Attention student loan borrowers: If you’re hoping to qualify for Public Service Loan Forgiveness, you may not be making any progress toward having your debt forgiven unless you’re enrolled in an income-driven repayment plan.
That’s the jarring reminder provided by a New York Times story about the plight of Jed Shafer, a 46-year-old community college teacher in Oregon who missed out on qualifying to have his student loan debt forgiven this year.
Instead, it looks like Shafer will have to keep making payments on his loans until he’s 55 — all because he was in the wrong repayment plan.
Department of Education statistics and problems uncovered by regulators suggest that millions of additional borrowers who haven’t yet applied for Public Serivce Loan Forgiveness may find themselves in Shafer’s shoes.
But most are probably unaware because only a small fraction of those who might eventually qualify for Public Service Loan Forgiveness have certified that they’re eligible.
How it happened
As detailed by The New York Times’ “Your Money” columnist Ron Lieber, Shafer combined his federal student loan debt into a Direct Consolidation Loan and enrolled what’s known as a graduated repayment plan, which bumps up the borrower’s monthly payments up over time. This was back in 2002 — five years before the Public Service Loan Forgiveness program was created.
When borrowers combine multiple loans into a federal Direct Consolidation Loan, their payments can be stretched out over 12 to 30 years, compared to 10 years in the standard repayment plan. The larger the loan balance, the longer the repayment term.
But with the advent of income-driven repayment (IDR) programs, these extended and graduated repayment programs have become less attractive.
Borrowers enrolled in IDR plans don’t have to devote more than 10 or 15 percent of their monthly income toward their student loan payments. If they haven’t paid off all their loans within 20 or 25 years, the remaining balance is forgiven.
The problem with stretching out your loan payments over such a long period of time is that you may end up paying a lot more interest. Many borrowers who are enrolled in IDR plans will pay off their loans before they qualify for loan forgiveness, and any debt that’s forgiven is considered taxable income by the IRS.
But there’s an even more generous program that provides tax-free loan forgiveness to government workers and employees of qualifying non profits after they’ve made just 10 years of payments: Public Service Loan Forgiveness.
When the Public Service Loan Forgiveness program launched in 2007, Shafer checked with his loan servicer to make sure he was eligible. He says his loan servicer at the time informed him that if he made 120 payments on time, he’d be good to go. What he wouldn’t discover until eight years later was that he was in the wrong repayment plan.
‘One of the most complex programs ever’
Public Service Loan Forgiveness is “one of the most complex programs ever concocted by Congress,” former Consumer Financial Protection Bureau student loan ombudsman Rohit Chopra told Lieber in April.
The problem is that there are many hoops to jump through, and lots of ways things can go wrong. Although your 120 monthly payments don’t have to be consecutive, you do have to be working for an employer that meets the program’s requirements for the payments to count, and only certain loans and repayment programs qualify.
The federal government currently offers eight repayment programs for student loans, including four income-driven repayment plans (ICR, IBR, PAYE and REPAYE).
Technically, you don’t have to be enrolled in an income-driven repayment program to qualify for Public Service Loan Forgiveness. If you’re making payments on federal direct loans in the standard 10-year plan, those are considered qualifying payments toward the 120 needed for forgiveness.
But if you stayed in the standard 10-year repayment plan, you’d pay off all your debt before you qualified for loan forgiveness. So the Department of Education recommends that borrowers seeking Public Service Loan Forgiveness “change to an income-driven repayment plan as soon as possible.”
Like Shafer, millions of borrowers are stretching out their loan repayment terms in extended or graduated repayment plans. In most cases, monthly payments made in such plans do not count toward Public Service Loan Forgiveness.
An exception is sometimes made for borrowers who are making payments at the tail end of a graduated repayment plan, in which payments generally increase every two years. Once their monthly payments exceed what they would have been under the 10-year standard repayment plan, they can be counted toward Public Service Loan Forgiveness.
Shafer’s payments under graduated repayment were more than he would have paid in an income-driven repayment plan, but less than what he would have paid if he’d been on a 10-year repayment plan. So even though he was making bigger monthly payments then he would have under an IDR plan, the payments did not count toward Public Service Loan Forgiveness.
Having already repaid $70,000 of his educational debt, Lieber says Shafer will probably pay at least that much more before he’s debt free nearly a decade from now.
Millions more could be affected
How big is this problem? How many other borrowers out there might qualify for Public Service Loan Forgiveness, but are in the wrong repayment plan?
An analysis of Department of Education statistics suggests that between 4.8 million to 7.2 million borrowers currently paying back federal direct student loans may be eligible for Public Service Loan Forgiveness. But chances are, only about 2.4 million of those borrowers are currently enrolled in income-driven repayment plans (see analysis below).
Tips for qualifying for Public Service Loan Forgiveness
Seth Frotman, the Consumer Financial Protection Bureau’s student loan ombudsman, offers the following tips for borrowers who are hoping to qualify for Public Service Loan Forgiveness:
- Make sure you have the right type of loans. Only federal direct loans qualify for loan forgiveness under Public Service Loan Forgiveness. If you have other types of federal loans, such as older loans from the Federal Family Education Loan (FFEL) Program, you may be able to consolidate them into a Direct Consolidation Loan to become eligible for PSLF. Do keep in mind that federal loan consolidation can have some pitfalls. If you’re already repaying some of your loans in an income-driven repayment plan, or have made qualifying payments toward Public Service Loan Forgiveness, consolidating those loans will cause you to lose credit for those payments.
- Enroll in the right repayment plan. Income-driven repayment (IDR) plans are qualified repayment plans under Public Service Loan Forgiveness. IDR plans set your payment based on your income, which may lower your monthly payment and maximize the amount forgiven. Some repayment plans, like extended repayment plans, don’t count toward PSLF.
- Certify that you work in public service. Submit an Employer Certification Form to track your progress and let your servicer know you are working toward PSLF. Your HR office may have the forms on hand, or they can request additional information at consumerfinance.gov/pledge.
- Stay on track. Keep a copy of the signed form for your records. After you submit the form, follow up with your loan servicer. Be sure to send your servicer an updated form each year so you can keep track of your qualifying payments, and make sure you stay on the road toward loan forgiveness. Certification was what tipped Shafer off that he was not!
Analysis: millions of borrowers may be in wrong repayment plan
According to a recent GAO report, the Department of Education estimates that 21 percent of non-college graduates, 29 percent of college graduates, and 31 percent of borrowers with graduate degrees could be eligible for Public Service Loan Forgiveness.
That suggests that somewhere between 4.8 million and 7.2 million of the 23.2 million borrowers already paying back $768 billion in federal direct student loans could qualify for Public Service Loan Forgiveness (All told, 42 million borrowers owe $1.34 trillion in federal student loan debt, but many of those loans have not yet entered repayment, or are in default. The Trump administration has proposed eliminating Public Service Loan Forgiveness for future borrowers).
Thanks to rapid growth in enrollment, 6.3 million borrowers are now paying back $337 billion in federal direct loans in an IDR plan — the recommended repayment plan for borrowers hoping to qualify for Public Service Loan Forgiveness. Like the larger population of student loan borrowers, most people enrolled in IDR plans probably don’t qualify for PSLF — they just like having more manageable monthly payments, and the potential to qualify for loan forgiveness after 20 or 25 years of payments.
As of June 30, 2017, only 669,000 borrowers have been granted preliminary certifications that their employer, loans, and loan repayment plan qualify them for Public Service Loan Forgiveness. Assuming that all 669,000 borrowers who have been certified for Public Service Loan Forgiveness are enrolled in IDR plans leaves 5.63 million borrowers who may or may not be eligible.
If 31 percent of borrowers enrolled in IDR plans are eligible (the high end of the Department of Education’s estimate for all borrowers), than an additional 1.74 million borrowers in IDR plans may qualify for Public Service Loan Forgiveness.
So of the 4.8 million to 7.2 million borrowers paying back federal direct student loans who could be eligible for PSLF, only about 2.4 million are enrolled in IDR plans.