Student loan forgiveness program rewards public service

In October, 2007, the U.S. Congress created the Public Service Loan Forgiveness Program to encourage individuals to enter and continue to work full time in public service jobs. The program is designed to forgive all remaining eligible federal loan debt after 10 years of eligible employment while making qualifying loan payments. B.J. Revill, director of financial aid at the University of Rochester School of Medicine and Dentistry, answered questions about the program, which he describes as “the biggest and most generous financial aid program to come along since the GI Bill after World War II.”

What is the Public Service Loan Forgiveness Program?

The Public Service Loan Forgiveness (PSLF) Program was established to encourage individuals to enter and continue working in public service employment by forgiving the remaining balance on their Federal Direct Loans after making 120 qualifying monthly loan payments.

What are the eligibility requirements under the PSLF Program?

You must be employed full time by a public service organization, and make 120 corresponding monthly loan payments on your federal Direct Loan(s).  Additionally, you must be employed by a public service organization when you apply for loan forgiveness.

What qualifies as working in “public service”?

Eligible borrowers must be employed full time in any position. Basically, if someone is employed at an academic institution—the University of Rochester Medical Center counts—they are in line for forgiveness.

For purposes of the PSLF Program, the term “public service organization” means working for: a federal, state, local, or Tribal government organization, agency, or entity (includes most public schools, colleges and universities); public child or family service agency; non-profit organization under section 501(c)(3) of the Internal Revenue Code that is tax exempt (includes most not-for-profit private schools, colleges, and universities); Tribal college or university; or a private organization that is not a for-profit business, which includes a labor union, a partisan political organization, or an organization that provides any of the following public services: emergency management, military service, public safety or law enforcement, public interest law services, early childhood education (including licensed or regulated health care, Head Start, and state-funded pre-kindergarten), public service for individuals with disabilities and the elderly, public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations) and health care support occupations, public education, public library services, and school library or other school-based services.

What loan programs are eligible for forgiveness under the PSLF Program?

Only federal loans made under the William D. Ford Federal Direct Loan Program are eligible for loan forgiveness. The Direct Loan Program includes the following types of federal loans: Direct Stafford Loans; Direct Unsubsidized Stafford Loans; Direct PLUS Loans for parents and graduate or professional students; and Direct Consolidation Loans.

How can other federal student loans qualify for forgiveness under the PSLF Program?

Although loan forgiveness under this program is available only for loans made and repaid under the Direct Loan Program, loans made under other federal student loan programs may qualify for forgiveness if they are consolidated into a Direct Con­solidation Loan.  Federal loans that may be consolidated into the Direct Loan Program include: Federal Family Education Loan (FFEL) Program loans, which include: Subsidized Stafford Loans, Unsubsidized Stafford Loans, Federal PLUS Loans for parents and graduate or professional students and Federal Consolidation Loans (excluding joint spousal consolidation loans); federal Perkins Loans and certain health professions and nursing loans.

What Direct Loan Program repayment plans are eligible under the PSLF Program?

The 120 required monthly payments must be made under one or more of the following Direct Loan Program repayment plans: the Income Based Repayment (IBR) Plan; the Income Contingent Repayment (ICR) Plan; or the Standard Repayment Plan, with a 10 year repayment period.

Is the amount forgiven under the PSLF Program taxable?

No.  According to the Internal Revenue Service, any student loans forgiven under the PSLF Program are not considered income for tax purposes.

Will the years as an intern, resident and/or fellow count towards the 120 months of employment?

Yes. The specific job that you perform does not matter, as long as you are employed by a public service organization.  Additionally, you will need to be employed full time, and be making eligible monthly payments.

Give an example of the potential savings.

For physicians, the key to taking maximum advantage of PSLF is entering repayment using the income based repayment option (IBR) as soon as the physician enters residency. Borrowers want to start the clock ticking on the 120 months of public service as soon as possible while income is low. Let’s compare a person who enters residency but delays payments on loans the entire time prior to entering repayment as an attending with a person who utilizes IBR while in residency, and then makes full payments for the next six years as an attending.

Each one is a single individual who borrowed $177,500 in medical school, enters four years of residency and then has a starting salary of $190,000 as an attending. The first person defers payment for four years of residency then enters a 10-year standard repayment plan. The estimated monthly payment would be $2,860. The total amount repaid on the loan would be $343,170, including $165,670 in interest. The second borrower begins loan repayment at the start of residency. For the first four years, the estimated monthly payment would range from $384 to $420. For the next six years, the monthly payment would be $2,043. The total amount repaid by the borrower would be $166,373. The government would forgive $126,843. The total savings for the second borrower compared with the first is more than $176,000.