10 Tips to Maximize the Public Service Loan Forgiveness Program

By Lt. Maryam Austin, General Litigation Division (Code 14) For many younger public service professionals, whose futures are eclipsed by massive amounts of student debt, a ray of hope out […]

By Lt. Maryam Austin, General Litigation Division (Code 14)

For many younger public service professionals, whose futures are eclipsed by massive amounts of student debt, a ray of hope out of this indebtedness is the Public Service Loan Forgiveness Program (PSLF). PSLF forgives the balance remaining on student loans for those who have made 120 qualifying monthly (ten years) payments while working full-time (at least 30 hours per week) in public service, which includes military service. Under PSLF, the forgiven amount is not considered income for tax purposes.  Unfortunately, PSLF enrollment and maintaining eligibility is a complicated process.  Additionally, Congress could make any number of changes to the Program, so close monitoring of proposed amendments to the program is prudent.

The average student loan debt for lieutenant junior grade and lieutenant Navy JAG Corps officers is $146,174.  It appears that a large majority of Navy JAGs would not have been able to choose the JAG Corps but for PSLF significantly helping to reduce their debt after ten years of military service.  Those making payments toward PSLF are typically enrolled in an income dependent repayment plan (IDRP).  As a result, they see their balances increasing with the passage of time, due to capitalized interest. Over 91% of Lieutenants (junior grade) and 96% of Lieutenants surveyed said they relied on the PSLF and it would be more likely they would leave the JAG Corps if it were capped or repealed.

While PSLF participants hold their breath with trepidation, longing for the day their loans are forgiven, there are some tips to make the most of the PSLF, by minimizing monthly payments and maximizing the total amount forgiven.

Tip 1: Serving in the Military is Unbeatable

Serving in the military, in conjunction with the PSLF, is arguably economically beneficial for JAGs whose substantial nontaxable housing allowance (BAH) is not included in their adjusted gross income on tax returns. For example, a Lieutenant, with dependents, working in Washington D.C., receives $32,400 a year in BAH.  That is $32,400 that is not reportable on his/her tax returns.  Additionally, depending on state of residence, some JAGs may not be required to pay state income tax.  When calculating student loan repayments, only taxable income is factored into the equation; thus, qualifying payments are likely to be much lower than a similarly situated individual not working in the military.  Another highly beneficial economic benefit is free medical/dental care, exchange and commissary (tax-free) privileges, the GI bill, child care subsidies, the VA mortgage benefit, just to name a few.  It is undeniable that military service and PSLF make a great combination.

Tip 2: Consolidating ASAP

Only Federal Direct Loans and Direct Consolidation Loans are eligible for PSLF. Federal Family Education loans and Federal Perkins loans must be consolidated with Direct

Loans if they are to be forgiven under PSLF. Private and Parent PLUS loans cannot be consolidated.  Individuals who know or suspect that they are going into public service should consolidate as soon after graduating as possible, as consolidation takes months to process.  Inclusion of Direct Loans, for which qualifying PSLF payments were previously made, with new loans in a consolidation may result in resetting the number of qualifying payments counted toward the 120. These pre-existing Direct loans may need to be left out of the consolidation. Additionally, individuals should focus on consolidating prior to entering service because if their loans’ average interest rate is over 6%, they can use the Servicemembers’ Civil Relief Act (SCRA) to reduce all pre-service interest rates to 6%.  Consolidating early ensures that payments count towards PSLF from day one.

The consolidation application, which is available at StudentLoans.gov, requires a list of all student loans, which can be found at the National Student Loan Data System (NSLDS) at NSLDS.ed.gov.

Once the consolidation application has been processed, the list of consolidated loans needs to be compared to the NSLDS profile to ensure ALL loans were included; otherwise, payments made towards PSLF will not be credited toward forgiveness of the mistakenly unconsolidated loan(s).

Tip 3: Enrolling in the Most Advantageous Repayment Plan

After loans have been consolidated, prospective participants must enroll in an IDRP or Standard Repayment Plan.  The Loan Servicer selects the repayment plan that results in the lowest payments (Income Based Repayment (IBR), Income Contingent Repayment (ICR) or Pay As you Earn (PAYE)).  IDRPs are calculated based on discretionary income (discretionary income for IBR and PAYE: Adjusted Gross Income (AGI) – 150% of the poverty guideline for family size and state of residence. For ICR: AGI – 100% of the poverty guideline). Applications for IDRP are available on studentloans.gov.

Married individuals must use the StudentLoans.gov repayment estimator to determine the effect of federal tax filing status (joint or separate) on payments.  For joint filers, the IDRP considers the income and loan amounts of both individuals, which may result in a higher payment.  If both couples have student loans, both payments will be effected.  For separate filers, spousal income and loans are excluded.

It is recommended that both a married filing jointly and married filing separately tax return be drafted and the repayment estimator be used to determine which type of tax filing status results in the greater savings as between a lower monthly student loan payment or a larger refund (as a result of eligibility to claim a lower tax rate and maximize tax deductions and/or credits (Student Loan interest deduction and Dependent and Child Care Credit are common examples)).

Individuals who are domiciled in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, and WI), and who choose to file as married filing separate returns, are required to split their community wages, deductions, and credits in half.  For these couples, filing separately may be advantageous, particularly in instances where one spouse’s wages are significantly higher than the other (perhaps as a result of a bonus).  Splitting the income in half

ay result in lower tax liability and minimize the appearance of income for IDRP purposes for the high wage earner. Conversely, the tax liability and income for the lower wage earner will increase; however, the impact may be minimal compared to the potential savings from the lower monthly student loan payments.

Tip 4: Immediately and Annually Submit the Employment Certification for PSLF

Those working in public service should immediately, and thereafter annually, submit the employment certification form.  This form, completed by an individual’s employer, verifies that an individual is employed by a public service entity full-time.  The initial submission will result in the loans being transferred to PSLF’s loan servicer, currently FedLoan Servicing.  Each time the form is submitted, FedLoan Servicing will calculate the number of eligible qualifying payments made against the required 120.  This calculation should be verified against an individual’s own payment records.  If there is a disparity, a statement of account should immediately be requested.  This statement will show what payments were/were not accepted.

Letters documenting the number of payments FedLoan Servicing has accepted should be printed and retained in a safe location, as FedLoan Servicing maintains up to a year of statements in its “Paperless Inbox”.

A U.S. Department of Education Privacy Act request can also be made in order to obtain payment history and correspondence with servicers.

Tip 5: Deferments and All Types of Forbearances Should Be Avoided

The objective of enrolling in PSLF is to make 120 qualifying monthly payments as fast as possible to discharge the remaining balance of student loans. Accordingly, deferring the loans or obtaining a forbearance is counterproductive.  Sometimes, when a servicer changes, the new servicer may apply an administrative forbearance which postpones payments for a brief time for the account holder’s “benefit.”  For PSLF, time is money; there should be a bill from the servicer – and a payment made – each month.  If an administrative forbearance was applied to the account, a borrower can contact their servicer and request that a bill be generated for that month so that their payment can be considered qualified for PSLF.

Tip 6: Enrolling in Automatic Debit

Payments have to be made every month, on time, which means within 15 days of the due date. A late payment results in the month not being counted as a qualifying monthly payment.  Those with multiple changes in servicers and payment due dates may discover that some of those payments were classified as “late.” Enrollment in automatic debit can avoid this common trap and save money. Most servicers, including FedLoan Servicing, give a 0.25% interest rate reduction for automatic payments.  Given the uncertainty surrounding PSLF, it does not hurt to reduce the interest rate.

Tip 7: Those Who Do Not File As Married Filing Separately Can Deduct Their Student Loan Interest from Their Adjusted Gross Income (AGI)

For those not filing as married filing separately, up to $2,500 of the Student Loan Interest deduction can be made prior to calculating the AGI, thus lowering tax liability. This deduction can be used even if one chooses not to itemize their deductions.  This deduction is inapplicable if the modified AGI is currently $160,000 (married filing jointly) or $80,000 (single, head of household or qualifying widow(er)).  At the end of the year, servicers provide form 1098-E that shows how much interest was paid.

Tip 8: Those Serving in a Tax-Free Combat Zone Should Recertify IDRP Immediately 

Individuals who serve in a Tax-Free Combat Zone should immediately resubmit the IDRP application in order to recalculate student-loan payments after obtaining their first Leave and Earning Statement (LES).  This can drop payments down to $0.  The lower payments will count toward PSLF qualifying payments.  Recertification is only required annually, so the new payment will be locked in for 12 months.

Tip 9: AGI Does Not Need To Be Used When Recertifying IDRP

If during the previous tax year, an individual receives a bonus (e.g., Continuation Pay) which results in a significant AGI increase, he/she does not need to use his/her tax return as proof of income. Instead, he/she can recertify using his/her LES.  This may prevent the monthly payment from spiking.

When submitting an LES as proof of income, circle the amount listed under “Wage Period” in the “FED TAXES” box and highlight with “total taxable income” notated at the margin.

 Tip 10: If the Servicer is Unwilling to Resolve an Issue, Contact the Federal Student Aid Ombudsman and/or Respective Congressman

There may be instances, such as when a servicer refuses to count payments toward PSLF, where it may be helpful to reach out to the Federal Student Aid Ombudsman of the U.S. Department of Education, or alternatively a Congressional representative.

For more information, please visit https://studentaid.ed.gov. To determine eligibility, please contact a legal assistance attorney at the Region Legal Service Office closest to you.

This article is not legal advice and is promulgated solely for informational purposes only.

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