PSLF waiver: What student loan borrowers need to know

What you need to know about the PSLF Waiver

An emergency waiver was put in place back in October which could allow for many borrowers to retroactively get qualifying Public Service Loan Forgiveness (PSLF) months that were previously not eligible based on current PSLF rules. Many who were not on an Income Driven repayment plan or had FFEL loans, Perkins loans, or consolidated after having worked at a qualifying institution are now able to retroactively get qualified months towards the PSLF program. This is a very positive step for this program.

In order to get qualifying months, borrowers must simply meet two criteria: (1) Working full time for a qualifying PSLF employer AND (2) has to have been “in repayment” status on their Federal student loans during their time at that employer. This new waiver is only in effect until October of 2022 and then it reverts back to the normal PSLF rules. Given that, now is the time to make sure borrowers are getting their loans properly aligned with the PSLF program rules to continue getting qualifying months past October of 2022.

Steps to get qualified months:

• Ensure the borrower is with FedLoan and if not, the borrower should reach out to FedLoan and express their interest in moving to them as their loan servicer to enroll in the PSLF program.
• Submit PSLF Employer Certification Form (ECF) for each qualifying employer that the borrower worked at “full time” while in some sort of repayment. Borrowers can have their HR team fax it over to FedLoan and/or upload this PDF directly on their FedLoan website portal.
• If necessary, start a Direct consolidation of ONLY the non “Direct” loans that the borrower wants to get qualified months for PSLF.
  • Borrowers should not consolidate ALL of their loans as this is not necessary nor recommended and instead, they should only consolidate the non “Direct” loans that they want to be included in the PSLF forgiveness. Ensure this will not impact any other forgiveness program that they are seeking like a Perkins loan cancelation or the like.
• Enroll in an income driven repayment program if not already on one.
• After all of the ECF forms have been submitted, verify the borrower’s qualifying months on their Department of Education record. FedLoan has a PSLF tracker on their website but ensure that these numbers are also getting added to their official record since FedLoan will not be servicing their loans much longer. The site advises that this could take months and so it is advised not to wait until October to start this process.

FedLoan’s replacement - MOHELA

Although we thought FedLoan was going to be leaving us this past year, through an act of God (and likely a lot of money thrown their way) the Department of Education has gotten FedLoan to stay on for one more year. MOHELA has been identified as FedLoan’s successor and borrowers who are not on the PSLF program will be moved over to MOHELA early this year. Those who are enrolled with FedLoan and on the PSLF program currently will not be moved to MOHELA until later in 2022. Our guess is that they will move them after the conclusion of the PSLF Waiver in October.

Forbearance period extension through May 1st – New income recertification opportunities

Many have already heard that the new COVID-19 forbearance period on Federal student loans has been extended through May 1st of this year. This now opens up new opportunities for borrowers to decide when they want to recertify their income before/after they file their taxes or wait until their extended recertification date. Since borrowers can recertify their income based off of their most recently completed tax return, they are technically be able to make payments on their 2020 income all the way through 2022 if they recertified their income right before they file their 2021 taxes. By doing this, it would allow them to perpetually be recertifying their income right before they file their taxes every 12 months and making payments in that year based off of their income from 2 years ago. This could be quite advantageous for those seeking the PSLF program and trying to get as many years of qualifying payments completed as possible at a lower income.

It is encouraged to have borrowers complete their income recertification through the StudentAid.gov site to prevent errors from their loan servicers. This site also asks them if they have had a “decrease in income” since the last time they filed their tax returns but doesn’t ask if they have had an “increase in income” like the loan servicers will ask. This is oftentimes a big deal for clients going through a major income jump.

Impact of retirement contribution increase to $20,500:

Many borrowers who are making payments on their student loans forget that their payment is based off of their “Adjusted Gross Income” and not simply their gross income. This means that any pretax retirement contributions can offset their income and thus lower their required monthly payment.

For those borrowers who are already earning an income above 150% of the poverty line, making a $20,500 pretax retirement contribution for 2021 could potentially reduce their effective payment by $171/mo if they are on PAYE, REPAYE, or the IBR 2014 repayment plans. For those on the old IBR plan, max contributions could now save them upwards of $256/mo.

Refinance now or wait?

Many borrowers who are likely not going to qualify for any Federal forgiveness programs are faced with a tough decision as to when/if to refinance. When making this decision, it comes down to three variables: interest rates, potential for Federal loan program changes/forgiveness opportunities, and Federal protections (discharge upon disability, death, payment plans, etc).

When it comes to interest rates, there is no interest accruing on Federal loans through May 1st but there could be a strong argument that interest rates will be much higher if they choose to wait and refinance over the summer.

When it comes to governmental changes, some borrowers are already beating themselves up for refinancing their loans too early, especially those who did so right before the new PSLF waiver which would have qualified them for full tax-free loan forgiveness.

The Federal loan program is seen as a very “cushy” setup and allows many options for borrowers to lower their payment or have the loans totally discharged if life changes in the future. Although potentially alleviated with insurance, some may want to stay with the Federal government since their loans would be discharged upon their death or permanent disability. This may be very attractive for those who are uninsurable due to preexisting conditions.

With the volatility in the Federal loan programs as of late, many borrowers are choosing to keep their loans Federal until the dust settles after the COVID-19 forbearance program ends.

Resources to stay updated

Staying up to date on student loan changes is often difficult and the spread of misinformation is unfortunately quite prevalent, even on some major news sites. It is important to ask yourself, what is the affiliation of the site that you are reading? Do you see lots of ads for refinancing banks sprinkled around the article? It's usually a clue that the information is a pitch for student loan refinancing offers. Without a detailed analysis of your loans, this isn't necessarily in your best interest. Also, consider the author and their qualifications. Many sites don't post their credentials, so be sure to watch out for those anonymous sites and articles.

Two sites that borrowers can comfortably lean on for information are the Certified Student Loan Professional’s (CSLP) blog as well as the Department of Education’s website itself. There are many other sites out there that might put out information prior to these two sites being updated but if they are not on either of these two sites yet, it is important to seek the counsel from a trained or experienced professional prior to a borrower making any financial decisions based off that information.

Michael Foley, CFP, CSLP, is a comprehensive financial advisor who runs his practice out of Scottsdale, Arizona under North Star Resource Group. Michael was trained at Duke University and holds his Certified Financial Planner designation alongside his CSLP®. Although Michael serves a diverse group of clients with their financial and student loan needs, with two physician parents, Michael has found a specialty in working with those in the healthcare space. To schedule an initial consultation click here.

Registered representative and investment advisor representative of Securian Financial Services, Inc. Securities and investment advisory services offered through Securian Financial Services, Inc. Member FINRA/SIPC. North Star Resource Group is independently owned and operated. 6720 N. Scottsdale Road, Suite 290, Scottsdale, AZ 85253. 4235145/DOFU 2-2022