By James M Dahle, MD, Emergency Physician, WCI Founder
The Public Service Loan Forgiveness (PSLF) program was established as part of the College Cost Reduction and Access Act of 2007 to encourage borrowers of direct federal student loans to work as employees of government and non-profit institutions. The rules of the program were not very well-understood or publicized for the first few years the program was in place. However, within 3-4 years, bloggers and journalists, along with their readers with direct federal student loans, began to recognize the substantial potential benefits of this program and made plans to take advantage.
Is Public Service Loan Forgiveness Legit?
I first wrote this article back in 2018 for Forbes in response to media reports that did not paint PSLF in a very good light. Some articles implied (incorrectly) that 99% of those who applied for PSLF and otherwise deserved it did not get it. Others wrote about how difficult it was for borrowers to get FedLoans to actually acknowledge that they deserved PSLF. Fortunately, those days are now past. Doctors and others are now receiving PSLF regularly. Here are a few examples from the WCI podcast:
- A Public Service Loan Forgiveness Success Story
- Pediatric Intensivist Gets PSLF with No Hassle
- Family Physician Receives PSLF
As mentioned above, the PSLF program started in 2007 and required 10 years of payments. So naturally, we all expected to see lots of people getting PSLF in late 2017 and 2018 but it wasn't happening. So naturally, people who had been working toward PSLF for years started to worry. However, there were really three issues going on simultaneously.
The first was simply that very few people actually started making qualifying payments in 2007, 2008, 2009, or even 2010. Nobody knew about the program so there simply were not very many people who could have qualified for PSLF yet. As we move into 2021 and especially into 2022-2023, there are thousands and thousands of people who will now have their 120 payments. By Spring of 2021, over 5,000 people have received PSLF.
The second issue was the incompetency of Fedloans to service PSLF. They did not have their processes worked out and had not yet trained their employees to deal with this program. They didn't even seem to be able to accurately count to 120 payments. Over the last few years, Fedloans has become much better at this and the process has been simplified. Instead of a final “PSLF application” at the end, borrowers now simply have to send in their annual employer certification forms and Fedloans takes care of the rest. Recent recipients are no longer having to hire attorneys and spend days on the phone with Fedloans to prove all of their payments should count.
The third issue was a simple math issue. The reports were using the wrong number as a denominator. They were saying only 1% of those in the program were receiving forgiveness, not that 1% of those who deserved forgiveness were receiving forgiveness.
The bottom line is that the program is legit. People really are getting the forgiveness they deserve and there is no reason to doubt that, barring legislative changes, it would be any different for you as a current borrower. Even if there are legislative changes, you are highly likely to be grandfathered into the program. Of course, you still need to make sure you understand the program requirements and comply with them.
The program allows any remaining direct federal loans to be forgiven once 120 qualifying on-time monthly payments have been made while directly employed by a qualifying employer. Direct federal loans include Stafford loans, PLUS loans, and direct consolidation loans. FFEL and Perkins loans do not qualify until they have been consolidated into a direct consolidation loan. Qualifying payments must be made under one of five programs:
- Income Contingent Repayment (ICR)
- Income Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Standard 10-Year Repayment Plan
The potential benefit is largest for those with the highest loan burden—indebted physicians and dentists. As tuition skyrockets and word of the program spreads throughout educational institutions, it is no surprise to see in the 2020 medical school graduation questionnaire that 45% of graduates plan to enter into a loan-forgiveness program. This is an increase from 39.7% in 2014 and just 11% in 2010. Bear in mind only 75% of graduates have student loans at all, so this is actually 60% of indebted docs that are going for forgiveness.
The key to having a large amount forgiven is to make as many relatively small payments as you can during residency and fellowship. The earlier payments start being made, and the longer the training period, the more that will be left to forgive after 10 years.
How to Avoid PSLF Problems
Public Service Loan Forgiveness has had some ugly PR in the past, even if it is getting better in recent years. So what is a borrower to do to ensure their student loans are forgiven? You need to first make sure you qualify and second make sure you can prove that you qualify.
Memorize the Requirements
It's not that complicated. You can become an expert in PSLF.
- Work full-time (as the employer defines it but at least 30 hours a week) as an employee of a non-profit or government employer
- Have eligible loans (direct federal, don't refinance them because they are then private loans)
- Be in an eligible repayment program (usually an IDR like PAYE or REPAYE)
- Make payments on time (defined as no more than 15 days late)
- Fill out the PSLF Forms correctly and make sure your employer fills their part out correctly
If you screw up any of those requirements, don't be surprised when you don't get PSLF as planned.
Keep Careful Records of Every Payment
Since PSLF could be worth hundreds of thousands of dollars to a doctor and sometimes the loan servicing companies have trouble keeping track of payments, it is critical to keep track of all of your payments yourself. Imagine you had to sue the Department of Education to get PSLF. What evidence would you want to have? Even if it doesn't go that far (and it probably won't), it will be a lot easier to prove you made your 120 payments if you actually have your own set of records of those payments. Don’t trust the servicer’s calculations. Always double-check their math.
Certify Employment Early and Often
Although not required, the PSLF Form should be filled out every time you change employers and at least once annually. Keep a copy. Technically, this form can be filled out retrospectively, but when so much money is on the line, it pays to be on top of all the details. Possession of years of forms certifying your participation in the program may also come in handy in the event the program changes and you wish to be grandfathered into the old terms.
Avoid Moral Hazard
A few people, upon learning of loan forgiveness programs like PSLF, consider borrowing even more money than they need. If the loans are going to be forgiven anyway, why not borrow as much as you can and pay as little toward it as possible? This is ill-advised for two reasons.
First, most medical and dental students are maxing out their direct federal loans anyway, so any extra loans they took out would not be eligible for PSLF anyway, they will be private loans.
Second, in the event that something happens to the PSLF program and the borrower is not grandfathered in, the borrower will end up paying all that principal and interest back. A professional student who wishes to become financially successful should live as frugally as possible, knowing that everything paid for with borrowed dollars may cost two or even three times as much due to the effects of compound interest by the time the debt is paid off years later.
Will PSLF Be Grandfathered?
Keep the Faith! Negative news about PSLF has caused many to abandon their course toward PSLF, essentially being scared out of the program. True pessimists might argue this is intentional on the part of the government to reduce costs, but either way, it has caused a lot of people to lose out on the promised benefits. It would be very unusual for a program change like this to occur that did not grandfather in those already enrolled in the program. In addition, PSLF is mentioned in the promissory notes—legal contracts between the borrower and the lender. Even if Congress or the Department of Education changes the program and does not make provisions to grandfather in current participants, those borrowers should have an excellent legal case that should at a minimum result in a significant settlement.
Save Up a PSLF Side Fund
The ultimate backstop, of course, is the ability to pay off your loans without the aid of the government. Most high-income professionals can, by living very frugally, pay off their student loans within 2-5 years of the completion of their training. Even those who are going for PSLF should still plan to do this. However, those payments should be made into their own investing accounts. This way, if PSLF is changed and they are not grandfathered in, or if they simply change their professional plans, they can move on with their lives with minimal financial consequences. The only cost in this situation is the difference between the interest rate they paid to the government and the interest rate they could have refinanced to with a private company.
It is fully understandable for a borrower planning on PSLF to be concerned, but it is not yet time to give up on the program. Instead, learn the rules, keep careful records and start saving up a PSLF side fund, just in case.
What do you think? Are you going for PSLF? Why or why not? What do you think will happen with it long-term? Comment below!