Policy surrounding federal student loans saw a sizeable amount of change this past year. Suspended payments and the extension of tax-free employer-based student loan contributions are two changes that have generated a number of questions. Of particular interest is the impact of these changes on people pursuing income-driven repayment (IDR) plans and Public Service Loan Forgiveness (PSLF). This post explores key points to consider, as well as how to help provide clarity for impacted student loan borrowers. Providing clarity on this topic is imperative when you consider 25% of the US labor force is in public service.
Suspended Payments, 0% Interest, & PSLF
It’s well established that monthly payments on federally held student loans in good standing are not required at this time. There’s also no interest accruing on those loans. For many borrowers, if they’re able to make payments during this time, it makes good financial sense. Full payments are applied to the principle of the loan, assuming the loan has no lingering unpaid interest that accrued prior to the CARES Act.
But for borrowers pursuing PSLF, making payments when no payment is required may actually lessen the amount forgiven once all PSLF requirements are fulfilled. The reasoning is that the months spent in payment suspension count as qualifying payments under PSLF, assuming all other PSLF qualifications are met.
For borrowers pursuing PSLF, it’s still important to ensure they’re on track every year. Previously, this consisted of annually completing the Employment Certification Form (ECF). To simplify the PSLF process, The Department of Education combined the PSLF form and the ECF. Today, borrowers should complete a full PSLF form each year and submit it to FedLoan Servicing.
And, since qualifying PSLF payments need to be made while under an IDR or standard plan, it’s also a best practice to recertify for IDR before their deadline every year even during the payment suspension.
With passage of the Consolidated Appropriations Act in December 2020, employers can make contributions (up to $5,250 annually) to an employee's student loans tax-free through 2025. Some may think this employee benefit will increase the borrower's discretionary income and thus their monthly payment under an IDR plan. But that’s not true. Due to the payments not being considered income, monthly IDR payment amounts are not impacted. In fact, borrowers can use the employer payments to offset the amount they themselves need to pay to remain in good standing once the payment suspension expires.
Can borrowers pay ahead on their loan if they’re pursuing PSLF, and does it speed up the forgiveness process? Yes and no. Borrowers technically can pay ahead on their loan(s) each year up until their IDR payment amount is recertified, but it doesn’t speed up the requirement of 10-years of qualifying employment.
Reduced Work Hours
Pandemic challenges have impacted employers and their workforce in different ways. Some organizations have had to reduce hours or furlough staff. To qualify for PSLF borrowers must be working full-time (at least 30 hours or the employer’s definition of full-time, whichever is greater) for a qualifying employer. While suspended payments count toward PSLF for full-time employed borrowers, the suspended payments do not count toward PSLF for those who have been laid off or are working less than full-time or 30 hours per week.
These borrowers do not lose their eligibility for PSLF. Rather, if they once again meet the qualifying requirements (employer and full-time status), the payments they make in the future can be added to the count of qualifying payments made up to the point where they dropped below full-time or 30 hours per week.
As we continue to see student loan policy changes as well as new opportunities borrowers can take advantage of, it’s important to provide borrowers with accurate advice from a trustworthy source that cuts through student loan confusion. Student Loan Success Center™ is the perfect solution because its counseling goes above and beyond traditional loan servicing support.
If you’re an organization that is interested in helping your alumni, employees, or customers who have student loan questions, contact us to learn how we can help.