By Becca Craig, CFP®
Call it cliché, but 2020 has proven to be THE definitive year of “unprecedented times,” and its implications for the Public Service Loan Forgiveness (PSLF) program proves no exception.
While no one’s crystal ball of financial forecasts could have anticipated the coronavirus pandemic or the various relief acts and executive orders to follow, the resulting combination of economic and political factors directly and definitely impacted hopeful borrowers pursuing public service loan forgiveness.
Given the PSLF program’s ongoing implementation problems, and the uncertainty that many of its participants face, a solid understanding of developments over the past few months is absolutely essential for borrowers seeking forgiveness through it.
But let me begin with a little background. Established in 2007, the PSLF program is a federal entitlement (similar to Social Security retirement benefits) that requires the Education Department to “cancel the balance of interest and principal due” for qualifying loans after borrowers make 120 qualifying payments via eligible repayment plans while working for qualifying employers among various other requirements. More plainly, borrowers can exchange 10 years of public service for an income-tax-free clean slate on their student debt.
Events this year, however, have affected how borrowers interact with the PSLF program and prompted some adjustments to its rules, the ramifications of which you’ll need to consider when building a concrete action plan for the remainder of 2020.
The Road So Far: 2020 In Review
The March 2020 CARES Act granted federal student loan borrowers an interest-free pause on payments through September 30, but that relief has been extended through December 31 in a presidential memorandum signed on August 8, before the current automatic forbearance period ends.
Another provision of the CARES Act allowed borrowers to set their monthly payment to $0 (non-payments). For borrowers enrolled in the PSLF program and working full-time for qualifying employers, $0 payments still count toward the 120 payments required for forgiveness, per U.S. Secretary of Education Betsy DeVos.
Action Items for PSLF Borrowers
Student loan servicers automatically applied payment suspension and interest rate reduction to accounts in March of this year. However, borrowers are encouraged to stay calm and carry on (with the facts), then consider taking additional proactive steps to create a powerful PSLF payment readiness plan. Factors to consider include:
Furloughs and part-time employment may still count toward PSLF. The Department of Education had not issued an official statement about furloughed employees’ PSLF payments (at least as of September 2020). In general, if the borrower is considered by their employer to be full-time during a temporary furlough, payments ought to apply toward loan forgiveness. (That is, a furlough is no different from other forms of unpaid leave.) Borrowers will have to rely on their employer’s willingness to certify their full-time employment. If a borrower is employed part-time by two or more qualifying PSLF organizations with at least 30 combined working hours per week, payments would still count toward their PSLF program total if all the employers involved certify the applicant’s employment.
Some tools are off-kilter. The Department of Education’s PSLF tool helps borrowers understand more about the program and what to do to get their loans forgiven. As a broad rule, any otherwise eligible forgivable loans in forbearance do not qualify. Currently, per the CARES Act, all loans are categorized in forbearance status, so the tool may falsely inform borrowers that eligible loans are ineligible. This is a programming issue, and it does not reflect a problem with a borrower’s eligibility or the PSLF program.
Payments won’t be applied to the PSLF total until after December 31. Some observers noticed FedLoan’s lag time in updating borrowers’ payment count. Your loan servicer may have yet to include some or all forbearance period payments in your total PSLF payment count. FedLoan may wait to update everyone’s payment totals in one fell swoop when the CARES Act interest freeze ends. Make sure to stay vigilant, and follow up with your loan servicer to ensure your credit is duly noted.
Get all your ducks in a row. File your annual Employer Certification Form (ECF) and recertify your income-driven repayment (IDR) plan now, especially if you’ve experienced a change to your financial circumstances due to a job transition, part-time employment, furlough, or other reduction in income. Borrowers can apply for a loan repayment recalculation at any time. While the Education Department will officially waive payments through Dec. 31, taking action sooner, rather than later, could secure borrowers a revised (and potentially more affordable) lower payment for the months that follow. For PSLF seekers, this is much preferred to requesting voluntary repayment deferrals or (non-CARES Act) forbearance, which could jeopardize qualification for eventual loan forgiveness. It’s best to stay the course, and on the wagon.
Assemble your team and make a plan. Meeting with a tax advisor now to devise an optimal 2020 tax filing strategy is a solid plan. The IDR monthly minimum payment is ultimately determined by Adjusted Gross Income (AGI). (Calculations vary among the qualifying repayment plans.) This has led some borrowers seeking PSLF to file their income taxes married filing separately (MFS) versus married filing jointly (MFJ). (Note: REPAYE incorporates both spouses’ income – no ifs, ands or buts. No exceptions.)
True, filing separately from one’s spouse would eliminate their income from the payment calculation. After all, the goal (should you be aiming for loan forgiveness through the PSLF program) is to pay the lowest monthly payment possible. It’s irrelevant if the loan balance accumulates interest over time, as eventually the entirety of the loan receives forgiveness after 120 qualifying payments.
As with most everything involving tax code, logic does not always prevail. For most, though, the costs of this strategy – that is, filing MFS – outweigh its benefits. For instance, if you are married, you must file MFJ to deduct student loan interest or receive education credits or deductions. In addition, MFS reduces a taxpayer’s child tax credit, eliminates the FSA Care credit, and effectively prevents contributions to an IRA or Roth IRA (phase out at $10,000 AGI). When comparing filing methods, it’s important to attribute income, deductions and PSLF payments to each spouse. By having strategic discussions with a tax professional now, borrowers can better prepare for and minimize future student loan payments for the purpose of PSLF.
The path borrowers trek to obtain loan forgiveness under the PSLF program is by no means a cakewalk. Despite the roadblocks and hazards 2020 has presented, by better understanding the current direction of the PSLF program and available proactive measures, borrowers can adapt to increase their chances of and confidence in arriving safely at their destination.
About the author: Becca Craig, ABA, CFP®
Becca Craig, Associate Wealth Advisor with Buckingham Strategic Wealth, combines wealth management expertise with her background in public policy and risk management to better educate individuals using a holistic approach to financial wellness. A champion and advocate of evidence-based planning, Becca enjoys making people's money work for them—not against them—so they can focus on the people, endeavors, and causes they care about most. Becca is a graduate of Washington University in St. Louis and enjoys yoga, gardening, and political activism in her free time.
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