Student Loan Refinancing vs. Public Service Loan ForgivenessOctober 8, 2019
Graduates seeking enriching careers like doctors, nurses, and pharmacists 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 (PSFL) 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 USA Today, the PSLF program has had 41,000 submissions, and only 206 applicants have qualified. When choosing how to proceed with your student loan debt, it is essential to be well informed and have all the facts before making a decision.
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.
Facts About Public Service Loan Forgiveness
If you are a borrower of student loan debt and you work within the public or non-profit sector, you have probably heard of the PSLF program.
If you ever played the game “telephone” as a kid, you’ll know that word-of-mouth from multiple individuals can get information and facts mixed up. According to Federal Student Aid, a division of the U.S. Department of Education, the “PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.”
To fully understand this Act, let’s review the legislative history.
The program created under the College Cost Reduction and Access Act of 2007 (P.L. 110-84) was designed to encourage student loan borrowers to remain and pursue careers in the non-profit and public sectors, as salaries in the private sector tend to be higher.
Loans Eligible for Public Service Loan Forgiveness
Certain federal loans are eligible for PSLF. The eligible loans for PSLF are non-defaulted loans under the William D. Ford Federal Direct Loan Program.
You may know this as the Direct Loan Program or Direct Loans. According to the Department of Education, the loans provided under this program are:
Undergraduates, vocational, or graduate students. Must be enrolled half-time in participating schools.
Direct Unsubsidized Stafford
Undergraduates, vocational, or graduate students. Must be enrolled half-time in participating schools.
For parents of dependent students accepted for enrollment half-time in participating schools. As of July 1, 2006, graduate students are eligible.
Individuals with student loans that have defaulted but have made satisfactory arrangements to repay the loans.
The Federal Family Education Loan Program and the Federal Perkins Loan Program, don’t qualify on their own for the PSLF program. However, if you have a loan within one of these two programs and consolidate them into a Direct Consolidation Loan, they can qualify. Now that we understand the type of eligible loans we’ll take a look at some qualifications.
Qualifying Repayment Plan
Borrowers seeking the PSLF program must have federal Direct Loans and be on a “qualified payment plan” known as an Income-Driven Repayment Plan (IDR).
The 10-Year Standard Repayment Plan qualifies for PSLF, but to have a balance remaining, you must enter into an Income-Driven Repayment plan. If you do not enter an Income-Driven Repayment Plan, you won’t have a loan balance left to forgive since you will have paid it off by the time you qualify for PSLF.
Income-Driven Repayment Plans
Income-Driven Repayment plans base your monthly federal student loan payment on your income. Income-Driven Repayment Plans Include:
Revised Pay As You Earn Repayment Plan or REPAYE Plan
Bases the monthly payment on you (and spouse’s) adjusted gross income, family size, and state of residence.
Pay As You Earn or PAYE
Monthly payments are based on your adjusted gross income and family size. You must be experiencing a financial hardship to qualify. You must also be considered a “new borrower” as of 10/1/2007 or after, or be someone who received an eligible Direct Loan disbursement on 10/1/2011 or after.
Income-Based Repayment or IBR
Monthly payments based on your adjusted gross income and family size. Must be experiencing a financial hardship to qualify.
Income-Contingent Repayment or ICR
Based on your monthly adjusted gross income and family size. Typically chosen if an individual can’t qualify for the Pay As You Earn Plan or Income-Based Repayment.Any changes to your income or your spouse’s income will affect your student loan payment. For example, if your salary increases, your student loan payment will as well. If you are married, both your income and your partner’s income are combined. Two combined incomes will increase your total income, likely increasing your monthly payment.
Keep in mind: On an Income-Driven Repayment plan, be aware of the overall loan balance. A review of the total debt amount will take place when applying for a mortgage, credit card, or auto loan. A standard evaluation process for financial institutions is reviewing a borrower’s debt-to-income (DTI) ratio. Borrowers who have high DTI ratios may receive higher interest rates on their loans because financial institutions view these borrowers as higher risk. Your federal student loan balance could end up costing you in terms of higher interest rates on other types of loans.
120 Qualified Payments
If you are on a qualified repayment plan, the next step is making 120 qualifying payments. If the total student loan balance is of concern and you plan on paying extra monthly, do so with caution. When paying over 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. Payments do not need to be consecutive to count as qualifying in some circumstances. 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
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 loan is 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.
Your employer plays a vital part as to whether or not you can qualify for PSLF. A qualifying employer should be a government agency or certain types of non-profit organizations. 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.
To qualify for PSLF, you need to be working full-time for a qualifying employer. Requesting the Employment Certification Form annually from your qualified employer can keep you on track for the program.
Applying for Public Service Loan Forgiveness
The Public Service Loan Forgiveness program is common among borrowers with federal student loans, but the qualifications are not well-known. For that reason, we have gathered some documents and information for you. First, you should complete and submit the Employment Certification Form for Public Service Loan Forgiveness annually. If you change employers, you should also have this form completed by your new employer. If you do not submit your Employment Certification Form yearly, you will need to submit it when you apply for the PSLF program. When applying for the PSLF program, you will need to submit one for each employer where you worked while making qualified payments. If you are looking for the Employment Certification Form you can download it here.
You can download the PSLF application here. Once you’ve completed your forms, you have three options for submission. Public Service Loan Forgiveness forms can be mailed, faxed, or submitted through your student loan servicer. You can mail your completed application to the U.S. Department of Education, fax your information to the number listed on their website, or upload your application to the servicer.
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 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. To the benefit of those who refinance, student loan refinance companies are obligated by law to disclose information regarding their offerings. Some would say that student loan refinancing has a straightforward process when compared to the PSLF program. Not only is student loan refinancing transparent and held to a number of standards, but it can also really empower borrowers with options. Borrowers who previously had little control over their student loans can now choose what repayment plan works best for their financial future.
There is no “one-size fits all” answer. You need to know your options for managing your student loan debt. Whether you choose to pursue Public Service Loan Forgiveness or refinance your student loans is your decision. Understand that if you choose to pursue PSLF, there is a possibility you will not qualify. Remember, according to an analysis done by USA Today, only 1 percent of student loan borrowers who applied for the PSLF program have qualified.
When deciding what path to take, consider what your financial goals are and what sets you up for the most success in the future.
Student Loan Refinancing
Student loan refinancing has gained popularity within the last five years. Private companies are offering student loan refinancing as a way to make student loan debt more manageable. Many benefits can be achieved when qualified borrowers refinance their student loans. Most notably they can change repayment terms to fit their financial goals and lifestyle, and combine multiple federal and private loans into one single loan with a simple monthly payment, while likely reducing the amount paid over the life of their loans.
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 you take out federal studentloans, 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 a look over your credit history and credit score. The private student loan refinance company will also review additional information, like income.
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.
Repayent 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. Be prepared when refinancing your student loans in case there is a loss of benefits.
Loss of Benefits
Federal loans offer benefits for borrowers that may not be available through a private lender like a student loan refinance company. It’s imperative to read the guidelines and fully understand them before moving forward with refinancing your student loans. 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.
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 as a healthcare professional, 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.
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