The U.S. Department of Education offers federal student loan borrowers 4 repayment plans based on income:
- Revised Pay As You Earn
- Pay As You Earn
- Income-Based Repayment
- Income-Contingent Repayment
These four repayment plans are referred to as income-driven repayment (IDR).
Each plan qualifies for the Public Service Loan Forgiveness Program.
The PSLF Program is a federal program that forgives specific remaining debt after 120 student loan payments under an IDR plan.
Conversely, neither the Standard 10-year plan nor the Graduated or Extended Repayment Plans qualifies for the PSLF program.
Now that we’ve established each IDR plan is a qualifying repayment plan for PSLF, the next question you should ask is…
Which income-driven repayment plan is best for PSLF?
The best income-driven repayment for the PSLF program is the PAYE plan.
The PAYE plan offers low monthly payments and works great for both single and married borrowers.
The problem is that most student loan borrowers aren’t eligible for this plan.
The PAYE plan is only for new borrowers. New borrowers, according to the Department of Education, are people who…
After the PAYE plan, the next best repayment plan IMO depends on your marital status.
Married people who file their tax returns separately will often end up with a lower monthly payment if they choose the IBR plan. This is because the IBR will only consider your income and not your spouse’s income when calculating your loan payments. The REPAYE plan, on the other hand, will count your joint income no matter how you file taxes.
This is why if you’re married and file a joint return, then the REPAYE plan may offer you lower monthly loan payments then the other plans.
The easiest way to review your repayment options to compare monthly payment amounts is to use the Loan Simulator at studentaid.gov.
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How PSLF payments are calculated
Your loans payments for PSLF are based on four things:
- Your loan balance
- Your family size
- Your adjusted gross income and
- The repayment plan you choose
Each repayment plan uses the first 3 things to calculate your discretionary income.
What is your discretionary income?
For the REPAYE, PAYE, and IBR plans, your discretionary income is the difference between your annual income and 150 percent of the poverty guideline for your family size and state of residence.
For the ICR plan, your discretionary income is the difference between your annual income and 100 percent of the poverty guideline for your family size and state of residence.
Once your discretionary income is calculated, the next step is to determine how much of that income you’ll have to pay to your student loans.
The REPAYE and PAYE plan requires you to pay 10% of your discretionary income.
The IBR plan requires you to pay 15%.
And the ICR plan demands 20%.
As you can see, the REPAYE and PAYE plan demand less of your discretionary income than does the IBR and ICR plans. This often leads to more affordable payments. And that is why I think those two plans are the best repayment plans for many federal student loan borrowers.
Public Service Loan Forgiveness Program requirements
You meet the eligibility requirements for the PSLF program if:
- You’re a full-time employee of an eligible employer (federal government, state government, local government, government agency, tribal government, or a nonprofit organization)
- Your federal student loans are Direct Loans
- You pay your Direct Loans back under an eligible repayment plan
- You make 120 qualified payments (on-time, within 15 days of the due date) under that plan
If you meet those 4 requirements, the federal government will potentially forgive all of your federal student loan debt. (Plus, the loan balance forgiven will be tax-free.)
I say potentially because the PSLF Program doesn’t forgive all federal loan types. Instead, only federal loans made under the Federal Direct Loan Program are considered eligible loans for PSLF.
So if you view your federal student loans and see that you have loans made under the Federal Family Education Loan Program (FFEL Loans) and the Perkins Loan Program are ineligible for PSLF, those loans aren’t eligible.
You can make those loans eligible loans, however, by consolidating them into a new Direct Consolidation Loan. If you consolidate, choose FedLoan Servicing as your loan servicer. They’re the designated loan servicer for PSLF.
Click here to learn How to Make FFEL Consolidation Loans Eligible for Loan Forgiveness
How to Apply for Public Service Loan Forgiveness
The ECF Form lets your loan servicer know that you have full-time employment as a public servant (e.g., government employee, non-profit organization employee, etc.).
You don’t have to complete this form, but I suggest you do so because it serves as a record of you’re working in a public service job.
After you make your 120th qualifying payment, you’ll submit the PSLF Application for Forgiveness. This application tells your loan servicer that you believe you’ve met all the requirements, and now it’s time to process your Direct Student Loans for forgiveness.
In my experience, it typically takes FedLoan Servicing about 2 to 3 months to review your application and make a decision.
If FedLoan denies your PSLF eligibility because you made payments under the wrong repayment plan, you have the option to apply for the Temporary Expanded Public Service Loan Forgiveness Program.
The TEPSLF program was explicitly created by the federal government to help people in your situation.
Click here to learn How to Apply for the TEPSLF Program