Why public service loan forgiveness fails

The subject of loan forgiveness and in particular, Public Service Loan Forgiveness has been in the news for quite some time. Most of it has been negative where consumers are sadly finding that they failed to follow the process and do not qualify for forgiveness. The reasons for this include or more of the following:

A) the consumer failed to follow or understand the rules

B) a financial advisor provided incorrect or inadequate information

C) Both were confused at the guidelines provided on the government's web sites or from information provided by the consumer's loan servicer.

This situation may have been avoided if the rules were carefully followed. PSLF, like other student loan repayment plans, is not something one should assume you just "set and forget."

Student loan repayment plans should be carefully reviewed at least on an annual basis with a financial advisor who can advise about the total picture of a client's finances and goals.

How Public Service Loan Forgiveness Works

The PSLF program offers tax-free loan forgiveness after ten years, whereas other loan programs offer taxable forgiveness after 20-25 years. Understanding the rules of student loan debt can make a massive difference in the lives of your clients.

Ryan_FrailichRyan Frailich, CFP, CSLP, and Founder of Deliberate Finances, recently published a detailed article explaining the process of public service loan forgiveness through an excellent case study.

In the study, he illustrates how a married couple with student loans implemented a strategy for PSLF. One member is an attorney with a six-figure salary and the other with six-figure loans working in a nonprofit.

Read the study here.


What to know about choosing PSLF

  1. The strategy changes made as a part of planning for PSLF require careful evaluation. Should one move out of the nonprofit sector a few years later, the overall loan costs can increase substantially.
  2. PSLF has five primary requirements for successfully navigating the Public Service Loan Forgiveness road. These cover the required employment type, the correct loan type, the right loan repayment plan, making the "qualified" payments, and submitting the required loan documentation.
  3. Understanding how to minimize AGI to reduce the required loan payments. Redirecting funds to retirement plans, health insurance costs, and health savings plans, among others.
  4. Advisors should help consumers factor the loan repayment costs and quantifying the overall economic benefit of PSLF.

Finally, the study concludes with a comparison of the downsides of managing PSLF and minimizing AGI to maximize the benefits of the program.

Next Actions For Advisory Firms

Financial advisors have traditionally spent little time advising clients about student loan repayment. It's a subject not commonly addressed in the traditional educational path of a CFP or CPA. Because there is a wave of a new generation of clients who have high debt levels, advisors are likely to see clients with numerous questions about the best strategy for student loan repayment. The CSLP program is one path advisors can take to learn how to advise clients with student loans.

You can learn more about the case study and read more about Ryan here.


Larry Taylor, PhD

Written by Larry Taylor, PhD

Larry has over 20 years of experience as a marketing technologist and developer of financial education programs. One of his primary missions is to help professionals establish greater trust in their online audiences and to humanize digital communications. Larry holds a Ph.D. in Psychology with an emphasis on media.

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