In 2007, Congress created the Public Service Loan Forgiveness (PSLF) program. The program is intended to remove the student loan debt of low-salaried public service employees after 10 years. (There is also a similar program for teachers of low-income students, called Teacher Loan Forgiveness.)
Meeting the employment requirement for loan forgiveness is as simple as submitting an Employment Certification Form to Federal Student Aid. They will likely ask for documentation of your employment along with the form, such as a W2, or may contact your employer to confirm your employment.
To qualify for PSLF’s partial financial hardship requirement, you must qualify for and use an income-driven repayment plan for your student loans. You might think that you can’t qualify for financial hardship, but many well-paid families are eligible. You can find out more in our post “How to Take Advantage of Student Loan Forgiveness.”
Although student loan forgiveness is normally taxable and reported to the IRS on a 1099-C, loans forgiven because of your employment in certain professions, like Public Service Loan Forgiveness and Teacher Loan Forgiveness, are exempt from being taxed.
As FinAid.Org reports:
Public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program are not taxable.
Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income. The forgiveness of the remaining balance under income-contingent repayment and income-based repayment after 25 years in repayment is considered taxable income.
…Specifically, IRC section 108(f)(1) states that
In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.
It is strange that student loan forgiveness due to the student dying is a taxable event to the student’s estate, but that having your loan forgiven because you are the employee of a charity is forgiven by the IRS as well.
That PSLF favors public employees and nonprofits is unfair, but if you can qualify for loan forgiveness you should take advantage of the offer.
There is no morality to the use of government regulations. If you can qualify to receive government largess, take the money. There is no hypocrisy in playing by the rules and then voting your representative out of office for having supported the legislation that created them.
Photo by Jeremy Cai on Unsplash