder of your Direct Student Loans if you work in a qualifying public service job and meet certain stringent criteria, including making 120 qualifying monthly payments. There is no cap on how much can be forgiven, so if you are able to meet the criteria, the rest of your loan goes away.
What Are Public Service Loan Forgiveness Qualifying Jobs?
The first step to qualifying for any kind of federal loan forgiveness program is filling out the employment certification form . Often people wait until after a few years of making payments before filling out the employment certification form, only to then find out those payments didn’t qualify because their job didn’t meet the requirements.
In general, PSLF qualifying jobs are more about the employer than about the specific role you’re filling at the organization. The important thing is that the employer qualifies as a public service organization.
That includes government organizations and 501(c)3 tax-exempt non-profit organizations. There are a few non-profit organizations that are not officially 501(c)3 but still qualify—but only if they provide certain types of qualifying public services. Working as an AmeriCorps or Peace Corps volunteer also counts as a qualifying job.
Employers that don’t qualify—even though working for them can include meaningful and important jobs: Labor unions, partisan political organizations, non profit organizations that are not official 501(c)3 tax-exempt organizations, and any for-profit companies.
You also must be working full-time in the qualifying job, which generally means at least 30 hours per week or whatever your employer’s definition of full-time is.
Other Requirements for the Public Service Loan Forgiveness Program
There are a number of other requirements and specifications necessary to qualify for public student loan forgiveness. For example, only Direct Loans are eligible for PSLF.
If you have other kinds of federal student loans, particularly if you borrowed before July 1, 2010, then you may be able to consolidate your federal student loans into one qualifying federal Direct Consolidation Loan.
However, none of the payments you might have made on your Direct Loan before consolidation will count toward your 120 monthly qualifying payments.
The slightly more confusing part of the requirements are the 120 monthly qualifying payments. These do not necessarily need to be consecutive—if you leave a qualifying employer, you do not lose credit for previous payments you may have made under the employer.
The payments do have to be on qualifying repayment plan, however. Generally, to qualify for federal loan forgiveness programs, you need to be on an income-driven repayment plan. There are four different kinds offered, with the most desirable being the Pay As You Earn Repayment Plan (PAYE) and the Income-Based Repayment Plan (IBR). These typically set a cap on how much your monthly student loan payment will be based on how much you’re currently earning.
For example, if you’re on the Income-Based Repayment Plan, then your monthly payments will be either 10% or 15% of your discretionary income (depending on when your loan was disbursed), but never more than your payment would have been under the standard federal 10-year repayment plan. Your discretionary income is calculated each year based on your family size, location, and salary.
If you’re making income-based payments each month, then it might take longer to pay off your loan because your repayment term will be longer (20-25 years for IBR and 20 years for PAYE), and you’ll be paying interest during that whole time—which adds to the total amount you’ll end up paying.
However, if you meet all the requirements and make the payments, then you could ultimately have your loan forgiven. But even after you’ve made all the 120 qualifying monthly payments, you do not automatically get loan forgiveness or have the rest of your loan cancelled. You still need to apply.
Is Loan Forgiveness Right for You?
While loan forgiveness seems like the ultimate dream, there are downsides, too. Income-driven repayment plans are, obviously, tied to your income.
That means if you have a large loan but a small income and are making very small payments on your student loan, then you could end up paying more over the life of the loan as the interest compounds and gets added to the remaining balance.
If for some reason you make the 120 qualifying monthly payments but then aren’t able to get the remainder of your loan forgiven, all that extra interest could end up costing you. And, unfortunately, many students find it challenging to get their loan forgiveness application officially approved.
Another downside is that your loans have to remain as federal direct loans in order to qualify for potential forgiveness. That means you cannot consolidate or refinance them as private loans, even if the lower interest rates might save you money.
For example, the federal interest rate for undergrad Direct Loans is set at 5.05% through June 30, 2019. A $37,000 federal loan, paid back over 10 years, with a monthly payment of $393, would end up costing you about $10,202 in interest payments on top of the principal. That’s a lot of money.
Student Loan Refinancing with SoFi
And, of course, there’s the fact that if you want to pursue a career that doesn’t fall under the public service definition, then you might want to consider other student loan repayment options, like refinancing. When you refinance your student loans, you take out a new loan—potentially with a new interest rate or loan term.
Depending on your earning potential and credit score, you could qualify for a lower interest rate, which might reduce the amount you pay in interest over the life of the loan.
When you refinance with SoFi, there are no origination fees or prepayment penalties. And if you lose your job, you could qualify for Unemployment Protection, which allows you to put your loan into forbearance for a cumulative total of 12 months.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.