7 Qs About Your Student Loans and Public Service Loan Forgiveness

Taxes

Curious what all the fuss is about with Public Service Loan Forgiveness? We answer your top questions, including whether forbearance on your loans in 2020 will impact your tax return.

1. What is Public Service Loan Forgiveness (PSLF)?

Public Service Loan Forgiveness is a federal program many people rely on to have their student loan balances forgiven. Under the program, you can qualify for PSLF if you meet all of the following criteria:

  • you have a direct loan
  • work full-time in the public sector
  • make 120 qualifying monthly payments under an income-driven repayment plan

Once you check off all of the requirements, your federal loans can be forgiven. And they’re forgiven tax-free.

2. What type of employment qualifies?

It’s not about the type of job you have; it’s about your employer. You must work for one of the following organizations to qualify:

  • government organizations at any level (U.S. federal, state, local, or tribal)
  • non-profit organizations that are tax-exempt under Section 501(c)(3)
  • AmeriCorps or Peace Corps (as a full-time volunteer)

Unfortunately, you do not qualify for PSLF if you work for:

  • labor unions
  • partisan political organizations
  • for-profit organizations, including for-profit government contractors

3. Do private loans qualify for PSLF?

Sadly, student loans from private lenders do not qualify for PSLF. Only Federal Direct Stafford Loans (subsidized and unsubsidized), Federal Direct PLUS Loans, and Federal Direct Consolidation Loans qualify.

And if you choose to consolidate your loans, only qualifying payments made on the new Direct Consolidation Loan are counted toward the 120 payments required for PSLF. Any payments made prior to the loan consolidation do not count.

4. How do I apply for PSLF?

There are two different scenarios when it comes to applying for Public Service Loan Forgiveness.

  • You already made 120 qualifying payments. If this is you, you must complete the Public Service Loan Forgiveness: Application for Forgiveness to apply. Find the PSLF application and additional instructions at the Federal Student Aid
  • You are working toward making 120 payments. If you are still actively working toward checking off your 120 payments, you must complete and submit the Public Service Loan Forgiveness: Employment Certification annually or when you switch employers.

5. Are the forgiven loans taxable?

Good news! Any qualifying loan money forgiven under PSLF is not considered income or taxed as such. You do not need to worry about paying any federal income tax on that money.

6. How did the CARES Act relief affect loans under PSLF?

In March, the CARES Act temporarily suspended all payments on U.S. Department of Education (ED) held federal student loans and the accrual of interest on those loans until Sept. 30, 2020. Recently, the president signed an executive order to extend that date to Dec. 31, 2020. The suspension is an automatic suspension, meaning if you have qualifying federal student loans, you do not have to do anything for the suspension to go into effect. You can, however, continue to make your regular payments if you desire.

When it comes to the PSLF program, even though the repayment of most federal loans is on hold, your ability to qualify for PSLF is not. How does that work exactly? Well, it’s quite simple. If you have a Direct Loan and continue to work full-time for a qualifying employer during the suspension period, you will continue to receive credit toward PSLF as if you made normal, on-time monthly payments.

 7. How does the suspension of my student loan payments affect my 2020 tax return?

The short answer? It really doesn’t. There is no penalty or last-minute payback system in place after the clock strikes midnight on Dec. 31, 2020. You shouldn’t expect to report anything different on your return than you normally do.

The only thing that likely will look slightly different is the amount of student loan interest you can deduct. Being the CARES Act reduced all interest rates on direct loans to 0% during the suspension period, your student loan interest deduction may be much smaller this year. Financially speaking, however, continuing to pay down your student loans during this time (if you can make it work) is a much better option for you than any tax benefit you’d get from writing off a greater amount of interest. That’s because any money you pay at this time goes directly toward paying down the principal amount on your loan rather than being divided between that and your interest balance.

To answer more of your PSLF questions, check out the Public Service Loan Forgiveness FAQ. For additional information on the CARES Act student loan relief, visit .

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