1. Public Service Loan Forgiveness is about 120 qualifying payments (not just 10 years):
- PSLF requires 120 qualifying monthly payments, and these don't have to be consecutive. Breaks in employment? No problem, your journey doesn't reset.
- Whatever your balance is at the end of your 120th qualifying payment is eligible for tax-free forgiveness.
2. Treat It Like a 'Tax':
- With Income-Driven Repayment plans, your payments are a percentage of your income.
- Consider it more like a tax than a traditional loan repayment. Whether you have $50,000 or $500,000 in federal student loans, your payment won’t change based on the size of your debt; it will be based on your income.
3. Lower Payments with Pre-Tax Contributions:
- Contributing to pre-tax retirement accounts, HSAs, or FSAs can effectively lower your taxable income, thus reducing your student loan payment under income-driven plans.
- This is a great way to save and invest for the future while also benefiting in the short-term.
4. How to Qualify for Public Service Loan Forgiveness:
- Work full-time (at least 30 hours a week) for a non-profit, state, or government job.
- Enroll in an income-driven repayment plan.
- Submit a PSLF certification form annually.
5. Consider Starting Repayment When Your Income is Lowest:
- If you just graduated and your income is less than the poverty line deduction for your family size in an income-driven repayment plan, you can start the repayment clock with a $0 monthly payment.
- For example, with the SAVE plan, if you are a family size of 1 (no spouse or children), your poverty line deduction is $33,885 for the 2023 tax year. If your Adjusted Gross Income is below this amount, you won't have a payment under the SAVE plan for that year.
6. Your Adjusted Gross Income (AGI) Determines Your Payment:
- You'll need to submit your annual recertification for your IDR plan. The Student Aid website can link to the IRS database to pull your most recent tax return for determining your payment.
- Your student loan payments will usually be based on the income you made in the previous year, not your current income.
7. Married Borrowers, Consider Filing Separate Tax Returns:
- If you're married and file a joint tax return, your IDR plan will consider household income for your student loan payment.
- With the SAVE plan, spouses can file separate tax returns to base repayment on their individual incomes. This could lower your payment if one spouse has a higher income (especially if they don’t have any student loans).
- Note: Filing separately can potentially have adverse tax/planning consequences, so consult with a tax professional/financial planner before using this strategy.
8. Focus on Payments, Not Balance:
- Your loan balance can be misleading in the PSLF program. It's the number of qualifying payments that count, not the amount you owe. Navigating PSLF can be complex, but understanding these nuances can make a big difference in your journey towards loan forgiveness.
9. Working in Private Sector and Ineligible For PSLF:
- You can still qualify for student loan forgiveness through an IDR plan, but it will take longer (20-25 years / 240-300 payments).
- Note: Long-term forgiveness (non-PSLF) is treated as taxable income. Plan to save for the eventual "tax bomb" when forgiveness is achieved.
10. Consider Private Refinance:
- If you have federal student loans with higher interest rates, private refinancing can lower your interest costs.
- Be aware that private refinancing eliminates the flexibility of federal loans, including eligibility for income-driven repayment, forgiveness, or financial hardship forbearance.
- If opting for private refinance, choose a repayment term that offers affordable payments and allows for extra principal payments to save on interest.
NOTICE:? This explanation is provided for informational purposes only and is not to be construed as or considered to be legal or tax advice.? You should always consult your tax advisor with any and all questions regarding any all tax and tax related matters, including any questions that you may have concerning tax strategies described generally above.
