Chasing Public Service Loan Forgiveness & Dealing with Private Loans

One of the biggest downsides to Public Service Loan Forgiveness (PSLF) is that the program wasn’t designed to help with private student loans.

Borrowers chasing PSLF have a clear path to debt freedom with federal loans. Unfortunately, those with private loans often face significant challenges.

Today I will break down how private debt complicates pursuing PSLF. I’ll also cover some strategies that borrowers can use to wipe away all of their student loans — federal and private.

In this Article:

Private student loans and Public Service Loan Forgiveness Eligibility

The idea behind PSLF is that borrowers should be able to work for the government or a non-profit AND repay their student debt. Essentially, borrowers pay what they can reasonably afford for ten years and earn loan forgiveness.

Now that Public Service Loan Forgiveness has been around for just over a decade, many flaws have surfaced. Complicated rules and requirements prevented many borrowers from earning forgiveness.

Because of the confusion around PSLF, we are not even discussing whether or not the program achieves its primary goal. Are recent graduates able to afford to take lower-paying public interest jobs?

I’d argue that private student debt makes working in a public interest job significantly more difficult. The discretionary income formula used for payments on Income-Driven Repayment plans does not factor in private student loan payments. Additionally, many borrowers have more private debt than federal debt due to strict borrowing limits for undergraduate borrowers.

As a result, Public Service Loan Forgiveness for borrowers with sizeable private loan balances becomes a significant challenge. Fortunately, there are a few strategies that borrowers can use to eliminate their debt.

Converting Loans to Become Eligible for Public Service Loan Forgiveness

In most cases, no process exists to convert private debt into federal debt eligible for PSLF. However, there are a couple of exceptions to the rule.

Federal Loan Conversions – Not all federal loans are eligible for PSLF. One noteworthy example is FFEL loans. This debt was guaranteed by the federal government but issued by private lenders. The debt is considered to be federal but not federally held. Fortunately, borrowers can use federal direct consolidation to convert the debt into a loan eligible for PSLF.
Converting Private Loans into Federal Loans – Borrowers who attend graduate school may be able to slowly convert private debt into federal debt. The process won’t happen overnight, but savvy borrowers can finish school with more federal debt and less private debt.

Attack Private Debt or Focus on Other Goals?

In most cases, the ideal strategy is to pay the minimum on all federal loans and attack private loans.

However, maximizing the benefit of PSLF may require a less aggressive approach to private debt.

One of my favorite financial strategies for borrowers chasing PSLF is to save money for retirement. Money put in a 401(k) or traditional IRA has tax advantages. These tax advantages lower your Adjusted Gross Income, which means a lower payment on your federal loans. The lower federal loan payment means more money is forgiven after ten years of PSLF.

Thus, putting money in a retirement account can do the following:

Lower IDR student loan payments,
Lower your income tax,
Increase the amount of debt forgiven under PSLF, and
Build your retirement.

Private debt makes it harder to take advantage of this wealth-building strategy.

Keeping Private Debt Manageable While Maximizing Public Service Loan Forgiveness (PSLF)

Private student loans may charge outrageous interest rates. Most borrowers should prioritize getting rid of debt with interest rates above 10%.

One of the best shortcuts to lowering interest rates is to refinance the loans with a private lender. (Note: Borrowers pursuing PSLF should only refinance private loans. Refinancing federal loans will convert them to private loans, and the debt will lose PSLF eligibility.)

Two of the best refinance options are a five-year variable rate loan and a 20-year fixed-rate loan. Borrowers looking for the lowest possible interest rate usually select a five-year variable-rate loan. The lowest rates on the market currently start at about 2%. On the other end of the spectrum, a long-term loan has the lowest monthly payments.

However, PSLF-focused borrowers may benefit from a 10-year loan. These loans don’t have the lowest interest rates or the lowest monthly payments. Instead, it creates a schedule where the private loans are paid in full at the same time a borrower earns Public Service Loan Forgiveness. Essentially, it would be the most flexible option that eliminates all student debt after ten years.

The following lenders are currently advertising the best rate on 10-year fixed-rate refinance loans: