Here's What You Need to Know About PSLF

Student loans are back in the news again. The Government Accountability Office recently released a report detailing how the federal government is expecting to forgive over $100 billion in student loan balances in the coming years. While there are many loan forgiveness programs, the Public Service Loan Forgiveness (PSLF) program is one of the most common. 

Doctors working in nonprofit hospitals, teachers, government employees and more can all be eligible for PSLF.  But there’s a catch and it’s one that many people don’t find out about until it’s too late. Only specific types of student loans will qualify for PSLF. Many loans aren’t eligible for the program at all. Unfortunately, your student loan servicer will not notify you of this. It’s on you to make sure you are eligible for PSLF and the sooner you take action, the better. (For more, see: Should I Pay Off Student Loans or Save for Retirement?)

What is PSLF?

Public Service Loan Forgiveness is available to individuals with specific kinds of federal loans who work for the government or a 501(c)(3) nonprofit, including charities and nonprofit hospitals, among others. It’s important to note that it’s your employer that determines whether or not you are eligible. If, for example, you teach at a for-profit school you wouldn’t be eligible for PSLF. So make sure your employment qualifies before pursuing PSLF.

In order to obtain forgiveness under this provision, you must fulfill two provisions. First, you need to make 120 payments while on an income repayment plan. Note that this is not the same as having the loan for 10 years. You must actually be making the payments in order for a month to count toward your total. At the end of 120 months where you have made a qualifying payment, you are eligible for forgiveness. Secondly, of course, you must make these payments while holding a qualifying job.

There are many more important details about PSLF that you should review if you seek to pursue this forgiveness plan. You need to be sure you are on the right type of repayment plan, as I mentioned above. While not required, you should file a form indicating that you hold a qualifying job with your servicer each year. For now, the important question I want to highlight revolves around what types of loans do not qualify for PSLF. And, of course, what can be done to fix the situation if you have these loans. (For related reading, see: Student Loan Debt: Is Consolidation the Answer?)

Eligible and Non-Eligible Loans

Any Federal Direct Loans are eligible for PSLF. Common types of Direct Loans include Direct Stafford Loans (subsidized and unsubsidized), Direct PLUS Loans, and Direct Consolidation Loans (more on that last type in the next section). Typically, the information on your monthly statement may not always be enough to determine the specific loan type you have.

Unfortunately, not all loans are eligible for PSLF. If your loans were issued by a private lender, this may come as no surprise. Regrettably, private loans have very few of the flexible “perks” that federal loans have and that includes forgiveness provisions.

More subtly, there a few types of federal loans that aren’t eligible for PSLF, either. One of the most common mistakes I see around PSLF is individuals who have been making payments for years while holding a qualifying job, but aren’t actually eligible for forgiveness at all, solely because of the types of federal loans they have. The main types of federal loans that are not eligible for PSLF are:

  • Federal Family Education Loans (FFEL): Federally-backed loans issued by private banks. The government discontinued this program in 2010, so this typically only affects people who graduated college in 2014 or earlier.
  • Perkins Loans: The federal government funds these loans, but your individual college distributes the funds. Perkins loans aren’t quite as common as Direct Stafford loans, but many colleges include them in financial aid packages.

If you are pursuing PSLF, review your loans to confirm that you don’t have either of these types. Unfortunately, the current PSLF plan does not allow forgiveness of these loans.

Pursuing PSLF With FFEL or Perkins Loans

Thankfully, you still have options if you have FFEL or Perkins loans and want to work toward forgiveness. There is a way to qualify these balances. In order to do so, you must consolidate the other loans through a Federal Direct Consolidation Loan. In this process you can combine the federal loans you currently have, including Perkins and FFEL loans, into one direct loan through the federal program.

The purpose of getting a Federal Direct Consolidation Loans isn’t to cut your interest rates. The rate for the new consolidation loan is a blended average of all the loans you consolidate. Instead, a major benefit of consolidation is that all of your consolidated loans are eligible for PSLF. So if you roll your Perkins or FFEL loan into a Federal Direct Consolidation Loan, the balance may now be forgiven through the program.

Two important caveats, though. First and foremost, there are a number of unique benefits for Perkins loans specifically that do not transfer over to the new consolidated loan. If PSLF is a high priority for you, this may not matter, but it is something to consider before deciding. Work with a financial planner who specializes in student loan planning to review the pros and cons before taking action. (For related reading, see: Debt Forgiveness: Escape Your Student Loans.)

Second, and most importantly, consolidating your loans in this way will “reset” your 120 payment counter for forgiveness on any direct loans you are consolidating with the Perkins and FFEL loans. The U.S. Department of Education says it best (emphasis added):

"If you have both Direct Loans and other types of federal student loans that you want to consolidate to take advantage of PSLF, it’s important to understand that if you consolidate your existing Direct Loans with the other loans, you will lose credit for any qualifying PSLF payments you made on your Direct Loans before they were consolidated. In this situation, you may want to leave your existing Direct Loans out of the consolidation process."

That’s a very critical point. Consolidation has huge benefits for PSLF because it can qualify balances originally issued under Perkins or FFEL loans. But, if you have other direct loans as well, make sure you only consolidate the needed loans if you have already begun payments to avoid resetting your 120 payment count.

Student Loans Are Complicated

There are many different types of student loans and all of them are eligible for different benefits, including PSLF. I wasn’t able to touch on all of the potential complicating factors in this article. But you can download my student loan guide to learn more and if you are contemplating pursuing PSLF, consolidating your loans or making any other adjustments to your particular loans, it’s never a bad idea to get a second opinion. (For more from this author, see: Will Students Left With Debt Benefit Under Trump?)