Student Loan Refinancing vs Public Service Loan Forgiveness (PSLF)October 8, 2019
Updated February 9, 2021
Graduates seeking enriching careers like doctors, nurses, pharmacists, lawyers, teachers, government employees and members of the military can often graduate from school with a large amount of student loan debt. Student loan debt can be especially burdensome during residency.
Many healthcare professionals look to Public Service Loan Forgiveness (PSLF) for relief. Public Service Loan Forgiveness is a federal government program under the U.S. Department of Education’s Direct Loan Program offered to forgive qualified candidates of their Federal Direct Loans. The PSLF program can be a good option for healthcare professionals, but it is vital to understand the qualifications.
According to Studentaid.gov, the PSLF program has received more than 227,000 unique applications, and only 6,493 applicants have qualified. When choosing how to proceed with your student loan debt, it is essential to be well informed to achieve the best possible results. Identifying whether student loan refinancing or Public Service Loan Forgiveness are right for you is a great first step, and making a decision early in the repayment process could save you time and money.
Let’s review the requirements of the Public Service Loan Forgiveness program, take a look at student loan refinancing, and review the qualifications of both programs to see which option could be right for you.
What is Public Service Loan Forgiveness (PSLF)?
Public Service Loan Forgiveness (PSLF) is a program designed to encourage qualified individuals to pursue careers in eligible nonprofit or public service fields. If you apply and are approved, your remaining student loans will be forgiven after you complete all the qualifications.
How to Qualify for Public Service Loan Forgiveness
Qualifying for Public Service Loan Forgiveness requires eligibility based on specific criteria. You may be approved for Public Service Loan Forgiveness if you’re working for a qualified employer. To apply, you must submit the Public Service Loan Forgiveness (PSLF) & Temporary Expanded PSLF (TEPSLF) Certification & Application.
If approved, you must re-certify annually and any time you change jobs by re-submitting the PSLF application form.
After you’ve worked in an eligible position and have made 10 years of qualifying monthly student loan payments, your student loan debt may be forgiven. Best of all, there’s no limit to the amount of student loan debt that can be forgiven under PSLF.
Learn more about the specifics of qualifying for PSLF below.
Loans Eligible for Public Service Loan Forgiveness
If you’re planning to pursue this student loan forgiveness option, it’s important to note that private student loans are not eligible for PSLF, but certain federal loans are. The eligible loans for PSLF are non-defaulted loans under the William D. Ford Federal Direct Loan Program. These include:
- Direct Stafford Loans
- Direct Unsubsidized Stafford Loans
- Direct PLUS Loans
- Direct Consolidation Loans
Even if your original federal student loans are not eligible for Public Service Loan Forgiveness, you may be able to consolidate them through a Direct Consolidation Loan to change that.
For example, if you have a Federal Family Education Loan (FFEL) or a Perkins Loan, you may be able to consolidate these and apply for Public Service Loan Forgiveness. It’s important to remember, however, that consolidating your student loans will restart your PSLF timeline, and you will be required to make 10 years of eligible student loan payments from the date you consolidated.
Your employer plays a vital part in whether or not you can qualify for PSLF. Qualifying employers may include:
- Nonprofit organizations with 501(c)(3) status
- Nonprofit organizations without 501(c)(3) status but that provide a qualifying public service
- Peace Corps
- Government organizations
To qualify for PSLF, you need to be working at least 30 hours per week for a qualifying employer, and if you change jobs, you will need to re-submit your PSLF application paperwork. You may also qualify if you work for two qualifying employers and average at least 30 hours per week. Re-submitting the Employment Certification Form annually can keep you on track for the program.
If PSLF is important to you and part of your financial plan, it is imperative that you verify this internally. If at any point your employer is no longer a qualified institution, they are not responsible for notifying you. For example, in the healthcare industry, it is not uncommon for hospitals to convert from a non-profit to a for-profit institution.
If you’ve been working for a qualifying employer but have not already applied for Public Service Loan Forgiveness, it may not be too late. Any payments made after October 1, 2017 while working for a qualified employer can be eligible toward PSLF, but you must submit a Public Service Loan Forgiveness application for them to qualify. If approved, you may receive credit for those qualifying payments made in the past – just keep in mind that you may have to work a little harder to track down some of the application information.
Qualifying Repayment Plan
Borrowers seeking the PSLF program must have federal Direct Loans and be on a qualified payment plan. These include Income-Driven Repayment Plans (IDR) and the 10-Year Standard Repayment Plan.
If you do not transition to an Income-Driven Repayment Plan, however, you won’t have a loan balance left to forgive since you will have paid it off by the time you qualify for PSLF.
If you applied and weren’t approved for Public Service Loan Forgiveness, you may choose to explore Temporary Expanded Public Service Loan Forgiveness. In March 2018, the Consolidated Appropriations Act offered an additional opportunity to individuals who may not have qualified for PSLF to re-apply for forgiveness. Visit Studentaid.gov for a full list of eligibility requirements.
120 Qualified Payments
If you are on a qualified repayment plan, the next step is making 120 qualifying payments. If you plan on paying extra monthly, do so with caution. When paying more than the minimum amount, you will need to contact the loan servicer.
For example, a common federal student loan servicer is FedLoan Servicing. When you contact the federal student loan servicer, you have to request that the extra amount paid is not applied to cover future payments. To qualify for PSLF, you cannot receive credit for a qualifying Public Service Loan Forgiveness payment if no payment is due. You will also need to pay the full amount on the bill for it to be considered a qualified payment.
A common misconception about the PSLF program is that payments need to be consecutive. For example, if you work for a qualifying employer and made qualified payments, but then begin to work for a non-qualified employer, you will not lose credit for the qualified payments made before working for the non-qualifying employer.1 That said, it’s important to understand that payments made while working for a non-qualifying employer will not count toward your 120-payment total.
It is essential to know that your payment cannot be any later than fifteen days after your due date to be considered a qualified payment. On loans placed into an in-school status, grace period, deferment, or forbearance, you cannot make a qualifying monthly payment. If your loans are in deferment or forbearance to make a qualified payment, you must contact the servicer and request the status waived. According to the federal government, the best way to ensure that you are making on-time payments is to sign up for direct debit with your loan servicer. You need to be working full-time for a qualified employer while making payments on the loan.
Applying for Public Service Loan Forgiveness
To see if you qualify for Public Service Loan Forgiveness, you should complete and submit the Employment Certification Form for Public Service Loan Forgiveness annually.
Once you’ve made all your qualified payments, complete the PSLF application one last time. Remember that you must still be employed by a qualifying organization when you submit the final application.
If you’ve submitted your paperwork annually, then you may only need to submit the form for your most recent employer. On the other hand, if you haven’t previously submitted Employment Certification Forms, then you’ll need to complete the forms for each qualified employer.
After completing the form, you can either mail or fax it to the U.S. Department of Education, or you can log into your FedLoan account and submit the form electronically.
The Reality of Public Service Loan Forgiveness
The PSLF program only allows forgiveness for certain types of federal loans as described above. To date, the Public Service Loan Forgiveness program has rejected 99% of applicants2.
If you are denied for Public Service Loan Forgiveness, then you may consider applying for Temporary Expanded Public Service Loan Forgiveness if you meet the qualifications. Keep in mind that this is a temporary government program introduced by the Trump administration in 2018 and may not be available long-term.
If you want to qualify for PSLF successfully, you must pay close attention to the detailed eligibility requirements of the program. Many of the requirements of the PSLF program can be difficult to understand or even find.
Student Loan Refinancing
If you’re considering student loan refinancing as an alternative to Public Service Loan Forgiveness, here are a few details you may be interested in.
Student loan refinancing means taking out a loan with a new lender. The new lender will then in turn pay off your old lender. Your new loan will include revised terms, often including a lower interest rate and the adjusted repayment term of your choosing.
The new interest rate provided is based upon a borrower’s credit history and credit score, in addition to other eligibility criteria, depending on the financial institution. Overall, refinancing student loans can have an impact on a borrower’s interest rate, repayment terms, and benefits.
When deciding what path to take, consider what your financial goals are and which option might set you up for the greatest financial success.
When you take out federal student loans, all borrowers receive the same interest rate on a given Federal Direct Loan.
The federal government does not review a borrower’s or cosigner’s credit history or credit score. When you refinance your student loans, the private company will take several factors into consideration, including your credit score and debt-to-income ratio.
If you’ve managed your money well and paid your bills on time, you could even earn a lower interest rate by refinancing your student loans, which would help you pay your balance down faster.
Many companies that refinance student loans will offer both variable and fixed rate loans. If you previously had a variable rate loan and qualify to refinance, you can select a fixed-rate loan instead and vice versa.
Refinancing provides qualified borrowers the opportunity to make changes to existing student loan terms.
Repayment Terms & Cosigners
Federal student loans do not provide borrowers with an option regarding the repayment terms on the loan. Some federal loans provide a 10-year standard repayment plan, but other federal loans can span 25 to 30 years. When refinancing your student loans, you can select from the repayment terms offered by the company. Many companies offer repayment terms of 5, 7, 10, 15, and 20 years.
Can you imagine paying off your student loan debt in five years? Many borrowers find that repaying their student loans faster has helped them to save money on interest. Having the ability to select repayment terms can allow borrowers the flexibility to reach other financial goals in their life. Generally, the repayment term selected will affect the interest rate on your new loan after you refinance.
If you took out a private loan for college, it is likely you may have needed a cosigner. When you refinance student loans, you could potentially remove the cosigner from the loan if you have established the necessary credit to take out a loan on your own. Removing a cosigner relieves the cosigner from the financial burden and responsibility of student loan debt and frees up the cosigner’s credit.
Federal Loan Benefits
Federal loans offer benefits for borrowers that may not be available through a private lender like a student loan refinancing company. It’s imperative to read the guidelines before refinancing or consolidating your student loans because neither can be reversed.
One of the biggest setbacks of student loan refinancing is that once you’ve refinanced your student loans through a private company, you no longer qualify for the PSLF Program. You may want to learn about federal student loan consolidation vs. refinancing.
When you refinance your federal student loan, the debt is paid off by the student loan refinance company, and a new loan is issued to you by the refinance company. Therefore, there is no federal student loan anymore. Since that loan is now paid off, there is no balance to forgive, and in turn, you cannot utilize PSLF. This is not the only drawback of refinancing.
Many student loan refinance companies offer different benefits regarding deferments or forbearances and make decisions on a case-by-case basis. Benefits that may have been utilized while repaying your federal student loan may no longer be available through a private lender.
Public Service Loan Forgiveness or Student Loan Refinancing? Which is Right for You?
Now that you have an understanding of the options available to you, consider what makes the most financial sense for your situation.
Student loan refinancing may be a better option if you want to pay off your debt quickly since student loan refinancing allows you to change repayment terms and may have lower interest rates. Changing repayment terms can allow you to pay down your debt faster or even extend repayment.
Another situation where refinancing may be a more attractive offer is if rates achieved by refinancing are lower than rates on your federal loan or your private loans. By achieving a lower interest rate, you will be paying less interest over time. If you are not planning on applying for PSLF for your federal loans, or you have private student loans that carry high-interest rates, you should look into the options available for refinancing student loans.
However, by refinancing your federal student loans you will lose many benefits and protections available to federal student loan borrowers. Keeping your federal protections may be more beneficial than refinancing your student loans.
Whether you choose to pursue PSLF or student loan refinance, you should be knowledgeable about the requirements and the pros and cons of each option.