Five Steps to Creating a Public Service Loan Repayment Plan
By Becca Craig, CFP®
Call it a cliché, but 2020 has turned out to be the definitive year of “unprecedented times” and its implications for the Public Service Loan Forgiveness Program (PSLF) are no exception.
While no one’s financial forecast crystal ball could have predicted the coronavirus pandemic or the various acts of relief and the decrees to follow, the resulting combination of economic and political factors had a direct and definite impact on promising borrowers seeking public service loan forgiveness.
Given the ongoing challenges of implementing the PSLF program and the uncertainty faced by many of its participants, a good understanding of how the past few months have evolved is absolutely essential for borrowers looking to be forgiven. his intermediary.
But let me start with a little background. Created in 2007, the PSLF program is a federal law (similar to Social Security retirement benefits) that requires the Department of Education to “write off the balance of interest and principal owed” for qualifying loans once borrowers have made 120 eligible payments Going through eligible repayment plans while working for eligible employers among various other requirements. Put simply, borrowers can trade 10 years of public service for a tax-free clean slate of their student debt.
The events of this year, however, have affected the way borrowers interact with the PSLF program and have resulted in some adjustments to its rules, the ramifications of which you will need to consider when developing a concrete action plan. for the remainder of 2020.
The road so far: 2020 in review
The CARES Act of March 2020 gave federal student loan borrowers an interest-free break on payments until September 30, but this relief was extended until December 31 in a presidential memorandum signed on August 8, before the end of the current automatic forbearance period.
Another provision of the CARES Act allowed borrowers to set their monthly payment at $ 0 (non-payments). For borrowers enrolled in the PSLF program and working full time for eligible employers, payments of $ 0 still count toward the 120 payments required for forgiveness, by US Secretary of Education Betsy DeVos.
Steps to take for PSLF borrowers
Student loan managers automatically applied the suspension of payments and reduced interest rates to the accounts in March of this year. However, borrowers are encouraged to stay calm and carry on (with the facts) and then consider taking additional proactive steps to create a powerful PSLF payment readiness plan. Factors to consider include:
Leave and part-time jobs can still count for the PSLF. The Education Department had not released an official statement on PSLF payments from employees on leave (at least as of September 2020). In general, if the borrower is considered by his employer to be full-time for a period of temporary leave, payments should apply to the loan cancellation. (That is, leave is no different from other forms of unpaid leave.) Borrowers will have to rely on their employer’s willingness to certify their full-time job. If a borrower is employed part-time by two or more eligible PSLF organizations with at least 30 combined working hours per week, payments will still count towards their PSLF program total if all employers involved certify the employment of the applicant.
Some tools are staggered. The Ministry of Education PSLF Tool helps borrowers better understand the program and how to get their loan canceled. Generally, forgivable loans that are otherwise eligible are not eligible. Currently, according to the CARES law, all loans are classified in forbearance status, so the tool may falsely inform borrowers that eligible loans are not eligible. This is a programming issue, and it does not reflect an eligibility issue of a borrower or the PSLF program.
Payments will not be applied to the PSLF total until after December 31st. Some observers have noticed FedLoan latency time in updating the statement of borrower payments. Your loan manager may not yet have included some or all of the forbearance payments in your total PSLF payments. FedLoan can wait to update everyone’s payment totals all at once when the CARES Act interest freeze ends. Make sure you stay vigilant and follow up with your loan manager to make sure your credit is properly rated.
Get all your ducks in a row. Deposit your annual Employer’s attestation form (ECF) and recertify your income-based reimbursement (IDR) now, especially if your financial situation has changed due to a job transition, part-time job, time off or other reduction in income. Borrowers can request a recalculation of their loan repayment at any time. While the Education Ministry will formally waive payments until Dec.31, acting as soon as possible could ensure borrowers a revised (and potentially more affordable) lower payment for the months that follow. For PSLF applicants, this is far preferable to the request for voluntary deferral of repayment or abstention (outside the CARES law), which could compromise the qualification for a possible loan forgiveness. It is best to stay the course, and on the wagon.
Get your team together and make a plan. Meeting with a tax advisor now to design an optimal 2020 tax reporting strategy is a solid plan. The minimum monthly IDR payment is ultimately determined by the Adjusted Gross Income (AGI). (Calculations vary depending on eligible repayment plans.) This has led some borrowers looking for a PSLF to report their income taxes separately (MFS) compared to a joint marriage (MFJ). (Note: REPAYE incorporates the income of both spouses – no ifs and buts. No exceptions.)
Of course, declaring your spouse separately would eliminate their income from the payment calculation. After all, the goal (if you are aiming for loan cancellation through the PSLF program) is to pay the lowest possible monthly payment. It doesn’t matter if the loan balance accumulates interest over time, as the entire loan eventually receives a discount after 120 qualifying payments.
As with almost everything about the tax code, logic does not always prevail. For the most part, however, the costs of this strategy – that is, repository of MFS – outweigh its benefits. For example, if you are married, you must deposit MFJ to deduct student loan interest or receive education credits or deductions. Additionally, 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 to $ 10,000 AGI). When comparing reporting methods, it is important to attribute income, deductions, and PSLF payments to each spouse. By having strategic discussions with a tax professional now, borrowers can better prepare and minimize future student loan payments for PSLF purposes.
The path taken by borrowers to obtain loan forgiveness under the PSLF program is by no means a joy. Despite the obstacles and uncertainties that 2020 has presented, by better understanding the current direction of the PSLF program and the proactive measures available, borrowers can adapt to increase their chances and confidence of arriving safely at their destinations.
About the Author: Becca Craig, ABA, CFP®
Becca Craig, Associate Wealth Advisor at Strategic wealth of Buckingham, combines his wealth management expertise with his experience in public policy and risk management to better educate individuals using a holistic approach to financial well-being. A champion and advocate for evidence-informed planning, Becca enjoys making people’s money work for them, not against them, so they can focus on the people, efforts and causes that matter most to them. to heart. Becca is a graduate of Washington University in St. Louis and enjoys yoga, gardening, and political activism in her spare time.
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