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Student Loan Repayment Explained – Including PSLF Waiver & IDR Waiver

by Rob Bertman, CFA®, CFP® in Budgeting
May 1, 2022
student loan repayment

Student Loan Repayment Explained – Including PSLF Waiver & IDR Waiver

Here’s what you need to know about student loans…

They are TOTALLY different from any other kind of debt  and require a different approach compared to paying back every other type of loan.

I had absolutely no idea about how different they were until I met Travis Hornsby, Founder of Student Loan Planner back in 2017.

I can tell you that many financial advisors and financial planners have no idea either, because that was me up until 4 years ago.

Here I was, a CFP® (CERTIFIED FINANCIAL PLANNER™) and Chartered Financial Analyst® (CFA®) with 15+ years experience in the industry, thinking I knew enough to help just about anyone.

But Travis (who is also a CFA® and CFP®) blew my mind when he explained how they worked, and I realized student loans were a whole different ball game.

In fact, it blew my mind how different it was!

He taught me all about them and trained me to be a consultant. Since then, I have advised over 1,000 one-on-one covering nearly $300,000,000 in student debt over the last 4 years.

The last couple months have brought about even more changes to student loan repayment including the PSLF waiver and the new IDR waiver.

I’ll explain what you need to know, how this could affect you, and what you might need to do.

But first, we first need to talk about how student loans work and how they’re different from any other kind of debt.

What makes federal student loans different from all other debt?

The goal of paying back any debt is to minimize how much it costs to become debt-free.

With any other kind of debt, it’s all about refinancing to get the lowest interest rate you can and paying it back as fast as you can.

But federal student loans are totally different for 3 reasons:

how student loans are different from other debt

Reason #1: Income driven repayment

The repayment options for all other debt are solely based upon how much you OWE. That’s the deciding factor on what it will cost to pay off debt. 

But federal student loans can be paid back based upon how much you EARN rather than how much you owe.

These options are called income driven repayment (IDR) plans.

The 3 big IDR plans are Pay As You Earn (PAYE), REVISED Pay As You Earn (REPAYE) and Income Based Repayment (IBR).

These plans are based upon either 10% or 15% your “discretionary income” 

In most cases, your payment is calculated by using your adjusted gross income (AGI) from your tax return. Then, they subtract 1.5x the federal poverty level for your family size.

They’ll take that number, multiply it by 10% or 15% and divide by 12 to calculate your monthly payment.

Whether someone owes $200,000 or $500,000, their payment would be the same since it’s based upon income regardless of the debt. 

(Some IDR plans put a ceiling or cap on how high your payments go though.)

Bottom line is that your payments on an income driven plan ends up being more like a tax rather than a debt.

Then we combine paying based upon your income along with reason #2 and it turns traditional debt repayment on its head.

Reason #2: Loan forgiveness

Federal student loans have plenty of options for loan forgiveness.

The two biggies are Public Service Loan Forgiveness (PSLF) and Income Driven Repayment (IDR) with taxable loan forgiveness.

With PSLF, after making 120 cumulative monthly payments while being employed full-time at a qualifying employer (non-profit or government employer), the remaining balance will be forgiven tax free.

With IDR plans, you would make payments based upon your income for 20-25 years then whatever is remaining would be forgiven. Currently the forgiveness on these plans is taxable, but that may change.

This is when your loan payments become more like a tax, because you pay based upon your income for 10-25 years, then the rest of your federal student loans are forgiven.

The other thing is that federal student loans are discharged (forgiven) upon death or permanent disability. It’s not something that needs to be paid off by any assets if either of those unfortunate circumstances happen.

Bottom line is that there paying based upon your income for a certain amount of years then getting the remaining loan balance forgiven can make it much more affordable than paying the whole thing off the traditional way.

Reason #3: Simple interest

This final reason will have also have an impact for those whose payments on an IDR don’t cover the interest.

Simply put, the loan grows at a slower pace than the interest rate would suggest due to simple interest.

Simple interest is not nearly as common as compound interest, so it’s ok if you’re not as familiar with it.

Compound interest is the idea that you “earn interest on interest” 

For example, if you earn 7% compounded, $1 turns into $1.07 after a year. Then that 7% is applied to the full $1.07.

After 10 years a 7% compounded return turns $1 into $1.96.

Simple interest is different, $1 turns to $1.07 after a year, then the 7% is only applied to the initial $1. 

After 10 years of 7% simple interest, $1 turns into $1.70.

7% compounded for 20 years turns into $3.86, while 7% simple interest turns into $2.40, 38% less than the compounded return.

Student loans have simple interest, meaning that the interest rate is only applied to the principal balance. 

Think of the accrued interest on student loans as the 0% interest part of your loan. That interest does not earn interest. 

The interest rate is only applied to the principal balance. 

The bottom line is that student loans grow at a slower rate than an investment with a compounded return.

Student loans are different summary

So, the fact that student loans use simple interest, allow you to pay based upon your income, and offer loan forgiveness under various circumstances make them SO MUCH different from all other kinds of debt.

Federal student loans vs private student loans

Quick note here.

We’re talking about FEDERAL student loans here.

If you have private student loans or have refinanced your loans, they need to be paid back like any other kind of debt.

The above mentioned characteristics don’t apply to private loans.

Your best bet if you have those is to refinance your student loans if you can get a better interest rate and/or better payment terms.

If you have private loans, I highly recommend checking out Student Loan Planner’s refinancing page which has all of the best lenders as well as some of the best cash back bonuses.

Your two options for federal student loan repayment

Navigating the different student loan repayment options can get a little bit overwhelm, so let’s simplify your options for federal student loans into 2 main options.

Option 1: Handle it like any other kind of debt. 

Get a low interest rate and pay it back as quickly as you can.

This option works best for people who:

  • Owe less than they earn
  • Have not yet worked and have no plans to work in a PSLF qualifying job for 10 years.

Option 2: Loan forgiveness either with PSLF or on an IDR. 

The goal here is to pay as little as possible so you can get as much forgiven as possible.

Plus, you’ll have extra money left over to put towards saving, investing and paying off other debts

This is best for people who:

  • Owe more than they make in federal student loans
  • Are pursuing or may pursue PSLF.
  • Need payment flexibility due to a job or life change.

Income driven repayment explained

The goal of student loan repayment using an IDR option is to pay based upon your income for a certain number of years, then have the remaining balance forgiven.

Your payments change as your income does.

If your income goes up over time, your payments will too. If your income drops or you lose your job, you can have your payments adjusted downward without having to enter forbearance.

There are four student loan repayment plans where you can pay based upon your income until you get to student loan forgiveness:

  • Pay As You Earn (PAYE)
  • REVISED Pay As You Earn (REPAYE)
  • Income Based Repayment (IBR)
  • Income Contingent Repayment (ICR)

We’re going to focus more on the top 3 since ICR is rarely used and one to avoid if you have other IDR options.

There are a few things to consider when deciding between these plans:

  • How much of your income do you pay?
  • How long is the repayment period before getting loan forgiveness?
  • Can you file your taxes separately to exclude your spouse’s income?
  • Does it have the 10 year standard payment cap?
  • Can I qualify for it?

We’ll go through the IDR options one-by-one here:

Pay As You Earn (PAYE)

PAYE is one of the best student loan repayment plans out there, because it has the shortest repayment term on IDR, the lowest percentage of income, and it allows student loan borrowers to exclude spousal income if they file taxes separately.

On PAYE, your payment will be 10% of discretionary income for a maximum repayment term of 20 years, and has the 10 year standard payment cap.

How to qualify for PAYE:

  • You’re considered a new borrower meaning you took out your first loans after 10/1/2007.
  • You have direct federal student loans.
  • You meet the “partial financial hardship” requirement. That means when they calculate your payment, it is below the 10 year standard payment.

REVISED Pay As You Earn (PAYE)

REPAYE is also based upon 10% of discretionary income just like PAYE and you must have direct federal loans to qualify.

But that’s where the similarities end.

There is no cap on payments, you can’t exclude spousal income even if you file taxes separately, and there is also no partial financial hardship requirement to qualify. 

Why would someone use this plan? 

  • If you don’t qualify for PAYE because you’re not a new borrower.
  • You need to get on an IDR plan to finish out PSLF but don’t qualify for partial financial hardship.

Income Based Repayment (IBR)

IBR is a more expensive plan and a longer term than PAYE if you have grad school loans.

The payment is based upon 15% of discretionary income for 25 years if you have grad school loans but 20 years for undergrad loans.

Because of that anyone who is eligible for PAYE doesn’t even need to look at IBR in almost all cases.

Even though the payments are more than REPAYE, it could be better for those not eligible for PAYE, because you can file taxes separately to exclude spousal income and it does have a payment cap.

This plan not only works for direct loans but also for FFEL loans.

How to qualify for IBR:

  • You can have direct or FFEL student loans.
  • You meet the “partial financial hardship” requirement. That means when they calculate your payment, it is below the 10 year standard payment.

Summary of Income Driven Repayment Plans

income driven repayment plans

The factors to consider when selecting an income driven plan are:

  • What do I qualify for?
  • Am I married?
  • If so, does my spouse have federal student loans?
  • What is my income projected to do?
  • Am I going for PSLF?

Here’s a summary table of the 3 main plans all laid out for you.

Public Service Loan Forgiveness Explained

We’ll go over the ongoing rules at a high level first.

Then we’ll talk about how the PSLF Waiver temporarily changes things.

This program began in 2007 with the idea of awarding student loan forgiveness to those pursuing jobs in public service – work for a government employer or 501(c)3 organization.

Rather than having to pay the loans off on an IDR for 20-25 years, PSLF gives full, tax-free student loan forgiveness after 10 years of qualifying payments on an income driven plan.

The goal here is to keep your payments as low as you possibly can so that you can maximize your forgiveness.

This is really important because any extra dollar you put toward your loans is like tossing it in the garbage.

The requirements to get PSLF include:

  • Only Direct Federal Loans are eligible
  • In repayment status on an income driven repayment plan
  • Work full-time at a qualifying PSLF employer.
  • Reach 120 months of cumulative payments meeting the above requirements.

In order to get credit for qualifying payments, you must submit an Employment Certification Form aka PSLF Application which is where your current or prior employer signs off to verify your employment.

Once that form is completed and sent in to address on the form, it will match up the time period you worked with your time in repayment status. Then you’ll get a letter stating how many qualifying payments you’ve made and how many more you have to go.

Student Loan Planner has its best 40 tips to get public service loan forgiveness here to make sure you’re doing all the right things and saving as much as possible. 

The PSLF Waiver loosens requirements for past student loan payments

Let me start by saying that the PSLF Waiver only applies to PRIOR payments made. 

You have to meet the above requirements to have your payments count toward PSLF going forward.

The PSLF Waiver is righting a lot of the wrongs and problems with the program in the past…AND it’s working for many people.

I recently spoke to an early childhood educator who had ALL of her loans forgiven after going through the waiver process. She’s exactly who student loan programs like PSLF were made for and exactly why the waiver is in place.

Rather than having to have direct federal loans and being on an income driven plan, the PSLF waiver will count any payments made as long as you were:

  • Employed full time at a PSLF qualifying employer
  • In repayment status

In other words, it doesn’t matter what repayment plan you were on or what kind of loans you had.

Plus, it used to be that consolidation would reset the clock on PSLF, but during the waiver period, payments made pre-consolidation will count as long as the employment certification form is filled out before the waiver expires in October 2022.

Every month you meet the above requirements from October 2007 on will count toward PSLF.

PSLF limited waiver changes

How to take advantage of the PSLF Limited Waiver

IMPORTANT: This waiver expires in October, so you’ll want to take advantage of it as soon as possible.

At most, it takes two steps to qualify for the waiver.

  1. Submit the PSLF application for ALL qualifying employment from October 2007 on.
  2. Consolidate your loans.

Quick and important note on Consolidation vs Refinancing

The industry will often WRONGLY confuse consolidation with refinancing.

The true definition of consolidation means that your loans stay in the federal program but become wrapped into one or two loans called “Direct Consolidation Loans”

When I say “consolidate” your loans, I mean keep them in the federal system and held by the U.S. Department of Education. Here’s the website to consolidate on studentaid.gov.

Refinancing is the process where a private company pays off your federal loans and you now owe that company. 

PSLF is gone for good if you do that, so do NOT refinance if you are pursuing PSLF.

How to submit the PSLF Application

They made this pretty easy to do.

Use the PSLF Help Tool which will pre-populate the form for you. Just enter your qualifying employment info and voila!

Then you can bring it to your employer to sign and submit it using the info on the form.

Do this for all current and prior employers that you haven’t submitted for already.

When to do a Direct Consolidation for the PSLF Limited Waiver and how to do it

Completing a direct consolidation of your federal student loans will combine and round up your payments to the loan with the most credit toward PSLF so they’re all on the same track. 

Also, consolidating will make all of your federal loans eligible including FFEL loans and Parent Plus loans which were excluded from PSLF. Where before only direct federal loans to be eligible.

If you have different repayment periods across loans or the PSLF count is different, consolidating will solve that problem too.

IMPORTANT: Normally consolidating resets the clock toward PSLF, but that’s not the case during this waiver period.

It clearly states that on studentaid.gov (an Office of the U.S. Department of Education):

consolidating federal student loans - pslf waiver

This could give you the green light to consolidate if there’s any question that your loans or any payments hadn’t qualified.

PSLF Limited Waiver Summary

So to summarize, if you’ve had a problem with your PSLF payment count, had previously ineligible loans or were on a previously ineligible repayment plan, you’ll want to take the steps necessary to take advantage of the PSLF waiver.

REMEMBER: You only have until October 2022 to make this work and going forward, you have to meet the program’s requirements to be eligible going forward.

Here are all of the details of the PSLF Waiver program directly from the source at studentaid.gov

What is the IDR Waiver?

Income driven repayment plans also had their issues.

First of all, loan servicers are having trouble calculating how long student loan borrowers have toward the 20 or 25 year loan forgiveness.

Also, some loan servicers had unnecessarily steered borrowers into forbearance. When loans are in forbearance or deferment, the clock toward loan forgiveness isn’t running.

Some borrowers were told to do a consolidation which reset the clock toward loan forgiveness.

Finally, the loan forgiveness clock is only running from being on an IDR and not how long you’ve been in repayment.

If you were on the extended or graduated plans, that didn’t count toward that 20-25 years toward loan forgiveness. 

I had a conversation recently with someone who had been in repayment for 30 years and the loans hadn’t been paid off yet.

The IDR Waiver fixes a lot of that.

Now, ANY month spent in repayment counts toward that 20-25 year forgiveness clock no matter what repayment plan you were on and even if you consolidated.

Not only does the time in repayment status count, but you can also get credit for time spent in forbearance if:

  • You spent 12 or more consecutive months in forbearance
  • OR you have 36 or more months of total forbearance.
  • Deferment prior to 2013 also counts unless it’s “in-school” deferment

If you reach those forbearance thresholds, those time periods not only get added to the IDR loan forgiveness but they also get added to your PSLF credit.

I recently had a consult with someone who spent 3 years in repayment and also had 4 years in combined forbearance. 

Under the old rules, only 3 years would count toward the 20 year forgiveness, but with the IDR waiver makes it 7 years which is a huge deal!

That cuts off 4 years of payments!

IDR Waiver vs normal IDR forgiveness

How to take advantage of the IDR Waiver

For the most part, nothing needs to be done. The updates will happen automatically.

But if you have commercially held FFEL loans, then you’d have to consolidate to take advantage of it.

They haven’t posted any Q&A to the site yet, so we don’t know if consolidation makes sense or if there are any other steps to take.

But you can check out the IDR Waiver page from studentaid.gov which is the official source.

How does the CARES Act forbearance during COVID-19 factor into all of this?

The payment and interest freeze was put into effect by Congress in March 2020 and extended by both the Trump administration and Biden Administration by executive order. 

The clock will run toward forgiveness and no loan payment needs to be made if your loans are held by the Department of Education.

Quick note: This administrative forbearance does not count toward the IDR Waiver forbearance threshold though.

What do you need to do now?

If you have federal student loans, you’ll definitely want to explore how the PSLF Limited Waiver or IDR Waiver apply to your situation.

I would get on this RIGHT AWAY since these waivers expire in late 2022, and you don’t want to miss out on thousands of dollars if it applies to you.

Also, if you have friends and family with federal student loans, definitely pass along this information too.

The best source for updates to the student loan rules

If you want to stay up-to-date, Student Loan Planner is the best source. Refer your friends and family there too.

Whether you tune in to the podcast, follow them on social media, or subscribe to the email list, they have done the best job at explaining these changes as they come up and how they could affect you.

There is a lot of money at stake here, so if you have six-figure federal student loan debt and really want to make sure you’re on the right path and get clarity on the steps you need to take for your specific situation, definitely book a consult with them.

Remember that the PSLF Waiver and IDR Waiver are TEMPORARY so don’t wait to take action!