3 Major Changes to Public Service Loan Forgiveness (PSLF) Program for Student Loan Borrowers
by Rob Stoll, CFP®, CFA Financial Advisor & Chief Financial Officer / October 18, 2021
On October 6, 2021, the Department of Education announced 3 major changes to the Public Service Loan Forgiveness (PSLF) program that make it a lot easier to get student loans forgiven. While this doesn’t help all borrowers struggling with student loan debt, these changes will help those that work in nonprofit industries, such as teachers and certain medical professionals. In this post we’ll look at what changed and how these changes may help you.
- They announced these changes on October 6, 2021 and leave a lot of unanswered questions. The government will provide clarifications in coming weeks and months.
- We strongly advise you to get consultation on your loans before you make any drastic changes.
- We’ll update this post as we get new information.
- Nothing written here should be construed as advice. The point of this post is to bring awareness to these changes, not to tell you what to do with your loans.
- Consult the government’s website announcing these changes for the latest information.
What Hasn’t Changed: The Main PSLF Forgiveness Criteria
Before we get to the announced changes, it’s important to understand what hasn’t changed. The heart of the Public Service Loan Forgiveness program – or PSLF for short – is to encourage students to pursue work in sectors of the economy that benefit society. Examples include public school teachers, registered nurses at nonprofit hospitals, military service, law enforcement, or social work. These are just some examples.
The main PSLF criteria remain the same:
1) You must work full time at a Qualifying Employer (i.e. not for profit) for at least 10 years. You don’t have to work 10 straight years in public service, but the total years employed in such service must be at least 10 years.
2) You must make 120 “Qualifying Payments” which equates to 10 years of payments towards your student loans.
The new rules changed nothing for criteria #1 regarding your employer, but made #2 – Qualifying Payments – significantly more achievable for many borrowers.
Are the New PSLF Changes Permanent? No!
The Biden Administration has been looking for ways to help student loan borrowers, but they’re constrained by what’s allowed in current law. So how are they able to make PSLF easier? They’re using provisions in the HEROES Act of 2003, which allows the Department of Education to change parts of Federal student aid in a “national emergency.”
Enter COVID-19, and the resulting declaration of a national emergency, which has been extended to October 31, 2022.
That date is important. PSLF reverts to the old rules after that date. This means you’ll have to act before that date if you want to take advantage of these new rules.
Change #1: PSLF Eligible Loan Type Expanded to Include Payments on Perkins & FFEL Loans
One rule to get PSLF is that you must make payments on a Direct Federal student loan. If you made payments on any other type of loan, such as a Perkins or FFEL loan, those payment wouldn’t count towards PSLF.
However, the new rules will count all the payments you’ve been making on non-Direct Federal loans – including FFEL and Perkins – toward PSLF. So if you have FFEL or Perkins loans and have a job that would qualify you for PSLF, all those payments you’ve made won’t be wasted. You can now apply for PSLF and get credit for them.
To take an extreme case, let’s say you have FFEL loans you started paying off 10 years ago and you still have a few years left to repay. You never pursued PSLF because you learned about it just a few years ago and thought it was too late to consolidate your loans to a new Direct Consolidation Loan, which restarts the 10-year loan forgiveness clock.
Now, you can consolidate your FFEL to a Direct Consolidation Loan and get full credit for the 10 years of the payments you’ve already made. In theory, under these new rules, you could get your loans forgiven immediately under PSLF right after you’ve consolidated to a Direct Consolidation Loan, assuming you’ve worked full time at a Qualifying Employer during those 10 years.
But – and this is key – you have to consolidate your old loans to a new Direct Consolidation Loan by October 31, 2022.
Caution: The downsides of consolidating to a Direct Consolidation Loan
There are some important things to consider before you rush out and consolidate your FFEL or Perkins loans to a Direct Consolidation Loan.
- Unpaid interest will be capitalized on the new, Direct, loan. Which means the principal on your loan will go up and you’ll start paying “interest on interest,” which is not advised.
- Normally, you’d lose credit for payments you’ve made towards PSLF.
Capitalizing unpaid interest could be a big deal, so if you have a lot of unpaid interest, we strongly advise you to get advice on your student loans before you consolidate to a Direct loan.
- What if I consolidated my old FFEL loans to a Direct Consolidation Loan a few years ago – will I get credit for the payments I made on those FFEL loans? UNCLEAR as of October 18, 2021.
Change #2: PSLF Eligible Repayment Plan Requirement Expanded
Under normal circumstances, if you’re pursuing PSLF, you need to do two things. First, you need to make sure all your loans are Direct Loans. Second, you have to sign up for an income-driven repayment plan, which includes:
- Income Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
If you’ve been paying on any plan other than these three plans, your payments don’t normally qualify for PSLF. That’s changed.
With the October 6, 2021 rule change, any payments you’ve made on plans that aren’t listed above will now count as a payment towards PSLF.
For example, suppose you graduated three years ago and started repaying your loan on a Standard 10-year repayment plan. Then you learned about PSLF and switched to an income-driven repayment plan last year.
Under the old rules, you’d only have 12 months of Qualifying Payments under PSLF because that’s how long you’ve been on an income-driven repayment plan. But now, the 24 months of payments you made on a Standard repayment plan will count as a Qualifying Payment, putting you two years closer to getting your loans forgiven under PSLF.
Change #3: Late and/or Underpayments to Count as a Qualifying Payment?
This change is a bit more ambiguous but deserves mention. Normally, to get PSLF, you need to make 120 Qualifying Payments. The definition of Qualify Payments means a payment is, 1) in full, and 2) on time. If you make a late payment, or didn’t pay the full monthly payment amount, then that payment wouldn’t count as a Qualifying Payment.
Under the October 6, 2021 rules, it states, “…any prior payment made will count as a qualifying payment regardless of…whether the payment was made in full or on time.”
Given the number of borrowers who’ve struggled to make their student loan payments, this could be a hugely positive change. Meaning, if you missed payments or had to enter forbearance in the past, those “payments” will still qualify towards PSLF.
The more payments you can get to count towards PSLF, gets you closer to the 120 Qualifying Payments you need for loan forgiveness!
Will I Be Refunded if I Made Extra Payments? Yes!
Taking these three changes together means that many people will end up with more Qualifying Payments than they had before. So what happens if these new rule changes bring your total Qualifying Payment count over 120? According to the new rules, the government will credit those extra payments back to you.
As an example, let’s suppose we have someone who’s been pursuing PSLF for the last eight years, making a total of 96 payments since enrollment. These new changes make payments they made for the three years prior to enrolling in PSLF eligible for loan forgiveness. So instead of having 96 payments towards PSLF forgiveness, they now have 132 Qualifying Payments.
In this case, the government would refund the extra 12 Qualifying Payments back to the borrower! So not only are the loans forgiven today, but they get money back on payments they already made that were above-and-beyond what they had to pay towards PSLF.
It’s very early days on these rules so don’t get your hopes up too much, but it’s right there in the FAQ on the referenced website if you want to look at it for yourself.
What Should You Do Now?
Given the significance of these changes and the government saying repeatedly that more guidance will be provided “in coming weeks and months” it’s a good idea to let these rules digest a bit before making dramatic changes. That said, if you’re definitely pursuing PSLF, you should start doing two things.
First, let the government know you’re pursuing PSLF. To benefit from any of the changes above, let them know that you’re working towards PSLF before October 31, 2022. To do that, go to the PSLF page on the student aid website. You’ll not only let them know you intend to file for PSLF, but this is where you’ll end up certifying your employment. Certifying employment can be cumbersome, so get started on it now if you haven’t done so already.
Second, if you have any loan that’s not a Direct Loan (i.e. an FFEL, Perkins, or other type of loan), it’s a good time to get up-to-date on your loan information. Download the statements from your loan servicer and figure out:
- What’s the outstanding principal you owe?
- Do you have unpaid interest? If so, you’ll want to consult with someone before consolidating to a Direct Consolidation Loan.
- How many years have you worked full-time (defined as 30 hours/week or more) at a Qualifying Employer?
- How many total payments have you made on your loans while employed at your Qualifying Employer? Were some of those payments on FFEL or Perkins loans? Or were they made on a repayment plan other than IBR, PAYE, or REPAYE?
If you already have Direct Loans and have submitted for PSLF, then the website says they’ll automatically credit you for payments that count under these new rules.
Finally, visit the PSLF website for helpful Frequently Asked Questions. They do a good job laying out various scenarios and answering key questions.
Be Patient and Check the Rules Often
These changes are big and potentially open up PSLF for a lot more borrowers. In true government style, they leave a lot of questions unanswered. They promise to fill in the details in ‘coming weeks and months’ so you’ll have to be patient.
Remember, you have a year to make any changes you need to make to your loans in order to position yourself for PSLF. The deadline isn’t until October 31, 2022.
We will update this page as we get new information.
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Rob has over 20 years of experience in the financial services industry. Prior to joining Financial Design Studio in Deer Park, he spent nearly 20 years as an investment analyst serving large institutional clients, such as pension funds and endowments. He had also started his own financial planning firm in Barrington which was eventually merged into FDS.