Take Advantage of Public Sector Loan Forgiveness

Law school brings its own unique brand of temporary hopelessness to everybody that attends. For me, this feeling came during a meeting for 3Ls who had taken out loans to fund the biggest financial miscalculation of our lives. We were each given our very own folder with pre-filled forms that had our names, loan information, and an ominous number. The vast tonnage of debt clouding the air inside that room made it feel like we were all sitting at the bottom of an ocean.

Obviously, we all eventually find our own way out of student loan debt. Some folks did not incur large obligations to begin with. Others magically landed well-paying jobs out of law school that made the loan payments manageable. Many more lawyers manage to get along using some form of income-based plan, despite its shortcomings. An even smaller percentage of us work full-time in the public sector and have federal student loans that qualify for the Public Sector Loan Forgiveness (PSLF) program.

PSLF is basically saving my ass; it could save yours too.

What is PSLF?

From the Department of Education:

The PSLF Program is intended to encourage individuals to enter and continue to work full-time in public service jobs. Under this program, you may qualify for forgiveness of the remaining balance due on your William D. Ford Federal Direct Loan Program (Direct Loan Program) loans after you have made 120 qualifying payments on those loans while employed full-time by certain public service employers.

Essentially, you go to work full-time for either a city, county, state, tribal or federal agency (including the military), or a qualifying non-profit for ten years. You make on-time, income-based payments each month for ten years, and whatever is left after that time goes poof (and that is a tax-free poof … for now). The program is a pretty solid deal — at least as it stands now (more on this later).

Who Qualifies?

If you are an employee working for a qualified public sector employer for more than thirty hours a week, you qualify. That is it.

Which Loans are Eligible for Forgiveness?

This is where some folks get stuck. The student loan has to be an un-defaulted federal student loan usually taken out under Direct Loans. A few types of loans can be consolidated in order to qualify. The specific qualifying ones can be found on the Department of Education’s info sheet.

How Can You Take Advantage?

First, you have to get yourself a job with a qualifying agency. Much easier said than done, obviously, but the vast array of jobs and qualifying employers at least means there are plenty of options available.

Once you land a job that makes you an eligible public sector employee, the paperwork begins. But if you are reading this, you are likely in the legal profession considering working for a government agency, so pointless paperwork is now the currency of your realm. Get used to it.

While there isn’t a statutory or administrative requirement that you file eligibility paperwork with the Dept. of Education, it is a no-brainer to make sure that you are doing things correctly from the beginning. In order to verify that your job qualifies, that your loans are eligible for forgiveness, and that you are using the appropriate repayment plan for the next 120 months, you will have to provide supporting documentation verifying your job and your income, the latter of which will determine how much you have to pay a month. Then you have to do the same thing again every year.

The Drawbacks

This is not a free lunch by any means. It is a hell of a deal, but you have to confine yourself to a certain job sector for a decade in order to take advantage of it. You also still make income-based payments (under the “Income-Based Repayment” or “Pay-as-You-Earn” framework), which are not insignificant.

There is also a substantial amount of uncertainty surrounding this program right now. The program in its current form is almost certainly not what it will be when loans actually start being forgiven in 2017. Right now, the loan forgiveness that PSLF provides does not come with a tax-bomb on the back end. But the reform measures proposed by the White House might change significant aspects of the non-taxable forgiveness.

President Obama’s proposed 2015 budget proposal also seeks to cap the PSLF amount forgiven at $57,500, which might significantly affect a large number of recent graduates who have relied and made decisions based on the program. Many people smarter than me do not view this proposed cap as retroactive, and guidance from the Dept. of Ed appears to indicate that any loans taken out prior to 2015 would be grandfathered in to the old PSLF. However, no one at the Dept. of Education has actually confirmed this. While the proposed changes are simply recommendations at this point, it is not a good omen for future applicants.

The point is, nobody knows for sure what the actual program will look like by the time we each make our 120th payment. Optimistically, once you get into the program you are protected, and any sort of retroactive legislation would be unprecedented. Still, that is cold comfort for those of us who have altered careers, made drastic decisions and even moved states for government positions based on the premise that our big bad loans might someday go away.

Student loan debt in this country has become what Elizabeth Warren calls an “economic emergency.” And in emergencies, we sometimes have to take drastic corrective measures. The PSLF might be the last and best corrective measure that many of us have available. And if you are eligible to take advantage of it, you should strongly consider it.

Despite the uncertainty, the opportunity costs and the commitment to the public sector for a large chunk of your prime working years, the PSLF could be the one thing that makes that costly 3-year trip to law school actually worth it.

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