President Barack Obama recently issued his proposed changes to the 2015 federal budget, which included some sweeping reforms on certain kinds of federal student loans. One of these proposals includes capping the amount of potential student loan forgiveness under the Public Service Loan Forgiveness (PSLF) program at a maximum of $57,500. Read on to learn more about how your student loans might be affected if this proposal comes to pass.
What changes are proposed to the PSLF program?
Currently, the PSLF program allows those who have worked in a public service position for at least 10 years, while making timely payments on their federal Direct Loans or other eligible federal installment loans, to have their entire remaining federal student loan balance forgiven or discharged after their 120 payments. There is no cap or limit on the amount of outstanding loans that can be forgiven. However, most who take advantage (or plan to take advantage) of this option are utilizing the income-based payment model that allows you to lower your payments if you earn a low income in relation to your loan balance.
However, the 2015 budget proposes to cap the total amount of forgiveness at $57,500. This would effectively limit students from having balances in excess of this amount, leaving some students (particularly those in the medical or legal fields) with very high loan balances even after 10 years of timely income-based payments.
What other changes are being discussed?
One of the motivators behind this change to the PSLF program is the extension of the Pay As You Earn (PAYE) program. This program is similar to the income-based repayment plan, while gradually raising your payment as your earnings begin to increase. To help fund the expansion of the PAYE program, the government feels it is necessary to limit some of the benefits offered under the PSLF program.
What can you do now to minimize any negative impact of these changes?
Many student advocacy groups, legislative agencies, and others who are "in the know" have indicated that the likelihood of this exact proposal coming to pass are slim to none. However, the proposal in and of itself indicates that the federal government may be looking at limiting some types of student loan forgiveness to help expand other programs.
If you haven't yet filed an employment certification form with the Department of Education, now may be the time to do so. By filling out this form, you can have the Department of Education transfer and consolidate your eligible loans to make the forgiveness calculation easier, while also keeping you updated on the progress you've made toward loan forgiveness. Many experts recommend submitting a new form each year so that the Department of Education remains aware that you are currently employed in a public service position.
Others have hypothesized that the filing of this form can indicate (to the Department of Education as well as your loan servicer) that you are relying on the PSLF program to help forgive your loans. This reliance may be able to help you at a later point if funds are being cut.
What should you do if the proposal goes through?
If this proposal does come to pass, you may be able to refinance the portion of your student loans exceeding the dischargeable amount into a personal loan or other installment loans. These types of loans often offer a lower interest rate than consolidated federal student loans, and you should be able to find a repayment plan and term that fits your financial situation.
One caveat to this method is that the interest you pay on this loan, unlike student loan interest, may not be deductible on your federal income taxes.