While I’ve addressed student loan forgiveness in the past, I haven’t specifically addressed a variation of this: the Public Service Loan Forgiveness (PSLF) plan.
While the traditional loan forgiveness plan takes twenty years and the remaining balance is taxable, under the PSLF plan the balance is forgiven in ten years and isn’t taxable. Given that the primary requirement is working for a 501c3, this seems like an obvious route to go for many going into non-profit work – specifically to those in Seminary going into church work or counseling.
Unfortunately, the PSLF isn’t quite that simple. In fact, if you’re going into missions or occupation ministry it is probably a non-starter. You can download some FAQ’s here, or research more here, but basically there are three main guidelines:
- Make 120 ‘qualified’ payments
- Be Employed Full time the entire 10 years
- Working at “public service” organization
The consideration of these three conditions is very important. One of the great problems of debt is that when it becomes a way of life, the inherent risk isn’t realized until another variable changes. Debt isn’t a problem until you lose your job, have a health emergency, interest rates change, your bank goes out of business, the value of your asset goes down, or any other number of unknown circumstances. Or as Warren Buffett said, “You never know who is skinny dipping until the tide goes out.”
So as we look at these three conditions, keep in the forefront of our minds the risk of time – can we maintain these conditions for 10 years?
Make 120 Qualified Payments
A ‘Qualified’ payment is one that:
You make WHILE employed. You can’t make a qualified payment if you’re laid off, have a couple months between jobs, retire early, are on unemployment, become disabled, etc.
Must be 120 separate payments. You can’t prepay the loan payments, make several payments at the same time, or in any other way ‘jump ahead’ in the plan.
All payments must be on-time. You have to make all the payments within 15 days of the due date or they don’t count as a qualified payment.
Be Employed Full Time
If you aren’t employed as a full time employee, the payments don’t count as a ‘qualified’ payment. This includes any time you might be between jobs, your company goes out of business, you take some time off to have children, or any other reason you might be out of the workplace.
Working at a “Public Service” organization
This includes most 501c3 and all government organizations. This might not be an issue if you plan on being a public school teacher, or work as a counselor for the county Family Services. These jobs are longer career tracks in more stable environments.
But for most non-profit work this is a mess. The turnover rate in non-profit work is high. Non-profits can close or go under if they lose funding. These positions also chronically underpay, so it may be likely that you’re offered a position in a for-profit field at a significant salary increase.
If you plan on working in a church, there is a clause specifically to prevent most church employment jobs. The rules for churches are clearly explained:
Question: I am employed full-time by a qualifying not-for-profit organization that engages in religious activities. Does my employment qualify for PSLF?
Answer: It depends on how much of your job is related to religious activities. When determining full-time public service employment you may not include time spent on participating in religious instruction, worship services, or any form of proselytizing
This basically makes this program unavailable for anyone working in a church or most para-church ministries – including ANY ministry based in another country.
An email from one of our partner institutions summarized this well:
“Recently I’ve been hearing more and more about loan forgiveness after 10 years if you work for a non-profit, and it seems that the general impression out there is that this will apply to our students working in churches, which are 501(c)3 non-profit organizations.
This didn’t sound right to our financial aid officer or me, so we tracked it down. The short answer is NO, M.Div. graduates will not qualify for loan forgiveness unless they work at a completely secular organization for 10 years (and then what is the point of an M.Div.?). ”
In addition to the litany of issues listed above, there are a couple of other issues that I see:
You have to make less than the ‘regular’ payment
The ‘standard’ repayment plan for a student loan is a 10 year repayment plan. So to have a balance left at the end of that period, you have to have applied and been approved for reduced payments through the Pay-As-You-Earn or Income Based Repayment plans. These plans often have payments lower than the interest accruing, so the balance on your student loans can actually GO UP over time. This essentially makes you dependent on loan forgiveness as your only way out of debt. The problem with this is:
You have no job flexibility
If you have student loans with interest accruing faster than you’re paying it, rising balances that you legally can’t bankrupt out of, and you’re forced to work for the government for a minimum of 10 years this is starting to sound like indentured servitude. At least those in ancient Israel that sold themselves into slavery were supposed to be freed every seven years.
You can’t consolidate during the 10 years
This isn’t a huge deal, but it is a consideration.
It’s possible the government could change the rules
This may be unlikely, but it’s a lot of eggs to put in the basket of two administrations from now.
By nature of the program, extra payments are extremely discouraged.
If your eggs are in this basket, any extra principle payments essentially feel like throwing money away. You can’t finish earlier than 120 payments and 10 years.
No partial forgiveness
If you follow the program flawlessly for 9 years and some circumstance changes that doesn’t allow you to finish the program there is no ‘meet in the middle’. You just don’t qualify.
It discourages making money
Because minimum payments are based on income, if you make ‘too much money’ you will be required to make a payment that is more in line with the Standard Repayment. I’m not a big fan of setting up systems that penalize success.
It encourages high levels of borrowing
If students are considering this as their primary (and truly only) route to loan repayment, they are far more likely to borrow significantly more than the cost of their tuition.
For these reasons, the reasons I had previously outlined, and my belief that God values freedom, I don’t recommend pursing this as your loan repayment plan. If you find yourself in a position (say as a school teacher) that you enjoy, don’t plan on leaving, and that qualifies for the PSLF, I don’t see any ethical problem in taking advantage of the program. In that situation, I would recommend aggressively saving money in a separate savings account so that if the situation arose where you were unable to finish the 10 years/120 payments, you could write a check and pay off the balance.