In the 4th quarter of 2020, the Department of Education (ED) made two major changes to the administration process of the Public Service Loan Forgiveness Program. The following is a
summary of changes made and what borrowers
and their financial advisors need to know.
Public Service Loan Forgiveness (PSLF) has proven difficult for borrowers to navigate. In fact, in 2019, the GAO reported that 99% of those who have applied for PSLF had been denied. Whenever there are regulatory changes to the administration of the PSLF program it’s important that borrowers are made aware of the changes and what it could mean for their progress toward forgiveness.
New PSLF Form. ED has created a new PSLF form that will immediately replace 3 retired forms. The new form combines the employment certification, application for forgiveness under the Public Service Loan Forgiveness program, and the Temporary Expanded Public Service Loan Forgiveness application (TEPSLF) into one form. The new form provides borrowers with 3 options:
- The first option is to certify employment to trigger counting of qualifying payments. For borrowers who have old employment certification forms awaiting signatures by their employers, replace the old form with the new one as servicers have historically not accepted or processed forms that have been replaced.
- The second option is for a borrower to apply for PSLF or TEPSLF, but to continue to make payments while their application is being processed. Borrowers who are unsure if they’ve completed their 120 payments or are applying for PSLF in order to get denied so they can apply for TEPSLF after 1 year of qualifying payments will want to choose this option. If a borrower makes payments in excess of the 120 payments and their loans are discharged, the regulations allow for a refund of qualifying payments made in excess of the required 120.
- The final option is for borrowers who would like to apply for TEPSLF or PSLF and would like a forbearance applied to their account while their application is processed. This option will put a halt to payment, however the time under the forbearance will not count toward PSLF or TEPSLF if the borrower chooses this option. As such, borrowers should only choose this option if they are certain that they have achieved the required payments for PSLF or TEPSLF.
It’s unclear from the new form how ED and Fed Loans will determine if an applicant is applying for PSLF or TEPSLF as there is no way to indicate which one the borrower is applying for. It is advisable to include a letter with the form that indicates for which forgiveness program the borrower is applying. The new PSLF form can be found here.
Change to Paid Ahead Status – ED has issued new guidelines with regards to lump-sum payments made by borrowers that are applied to future payments due. The process of loan servicers using over payment or prepayment by borrowers to apply to future payments is called “paid ahead status”. In order for a payment to count toward PSLF, a borrower must make on time payments in a qualified repayment plan. Until this change, many borrowers that were in paid ahead status did not receive credit for on time payments because their overpayment was made too early.
On October 28th, 2020 ED made the following changes (retroactively to August 2020) to the treatment of paid ahead status:
With the limitations below, regardless of when a payment is made, the payment will be counted as a qualifying payment as long as it was made in full and no later than 15 days after the payment due date. This change allows borrowers to make prepayments or lump-sum payments and have those payments potentially count as qualifying payments (given employment certification is on file and all other eligibility conditions are met) under the PSLF Program for up to 12 months or until the next time their income-driven repayment plan is due for certification, whichever comes first.
Unfortunately, this change doesn’t extend further back than August 2020, so many borrowers who have been denied PSLF or qualifying payments toward PSLF due to paid ahead status prior to August 2020 will not find much relief in this change. The change is intended to rectify the paid ahead status going forward.
Student loan borrowers looking for certified financial advisors and tax professionals who can help them navigate their repayment options as well as incorporate repayment into their personal, tax and financial plans should seek out a CSLP here.
Financial advisors looking to learn the nuances of student loan repayment to better serve their clients by incorporating repayment options into tax and financial plans can learn more about becoming a CSLP here.
We will provide an update as more clarity is provided.