Student loans are a $1.3 trillion reality for the United States, making them the second largest source of debt behind home mortgages. Nearly 40 million Americans are paying back student loans, and with the rising cost of higher education, the end of the student loan issue is nowhere in sight.
Not-for-profit organizations may be able to use student loan debt to their advantage in the hiring market. The federal Public Service Loan Forgiveness Program (PSLF) provides employees of qualifying not-for-profit organizations the chance to wipe away thousands of dollars from their student loan debt. According to the Department of Education’s Public Service Loan Forgiveness report, as of June 30, 2016, 431,853 borrowers are eligible for PSLF. If your organization understands how the PSLF works, it can use the program as a recruiting tool.
How Federal Student Loan Forgiveness Programs Work
The PSLF is specifically designed to benefit the nonprofit sector. It offers an opportunity for student loan recipients to have the remainder of their loan balances, including interest, forgiven after 120 regularly scheduled qualifying payments, regardless of the student loan recipient’s job title, income level or position with a not-for-profit organization. To qualify for loan forgiveness, recipients must meet the following criteria:1. They are employed full-time by a public service organization.
Under the PSLF, qualifying public service organizations includes any of the following entities:
- A government organization (including a federal, state, local, or tribal organization; agency, or entity; a public child or family service agency; or, a tribal college or university)
- A not-for-profit, tax-exempt organization under section 501(c)(3) of the Internal Revenue Code
- A not-for-profit organization that is not exempt under section 501(c)(3) of the Internal Revenue Code must provide one of the following public services:
- Emergency management,
- Military service,
- Public safety,
- Law enforcement,
- Public interest law services,
- Early childhood education including Head Start and state-funded prekindergarten programs,
- Public service for individuals with disabilities,
- Public health,
- Public education,
- Public library services, or
- School library services.
Full-time means the employee works an average of 30 hours per week or meets the employer’s definition of full-time (e.g., teachers).
Employees can verify that they work for a qualifying public service organization by submitting an Employer Certification Form to FedLoan Servicing (PHEAA). An authorized official from the organization must sign the form to verify that the information about the organization is correct. It is recommended but not required that employees submit Employer Certification Forms each year that they are making their qualifying loan payments.
Not-for-profit organizations can assist the employees with completing the form by having a process in place to review and sign the Employer Certification Form. Further instructions on how not-for-profits can assist their employees with their forms can be found on the PHEAA website.2. The employee makes 120 regularly scheduled monthly payments on qualifying loans while a full-time employee of a qualifying public service organization.
The PSLF program went into effect on Oct. 1, 2007. From that point on, any qualifying loan payment made while employed for a qualifying public service organization would count toward the 120 regularly scheduled monthly payments for loan forgiveness, so long as the payment was for the full monthly balance. Payments do not have to be made consecutively, but they must be made on time for loans that are not in default. The first forgiveness of loan balances will be granted beginning in October 2017.
Qualifying loans include Direct Subsidized, Direct Unsubsidized, Direct PLUS Loans and Direct Consolidation Loans. Parent loans also qualify. Loan recipients who want to take advantage of the PSLF program are encouraged to consolidate student loans that do not qualify into a Direct Consolidation Loan.
The following loans may be consolidated into a Direct Consolidation Loan:
- Federal Family Education Loan (FFEL) Program loans, which include the following:
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- Federal PLUS Loans—for parents and graduate or professional students
- Federal Consolidation Loans (excluding joint spousal consolidation loans)
- Federal Perkins Loans
- Certain health professions and nursing loans
Payments made on the unqualifying loans prior to the consolidation will not count toward the 120 payments.3. Monthly payments must be on a qualified repayment schedule.
The default repayment schedule for student loans is 10 years (10-year Standard Repayment Plan), which would mean that employees that follow the Standard Repayment plan would not have the opportunity to have part of their direct federal student loans forgiven. To make best use of the program, loan recipients should opt for one of the following student loan repayment options:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Pay As You Earn Repayment Plan (PAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
Individuals who start on the standard repayment schedule can change to an income-based approach and still have their payments made as part of the standard repayment plan count toward the 120 regularly scheduled monthly payments. Married couples looking to optimize an income-based repayment term may want to consider changing their tax filing status to married filing separately versus married filing jointly depending on their income level. Savings could be substantial in some circumstances. A tax professional can help determine an individual’s optimal filing status.
Not-for-profit organizations may want to emphasize this provision both to prospective employees and to their current staff to demonstrate that even employees on a 10-year repayment plan still have the opportunity to have part of their loans forgiven.4. The employee files an application for PSLF.
Once the 120 monthly payments have been made, the employee applies for student loan forgiveness. The federal government will verify that the criteria are met before making a determination that the remaining balance of the qualifying loans can be forgiven, including student loan interest.
Student Loan Forgiveness is a Relatively New Opportunity
Because the PSLF program only applies to payments made after Oct. 1, 2007, October 2017 marks the earliest possible time that a full-time employee of a not-for-profit organization would be eligible for student loan forgiveness under the PSLF program. Applications for student loan forgiveness have not yet been made available, but organizations should be monitoring for when they are available.
The approach of the October 2017 date may also bring other changes to the program, particularly with the start of a new president’s term. The PSLF was enacted by Congress, therefore it could be changed by Congress as part of the consideration that will be coming to the Higher Education Act, which is due to be reauthorized in 2017.
Not-for-profits that are on top of the opportunities their employees have for student loan forgiveness could use it as a competitive advantage. With the class of 2016 averaging $37,172 in student loan debt, forgiveness may be a particularly appealing option for recent college graduates or graduates early into their professional careers.
Cooperation with the program is paramount to helping employees reap the full benefits available. For more information on how your not-for-profit can use student loan forgiveness programs to its advantage, please contact us
Joe Giso, CPA, MST, is a Managing Director in the Not-for-Profit & Education Tax Practice. Joe can be reached at JGiso@cbiztofias.com or 617.761.0623.