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How to Get the Full Value of Federal Student Loan Forgiveness Programs

Getting the full value of federal student loan forgiveness programs requires more than just paying the minimum to maximize forgiveness.

Written By: Michael P. Lux, Esq.

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Getting the most out of federal student loan forgiveness programs takes a bit of planning.

Because there is no limit to the amount that can be forgiven on federal programs like PSLF, many borrowers realize that paying as little as possible each month is ideal. However, maximizing forgiveness is about more than just getting on the right repayment plan and paying the minimum. Borrowers that consider their forgiveness goals when making retirement contributions and tax planning will come out ahead.

Each situation is different, but most borrowers can squeeze some extra value out of student loan forgiveness using one or more of the following strategies.

The Obvious Ways to Get the Full Value of Federal Programs like Public Service Loan Forgiveness

After nearly a decade of helping borrowers with student loans, I’ve found that the obvious isn’t always that obvious. To make sure nothing gets skipped over, borrowers should make sure they do the following:

  • Enroll in the Right Federal Repayment Plan – Not all repayment plans are eligible for programs like PSLF. Some repayment plans have forgiveness provisions for borrowers that make 20 or 25 years of payments. Make certain you are on the right repayment plan. One of the best tools for investigating repayment options is the Department of Education’s Student Loan Simulator.
  • Only Pay the Minimum – In most cases, paying extra on debt is a great way to reduce total spending. Paying extra usually reduces the amount spent on interest. When chasing forgiveness, the goal isn’t to minimize interest spending. The goal is to spend as little as possible and qualify as soon as possible.
  • Certify Income Yearly – Just about all forms of federal student loan forgiveness require enrollment in an income-driven repayment plan. Missing a yearly certification can be very expensive. It can also delay forgiveness.

Save Money in Tax-Advantaged Retirement Accounts

Surprisingly, putting money into a 401(k) or traditional IRA can mean more student loan forgiveness.

The explanation traces back to the method the government uses for calculating monthly student loan payments. Specifically, they calculate a borrower’s discretionary income based upon their most recent tax return. The key figure is the Adjusted Gross Income or AGI. Borrowers that contribute to certain tax-advantaged retirement accounts will lower their AGI.

Putting extra money in the right retirement account has several advantages:

  1. It lowers your tax bill.
  2. It lowers your monthly student loan bill.
  3. A larger portion of your student loan balance can be forgiven.
  4. More money gets set aside for retirement.

More specific details on how saving for retirement helps student loan forgiveness can be found here.

Additional Options to Save at Tax Time: Retirement contributions are not the only tax deduction that will lower student loan payments. Many borrowers may also be able to use Health Savings Accounts in the same manner. The key is to seek out tax deductions that lower your AGI. Tax pros use the term Above-the-Line Deductions to describe the tax breaks that lower an AGI.

Delay Marriage or Consider Filing Taxes Separately

I’ll stay in my lane and avoid giving any relationship advice.

Instead, I will note that spousal income can affect student loan payments on income-driven repayment plans.

Couples who both have student loans and are both working towards forgiveness usually won’t have as big of an issue. However, all married couples should consider filing taxes separately.

Filing separately is a strategy that notably doesn’t work for the REPAYE plan, so couples should carefully research their options before making any major tax decisions.

Keep Incredibly Detailed Records

If you have followed the news on Public Service Loan Forgiveness, things are bad.

Initially, the rejection rate exceeded 99%. The most recent numbers show that the rejection rate is still over 90%.

Qualifying for student loan forgiveness is not easy. Borrowers should carefully study all requirements for PSLF, or the forgiveness program of their choice. I’ve heard from far too many borrowers who thought they were on the brink of forgiveness only to learn that they had to start from scratch.

Make sure you are on the right repayment plan and make sure you have eligible loans.

Borrowers interested in Public Service Loan Forgiveness should use the PSLF Help tool on studentaid.gov. Those pursuing other forms of forgiveness should contact their loan servicer to verify eligibility and progress.

Keeping detailed records of loan payments and servicer feedback will help borrowers when the time comes to apply for forgiveness.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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