Churches now qualify as public service employers under the Public Services Loan Forgiveness (PSLF) program. As of July 1, 2021, PSLF regulations have been expanded to include an entirely new category of workers who had previously been denied access to the program: employees of religious 501(c)(3) organizations. The change could mean tremendous savings on federal loan debt for thousands of religious organization employees (and their parents).
What is the Public Services Loan Forgiveness Program?
The PSLF program is part of the College Cost Reduction and Access Act which Congress passed in 2007. PSLF forgives the remaining balance on federal Direct Loans after 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying public service employer. Stated another way, after a borrower repays student loans for 10 years, the government, using PSLF, wipes out any outstanding debt the borrower still owes. Government agencies and 501(c)(3) nonprofit organizations comprise the vast majority of qualifying public service employers under the PSLF programs. Until recently, however, the Department of Education didn’t consider churches and other religious organizations as “qualifying” public service employers even if the organization had 501(c)(3) status. Bolstered by recent Supreme Court rulings, former Secretary of Education, Betsy DeVos, believed the exclusion of religious organizations from the PSLF program violated the Establishment Clause of the First Amendment. Under her direction, the Department of Education expanded the definition of qualifying public service employers to include religious 501(c)(3) organizations.
Requirements for Loan Forgiveness
There are four main eligibility requirements for the PSLF program. While the Department of Education has expanded its interpretation of what it means to be a qualifying public service employer, many of the other loan forgiveness requirements remain unchanged.
1) Only federal Direct Loans are eligible for forgiveness.
There are four types of federal Direct loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans. Direct PLUS Loans are federal loans that graduate or professional students and parents of dependent undergraduate students can use to help pay for college or career school. The inclusion of Direct PLUS Loans means that parents who borrowed money for their dependent’s education may be eligible for PSLF if the dependent meets all the other eligibility requirements. Other federal loans, however, may not be eligible. Loans made under the Federal Family Education Loan Program (FFEL) and Federal Perkins Loans may not qualify unless they are consolidated into a Direct Consolidation Loan.
2) The borrower must make 120 qualified payments.
A qualified payment is a payment for the full amount due as shown on the bill and paid no more than 15 days after the due date. The payments do not have to be consecutive, and a missed payment does not disqualify someone from the PSLF program. However, there must be 120 distinct payments which means it will take a minimum of 10 years to qualify for PSLF. There is no way to speed up the process.
It’s important to note that payments made on a non-federal Direct Loan prior to consolidation into a Direct Consolidation Loan do not count toward the 120 eligible payment requirement.
Typically, payments made during a deferment or forbearance period do not count toward the 120-payment requirement. However, during the current deferment period that was created in response to the COVID-19 pandemic, borrowers will receive credit for payments during each month of deferment (currently 18 months) even if the borrower doesn’t make an actual payment.
3) The Direct Loans must be repaid pursuant to an eligible repayment plan.
The 10-year standard repayment plan is an eligible repayment plan for any loan that is not a Direct Consolidation Loan. However, if 120 payments are made under a 10-year standard repayment plan, the loan will be paid in full and there will be no outstanding debt to be forgiven under PSLF.
There are four income-based eligible repayment plans: Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Contingent Repayment (ICR), and Income-Based Repayment (IBR). All four of these plans qualify for the PSLF program.
4) The borrower must be a full-time employee of an eligible employer.
Part-time employment does not qualify the borrower for loan forgiveness and any loan payments made while the borrower works part-time or for a non-eligible employer will not count as one of the 120 qualified payments toward PSLF eligibility.
The PSLF program provides an excellent opportunity for church and religious organization employees to end indebtedness. The inclusion of religious 501(c)(3) organizations as eligible employers under the program is welcome news that is long overdue. However, those seeking to participate in the PSLF program should talk about the details and potential risks with a trusted financial advisor. PSLF is a government program, and this means it could be significantly altered or canceled altogether by a future act of Congress or a different application from the Department of Education. When borrowers first became eligible for loan forgiveness in 2017 (10 years after the program’s creation in 2007) only 1% of forgiveness applications were approved. Despite attempts to remedy issues with the program, the approval rate had only reached 1.8% by March of 2020. The incredibly low rate of PSLF forgiveness has resulted in lawsuits against the Department of Education. President Biden has made it a priority to fix the PSLF program, but changes will take time. Borrowers would be wise to use the PSLF program if it is available but should not rely on federal debt forgiveness.
Texas Baptists Resources
Pastors and ministers experiencing financial challenges due to student loan debt can reach out to Tammy Tervooren, Director of our Financial Health Team, in the Center for Ministerial Health at tammy.tervooren[at]txb.org to learn more about grants and low-interest loans available to help alleviate some of the financial burdens of student loans. Free personal financial counseling with a qualified financial professional is also available for pastors seeking financial guidance.
Attorney John Litzler directs the church law division of Christian Unity Ministries in San Antonio. He also serves as a BGCT legal consultant to assist Texas Baptist churches in understanding various legal issues.
Disclaimer: This article provides general information and a general understanding of the law and does not constitute specific legal advice. By utilizing the Texas Baptist website, you understand that there is no attorney/client relationship between you/your church and the author or between you/your church and the Baptist General Convention of Texas. This article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state with the specifics of your situation.