Public Service Loan Forgiveness, or PSLF, is a hot topic right now.
Only payments made after October 1st, 2017, are eligible. Since 120 payments are required for PSLF, the earliest anyone could have possibly been eligible was late 2018.
Now that we are past that date we are seeing a small number of borrowers receive student loan forgiveness through the program. But we’ve seen (many) more get rejected for various reasons.
Many who applied had loans that weren’t eligible, were on a repayment plan that wasn’t eligible, or had other issues.
Take these examples as a cautionary tale: when you are pursuing Public Service Loan Forgiveness make sure you are vigilant about it. That means fully understanding the requirements and documenting everything. When you’ve made the required 120 payments and submit your request for PSLF, you should be confident that you have done everything required.
Borrowers who are pursuing PSLF have a lot riding on it. There are few opportunities where you can have potentially tens of thousands or even hundreds of thousands of dollars worth of loans discharged, tax free.
Getting PSLF alone is a big win, but it also makes sense to maximize it. PSLF provides borrowers with incentives to shove money into tax-advantaged accounts. This is one way you maximize Public Service Loan Forgiveness.
But before we get into the strategies that maximize PSLF, let’s make sure you have a good base of information. Read these three articles first:
- The Ultimate Student Loan Spreadsheet to Track Your Student Loans – Download the free spreadsheet in this post and populate all your student loan information.
- Student Loan Income-Driven Repayment Explained – Read this overview of income-driven repayment plans. If you are pursuing PSLF you will want to be on one of these plans.
- How Public Service Loan Forgiveness (PSLF) Works – This post goes over the requirements of PSLF, which is extremely important considering how many borrowers have applied for PSLF who had ineligible loans, didn’t work for an eligible employer, or were on the wrong repayment plan. These are mistakes you can’t afford to make.
I have to reiterate one more time how important it is to understand your loans, the requirements of PSLF, and what you need to do to successfully achieve PSLF. My book Student Loan Solution has everything laid out in detail, as well as how to improve your broader financial life while repaying student loans.
Let’s get to what you’ve been waiting for: how to maximize PSLF.
First, a few “extra” things you can do to ensure you are well on your way to PSLF:
- Resubmit your Employment Certification Form every six months
One issue people run into with PSLF is not submitting the Employment Certification Form often enough. You technically aren’t required to submit this regularly, but it makes sense to. FedLoan, the loan servicer that borrowers are moved to if they are pursuing PSLF, doesn’t updated your eligible payments until you’ve submitted your Employment Certification Form. The reason why is because they have no idea whether or not you’ve left your employer since you last submitted the form. It costs nothing to submit the form, so doing this every six months or, at minimum every year, makes a lot of sense.
- Calculate your Payments
While you should be able to trust FedLoan to accurately calculate your required payment, it makes sense to double-check it because there have been reports that FedLoan has calculated required payments incorrectly. You an use the free student loan spreadsheet to plug in your loan balance and AGI. In turn it will calculate your discretionary income and what your payment amount should be under each repayment plan.
Maximizing Public Service Loan Forgiveness
Maximizing Public Service Loan Forgiveness comes down to your Adjusted Gross Income, or AGI, which is essentially a number on your tax return. Think of someone with a salary of $70,000. Their AGI will be lower than $70,000 because AGI factors out things like contributions to a standard IRA, 401(k), or other tax deferred accounts.
The beauty of PSLF is it rewards you for lowering your AGI, because for each dollar you lower your AGI is $1 that isn’t factored into your income-driven repayment, and is (typically) 10 cents you don’t pay towards your loans. If you are working towards PSLF the less you can pay towards your loans the better.
Take Advantage of Opportunities to Lower your Adjusted Gross Income
If you have a 403(b) through your employer, you can contribute up to $19,000 to your account in 2019. That’s up to $19,000 that won’t be factored into your AGI when you file taxes next year.
Obviously your income may not allow you to max out your 403(b), but if you’ve built an emergency fund and paid off credit card debt, the more you can contribute to a 403(b) the better. Not only are you minimizing the amount you pay towards your student loans, you are setting money aside for retirement. A win-win!
But a 403(b) isn’t the only tax-advantaged account out there. Other accounts that can help you lower your AGI include:
- 401(k) – This won’t be relevant to everyone, but some who are pursuing PSLF will have their partner’s income factored in as well. If that’s the case, it makes sense for both of you to contribute as much as possible towards accounts that shield your income from taxes and, in turn, being factored into your AGI. For them that may be a 401(k).
- Standard IRA – Many personal finance experts will say that when you are younger you should contribute to a Roth IRA, which you contribute to after-tax. But if you are pursuing PSLF you want to lower your taxable income today, and that means contributing to a Standard IRA.
- Health Savings Account (HSA) – If you have a high deductible health plan, which is likely as they are becoming more and more popular, you are entitled to contribute to an HSA. You make contributions to an HSA tax free, which lowers your AGI. It also makes sense because you build a medical emergency fund, which is more important now than ever before.
- 457 Plan – A 457 plan is a plan that is offered to certain state and local government employees. Employees can contribute to the 457 plan on a pre-tax basis, thereby lowering their taxable income. This is a potentially huge benefit for those pursuing PSLF, as it’s in addition to a 403(b) or 401(k). Meaning, you can contribute to both! That’s a lot of income that can be deferred and, in turn, lower your taxable income.
The thing that all of these accounts have in common is this: they set you up nicely for retirement and bolster your finances.
Someone who otherwise may find it impossible to make their student loan payments on a standard ten-year repayment plan could potentially have tens of thousands or hundreds of thousands of student loans forgiven (tax free) through PSLF. While they are while they make smart money moves by consistently contributing to a retirement account (or retirement accounts), build a healthy emergency fund, and even build up a healthy medical emergency fund in their tax-deffered HSA.
If you are pursuing PSLF or are considering pursuing PSLF, you owe it to yourself to maximize it. Think of all the corporations and wealthy individuals who are taking full advantage of the tax code – there is no reason you shouldn’t too!
Check out some of our favorite personal finance resources:
Are you getting the best credit card rewards? Check out the top cash back credit card offers (updated daily)
Make extra money: 15 ways to make money from your computer
Get the First Chapter Free!
Join our online community and get the first chapter of the book Student Loan Solution absolutely FREE!
