Public Service Student Loan Forgiveness: Pandemics, Payments and Planning

Over 42.3 million federal-student-loan-holding Americans likely breathed a collective sigh of relief when the Biden administration extended student loan repayment relief until September 30, 2021, continuing the government’s pause on payments for eight additional months.

While no one’s crystal ball of financial forecasts could have anticipated the coronavirus pandemic or the various relief acts and executive orders to follow, the resulting combination of economic and political factors has directly and definitely affected borrowers with student loans, perhaps especially those participating in the Public Service Loan Forgiveness (PSLF) program. To be sure, this new, longer grace period can serve as an opportunity for borrowers who are pursuing income-tax-free public service loan forgiveness to revisit their plans going into the rest of 2021.

But let me begin with a little background. Established in 2007, the PSLF program is a federal entitlement (similar to Social Security retirement benefits) that requires the Education Department to “cancel the balance of interest and principal due” for qualifying loans after borrowers make 120 qualifying payments via eligible repayment plans while working for qualifying employers, among various other requirements. More plainly, borrowers can exchange 10 years of public service for a clean slate on their student debt.

The Road So Far: Last Year in Review

In March 2020, the CARES Act granted federal student loan borrowers an interest-free payment pause. This relief was subsequently extended twice, the second time until January 31, 2021. In its first few days, the Biden administration then extended it again, to its current September 30 expiration date.

Fortunately, the CARES Act also allowed borrowers to set their monthly payment to $0 (non-payments). Current guidance indicates that, for borrowers enrolled in the PSLF program and working full-time for qualifying employers, $0 payments will still count toward the 120 payments required for public service loan forgiveness.

Considerations for PSLF Borrowers in 2021

While student loan servicers automatically suspended required loan payments and interest accumulation in March 2020, eventually borrowers will have to resume repayment. Use the intervening time to your advantage by taking inventory and taking action. Some factors to consider as you adjust your student loan repayment plans in light of the latest extension of relief could include:

Furloughs and part-time employment may still count toward PSLF. The Department of Education has not issued an official statement about furloughed employees’ PSLF payments (at least as of January 2021). In general, if the borrower is considered by their employer to be full-time during a temporary furlough, payments ought to apply toward loan forgiveness. (That is, a furlough is no different from other forms of unpaid leave.) Borrowers will have to rely on their employer’s willingness to certify their full-time employment. If a borrower is employed part-time by two or more qualifying PSLF organizations with at least 30 combined working hours per week, payments would still count toward their PSLF program total if all the employers involved certify the applicant’s employment.

Some tools are still off-kilter. The Education Department’s PSLF tool aims to help borrowers understand what they specifically need to do to get their loans forgiven. As a broad rule, any federal loans with forbearance status do not qualify to be forgiven under PSLF. And yet, per the CARES Act, all federal loans have been lumped into forbearance status. So the tool may falsely inform borrowers that their otherwise eligible loans are (temporarily) ineligible for forgiveness. Don’t panic! This is a programming issue, and it does not reflect a problem with a borrower’s eligibility or the PSLF program.

Payments might not be applied to your PSLF payment total until later. Observers have noticed FedLoan’s lag time in updating borrowers’ PSLF-qualifying total payment count. Your loan servicer may have yet to include some or all forbearance-period payments in your total PSLF payment count. Make sure to stay vigilant, and follow up with your loan servicer to ensure your credit is duly noted.

Get all your ducks in a row. Make sure you filed your annual Employer Certification Form (ECF). And given the most recent extension, recertify or double-check your income-driven repayment (IDR) plan, especially if you’ve experienced a reduction of income due to a job transition, part-time employment, or were furloughed at any point in the last 12 months. Borrowers can apply for a loan repayment recalculation at any time. While the Education Department will officially waive payments through September 30, 2021, acting sooner rather than later could secure borrowers a revised (and potentially more affordable) monthly amount when repayment begins again. Those seeking public service loan forgiveness should prefer this route to requesting voluntary repayment deferrals or (non-CARES Act) forbearance, which could jeopardize qualification for eventual loan forgiveness.

Assemble your financial team and make a plan. Meeting with a tax advisor now to devise an optimal tax filing strategy is a solid plan. Your income-driven repayment plan is ultimately determined by Adjusted Gross Income (AGI). (Calculations vary among the qualifying repayment plans.) This has led some borrowers seeking PSLF to file their income taxes married filing separately (MFS) versus married filing jointly (MFJ). (Note: REPAYE incorporates both spouses’ income – no ifs, ands or buts. No exceptions.)

True, filing separately from one’s spouse would eliminate their income from the payment calculation. After all, the goal (should you be aiming for loan forgiveness through PSLF) is to pay the lowest monthly payment possible. It’s irrelevant if the loan balance accumulates interest over time, as eventually the entirety of the loan receives forgiveness after 120 qualifying payments.

But as with most everything involving the tax code, logic does not always prevail. For most, the costs of this strategy – that is, filing MFS – outweigh its benefits. For instance, if you are legally married, you must file MFJ to deduct student loan interest or receive education credits or deductions. In addition, MFS reduces a taxpayer’s child tax credit, eliminates the FSA Care credit, and effectively prevents contributions to an IRA or Roth IRA (phase out at $10,000 AGI). When comparing filing methods, it’s important to attribute income, deductions, and PSLF payments to each spouse. By engaging their financial professionals in strategic discussions now, borrowers can better prepare for and minimize future student loan payments for the purpose of PSLF.

In Conclusion

Despite the obstacles that the past year have presented, PSLF borrowers can use this most recent reprieve to take steps to increase their chances of, and confidence in, crossing the finish line student loan-free.

A version of this article appeared October 7 on thestreet.com.

The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.

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Becca Craig, ABA, CFP®

Becca designs sound financial plans that challenge outdated financial frameworks and let her clients fearlessly engage their resources and embrace an abundance mindset. As her clients’ “financial advocate,” she loves making money work for her clients—not against them—so they can focus on the people, endeavors and causes they care about most.

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