VIN Foundation | Supporting veterinarians to cultivate a healthy animal community | Blog | Student Loan Forgiveness: Taxable or Tax-Free? Either way, It’s a Blessing

Student Loan Forgiveness: Taxable or Tax-Free?

Paying back a veterinary school student debt load can be extremely stressful and confusing, particularly when we continue to see updates and changes to existing loan repayment programs.

Just this past year, we’ve had continued extensions of the pandemic forbearance benefits, a special one-time forgiveness count, a special one-time cancellation of up to $20,000, and a limited PSLF waiver opportunity, to name a few.

Analyzing the various federal repayment options, programs, and changes then choosing the best pathway for your situation is challenging to say the least. Spending the last ten years helping veterinary students, veterinarians, and those who work with them navigate their student loans and repayment options, we’ve seen student loan forgiveness and the debates around it cause significant confusion. First, make sure you understand the differences between Public Service Loan Forgiveness (PSLF) and the potentially taxable forgiveness available with income-driven repayment (IDR) plans.

Many borrowers believe the student loan forgiveness is only open to those working for a non-profit. Anyone with federal student loans can be eligible for forgiveness, regardless of who they work for. PSLF does require you to work for certain non-profit employers, but you can still receive student loan forgiveness even if you never work or worked for a non-profit employer. Income-driven repayment plans result in student loan forgiveness if you reach the maximum repayment period for a specific plan and still have a balance.

Make sure you know the difference between PSLF and IDR forgiveness and whether or not you might be eligible for student loan forgiveness.

 

PUBLIC SERVICE LOAN FORGIVENESS:

Public Service Loan Forgiveness (PSLF) is a federal student loan provision that resonates with many veterinary students and veterinarians. This is a benefit provided under the College Cost Reduction and Access Act of 2007, establishing a pathway to have certain student loans forgiven tax-free after ten years of qualifying payments.

The first eligible payments could have been made starting in October 2007. That means we have passed the ten-year threshold where people can have their student loans forgiven tax-free under PSLF. The early returns were not very encouraging. Numerous issues with the first rules and poor communication led to many denied applications. However, since then we have seen numerous improvements to help current and future borrowers receive PSLF, even retroactively in many cases.

If you were one of the people who has applied unsuccessfully for PSLF, then be sure to look into Temporary Expanded Public Service Loan Forgiveness (TEPSLF) or the limited PSLF waiver.

The low first-round PSLF qualification rate was not a surprise for those who follow the student loan repayment landscape closely. Knowing whether or not you were making qualifying PSLF payments was nearly impossible in the early years of the provision. If you are working towards PSLF, make sure that you are submitting a Public Service Loan Forgiveness Employment Certification Form at least each year or whenever you change employers.

Veterinarians may qualify for PSLF if they work in positions such as academia (every U.S. veterinary teaching hospital is a 501c3 nonprofit), shelters, zoos, aquariums, state veterinarians, military veterinarians, working for the USDA veterinarians or any other federal government agency, other university research positions, lab animal medicine, many wildlife organizations, or teaching in veterinary technician programs (excluding private school programs), just to name a few.

Avoid these common concerns and pitfalls when it comes to PSLF:
“They are eliminating Public Service Loan Forgiveness so why should I bother trying?”

PSLF is not going anywhere. While previous administrations have discussed eliminating PSLF and reducing the number of income-driven repayment options, no one has ever proposed eliminating PSLF or IDR forgiveness for existing student loans. Anyone with federal student loans has a master promissory note, i.e. a contract that spells out all of the repayment options and benefits available. Eliminating PSLF or IDR forgiveness for existing student loans would require Congress to break all existing student loan contracts. That is highly unlikely to happen. They have actually gone out of their way to not do that, consistently preserving older student loan provisions until there are no more loans governed under those contracts, or they offer a way to consolidate into a new loan type that has different contractual terms.

What is usually proposed or chatted about in the media is to eliminate or significantly alter PSLF or IDR forgiveness for future borrowers – students who have not started borrowing yet who could have a different contract with different provisions. Don’t worry – nothing like that is even on the table right now.  

In fact, Congress passed and the President signed into law TEPSLF in 2018 which expanded the original PSLF benefits and helped borrowers who were denied PSLF the first time around get a second shot at tax-free forgiveness.

Recently, we’ve even seen the White House provide a limited PSLF waiver to help ease the PSLF qualification requirements beyond TEPSLF. As of Aug 23, 2022, the Dept of ED has surpassed $10 billion in debt relief for more than 175,000 borrowers since the PSLF limited waiver was announced in Oct 2021.  If you have ever worked for a non-profit or government organization between Oct 2007 and now and made any kind of payments to your student loans during that time, review the PSLF limited waiver and act (if necessary) before it expires Oct 31, 2022.

One surefire way to not earn PSLF is to not try or miss out on the new or even time-limited opportunities to receive PSLF credit. If you’re currently working for or have ever worked for a qualifying organization, then you should be receiving PSLF credit. Set yourself up for success! Know if you need to consolidate your loans to maximize your PSLF credit or switch to a qualifying repayment plan going forward! If you have questions about the rest, reach out for help! You can also review the “Most direct path to Public Service Loan Forgiveness (PSLF) for Veterinarians” document in the VIN Foundation WikiDebt resource.

“I’ve already applied for PSLF and was denied.”

The early round of applicants certainly faced some challenges in receiving student loan forgiveness.  However, there has never been a better time to try for PSLF again.  Under TEPSLF and the limited PSLF waiver, ANY payment made to federal student loans since October 1 2007 will be treated as forgiveness eligible if you meet the PSLF employment requirements.  If you’ve been denied before, try again.  If you have been told you had the wrong loan types or were using the wrong repayment plan, try again.

All of the confusing and strict requirements around loan types and repayment plans have been removed.  If you still have the wrong loan types (FFEL), then you must consolidate your loans into a Direct Consolidation Loan and submit a PSLF application before October 31, 2022 to receive maximum retroactive credit under the limited waiver.

TAX-FREE STUDENT LOAN FORGIVENESS:

PSLF is a benefit you apply for and might receive IF you do all of the right things for a period of at least 120 months, or 10 years.   In order to be eligible to apply for PSLF, you must have made 120 monthly on-time payments to Federal Direct Loans using an income-driven repayment plan (ICR, IBR, PAYE, REPAYE) or standard 10-year plan, while working full-time as an employee of a federal, state, tribal entity or 501c3 organization. If you’re working towards PSLF or expect to receive PSLF in the future, then submit the PSLF Employment Certification Form at least annually to be sure.

SPECIAL OPPORTUNITIES: TEPSLF and the PSLF Limited Waiver have significantly relaxed the original PSLF requirements. TEPSLF provides a limited pot of money for borrowers who may have been using the wrong repayment plan while working for a qualifying employer and making payments since Oct 2007. The Limited Waiver will count ANY payments made to any eligible federal student loan after Oct 2007 as long as you meet the employment requirements. Both TEPSLF and the Limited Waiver will require you to consolidate any non-Direct Loans in order to receive this special retroactive consideration.

TEPSLF will exist until it runs out of funds. The Limited Waiver requires you to act on consolidation (if necessary) and submitting a PSLF employment certification form before Oct 31, 2022.

Once you’ve made 120 qualified monthly payments, you’re able to apply for PSLF. If granted, any remaining eligible federal student loan balance will be forgiven tax-free. If you qualify for PSLF under TEPSLF or the limited waiver, you can even receive a refund of payments you have made after meeting the 120 qualifying payments.

Veterinarian Receiving PSLF under TEPSLF and Limited Waiver expansions

PSLF is the holy grail of student loan repayment if you can get it! Don’t let the early returns dissuade you from earning PSLF as long as you are meeting all of the requirements. Veterinarians are currently receiving PSLF, as shown in the above illustration. Learn from the mistakes of others and you will be eligible for tax-free forgiveness sooner rather than later.

TAXABLE STUDENT LOAN FORGIVENESS:

There is another type of student loan forgiveness available that confuses many borrowers, even though they may be using plans where their monthly payments are based on their taxable income. Income-driven repayment plans like ICR, IBR, PAYE, and REPAYE have maximum repayment periods.  The periods are 20 or 25 years depending on your loans and repayment plan. If you reach the maximum number of payments under an income-driven repayment plan, any remaining balance is forgiven.  Let’s call this income-driven repayment forgiveness (IDRF).

The two major differences between IDRF and PSLF.
  1. IDRF can be treated as taxable income (if received after 2025)
  2. IDRF does not require an application for forgiveness, rather it is automatically granted once you reach the maximum number of payments while using income-driven repayment.
As noted in the Code of Federal Regulations for income-driven repayment (§682.221 and §685.209), “The loan holder determines when a borrower has met the loan forgiveness requirements … and does not require the borrower to submit a request for loan forgiveness.
No later than six months prior to the anticipated date that the borrower will meet the loan forgiveness requirements, the loan holder must send the borrower a written notice…”
Within 6 months of reaching the maximum repayment periods under income-driven repayment, your loan servicer must tell you that you are nearing student loan forgiveness.

The calendar year in which forgiveness occurs will be important because this forgiven debt will be treated as taxable income if the student loan forgiveness tax-exemption is not extended beyond 2025.  If considered taxable income, you will report the balance forgiven on your tax return after you receive a 1099-C for the amount canceled (aka forgiven).   Your tax liability will depend on your total income and the federal (and any state) income tax rates the year forgiveness occurs. To estimate your student loan forgiveness tax liability, review the Forgiveness Planning Module in the VIN Foundation Student Loan Repayment Simulator and read the WikiDebt section on forgiveness planning.

Avoid these common concerns and pitfalls when it comes to IDR Forgiveness:

“I don’t work for or have never worked for a non-profit, so student loan forgiveness doesn’t apply to me.”

Incorrect. Anyone who has federal student loans has the option to use a forgiveness-eligible repayment plan. PSLF happens to be an additional, accelerated forgiveness option IF you happen to be employed by a qualifying organization while using one of the forgiveness-eligible repayment plans.

PSLF requires you to work for a qualifying organization while making forgiveness-eligible student loan payments for at least 10 years. At that point, you are eligible to apply to have your loans forgiven tax-free under PSLF.

IDR forgiveness requires you to make qualifying payments based on your taxable income and family size for a maximum period of 20 or 25 years (depending on your loan types and repayment plan). If you still have a balance remaining when you reach your maximum repayment period, the remainder is forgiven. Forgiven balances can be treated as taxable income when your loans are canceled. However, the American Rescue Plan has exempted student loan forgiveness from taxability for the tax years 2021-2025.

“I was planning to pay based on my income using an income-driven repayment plan like PAYE, REPAYE or IBR, but after seeing so few people get PSLF, I’m not sure that is the right strategy for me.”

While confusion caused by the early data on PSLF and the constant calls to eliminate student loan forgiveness is certainly understandable, there are details we need to clarify between PSLF and the IDR forgiveness you can earn using repayment plans like ICR, IBR, PAYE, and REPAYE. If you’re unfamiliar with these acronyms, review the VIN Foundation WikiDebt income-driven repayment comparison table.

Not all student loan forgiveness is created equal. There are two general types of student loan forgiveness: 1) Public Service Loan Forgiveness which is always tax-free, and 2) Income-Driven Repayment, which can be taxable, at least after 2025 if the current tax exemption is not extended beyond 2025.

In both instances, forgiveness can be an end result. In either case, an IDR is a critical part of the repayment strategy. With a starting student debt to income ratio greater than one, you are likely to reach forgiveness, whether it is under PSLF or IDR.  The difference then becomes whether or not your forgiveness will be taxable or non-taxable.  The key point is that ANYONE with federal student loans can be eligible for forgiveness.

STUDENT LOAN FORGIVENESS TAKE-HOME POINTS:

The early struggles of folks who have applied for PSLF does not mean you will be denied PSLF. There are also numerous current and planned improvements to PSLF to help improve the success rate. Many of the current improvements will provide retroactive PSLF credit to those who normally would not be eligible for it. Know how to receive PSLF credit before some of these opportunities expire if you may have earned it to have your loans forgiven sooner. 

Forgiveness received under PSLF is also very different from the forgiveness received under income-driven repayment plans. Taxable forgiveness does not require an application and will happen when/if you reach the maximum repayment period for income-driven repayment. There are additional limited opportunities available to receive retroactive forgiveness credit, regardless of the repayment plan(s) you have been using.

For the majority of recent graduate veterinarians who have federal student loans, income-driven repayment is an essential part of a financial wellness plan. Don’t let the early news on PSLF dissuade you from using income-driven repayment.  Also, don’t discount working towards PSLF if that matches with your veterinary career aspirations. If you’re not sure how to evaluate your income-driven repayment plan eligibility or compare the various repayment options, try the tools available on the VIN Foundation Student Debt Center.

For those who are worried about their student loan repayment options and benefits: read your current master promissory note, review your student loans and repayment options using the VIN Foundation My Student Loans tool, check with your loan servicer on your income-driven repayment and/or PSLF progress, and simulate your remaining costs using the VIN Foundation Student Loan Repayment Simulator.

If you need help, please do not hesitate to reach out to VIN and VIN Foundation for some guided assistance in making sense of your student loans and repayment options.

VIN Foundation | Supporting veterinarians to cultivate a healthy animal community | Our Team | Student Debt Consultant | Tony Bartels, DVM, MBA

Tony Bartels, DVM, MBA

Dr. Tony Bartels graduated in 2012 from the Colorado State University combined MBA/DVM program and is an employee of the Veterinary Information Network (VIN) and a VIN Foundation Board member. He and his wife have more than $400,000 in veterinary-school debt that they manage using federal income-driven repayment plans. By necessity (and now obsession), his professional activities include researching and speaking on veterinary-student debt, providing guidance to colleagues on loan-repayment strategies and contributing to VIN Foundation initiatives.

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