Educators With Student Loans: Do This NOW!

Seriously. If you are an educator with outstanding federal student loans, you need to complete the following four steps ASAP.

Note: The following applies to anyone with federal student loans, but some of the specifics are geared toward educators. But if you are not an educator, you should still work through the following steps.

First, I’m going to succinctly list the steps for you then, below, I will give a bit more detail about each step. As always, there will be exceptions to this, but this is likely good advice for at least 95% of educators with federal student loans.

1. Confirm how many months are currently being counted toward Public Service Loan Forgiveness (PSLF). Make sure that if there are any months where you worked for a public employer that are not being counted that you submit the employer certification form for those months. And, if you graduated during the Covid “pause”, contact your loan service provider to change the first six months after graduating from “grace period” to “forbearance.”
2. If you have multiple federal student loans with different payment start dates, login to your account and consolidate them.
3. Check to see which income-based repayment program you are on. If you are not in REPAYE (newly renamed SAVE), then most likely you will want to switch.
4. Take a look at your pay stubs and tax return and identify ways to optimize that might lower your student loan payment.

Step 1: Verify Months

If you login to Mohela (should be your provider if you are in PSLF), you should be able to drill down into the payment tracker in your account and identify which months are currently being counted toward PSLF. If you notice any months that you worked for a public employer that are not being counted, submit the employer certification forms for those months. (If you already have submitted the employer certification form, then contact Mohela to discuss the discrepancy.) This is particularly important to do because there have been some changes that allow months that previously weren’t being counted to now count.

• Any months since October 2007 that you were in repayment but not in an income-based repayment plan.
• Any months you were in forbearance. (This is huge for anybody who has ever been in forbearance for any reason).
• For people who graduated after March 2020 and before September 1, 2023 (during the Covid pause), you can contact Mohela (or whichever loan service provider you have) to request they change the status of your first six months after graduating from “grace period” to “forbearance”, which will ultimately give you six more months toward your 120.
• Any months in deferment prior to 2013 (not counting in-school deferment). This one won’t apply to many folks.

Note: Some folks may have a loan service provider other than Mohela (Mohela has been the default for PSLF the last few years). If you consolidate, I believe it will then switch to Mohela. If you are doing the other steps, you should be able to do them with your loan service provider as well.

After doing this, you may discover that you already qualify for full forgiveness (120 months of payments) or, at the very least, you are much closer.

Step 2: Consolidate Federal Loans

If you have multiple federal student loans with different payment start dates, you will want to consolidate them. This is because, if you do, then your payment history on any loan will apply toward all your loans. For example, let’s say you had undergraduate loans that you made some payments on and then, later you got graduate loans. Right now the 120-payment history on the graduate loans “resets” and starts with your first payment on the graduate loans. But, if you consolidate, then all the payments you made toward your undergraduate loans will also count toward the 120 payments needed to forgive your graduate loans. This is huge for many folks.

To consolidate, go to studentaid.gov, login, and hover above “loan repayment” and then choose “consolidate loans” (see the demo here). Make sure to choose Mohela as your provider for PSLF. You will need some basic information like your adjusted gross income (AGI) for your 2022 tax return (typically line 11 on your 1040 form). You will then need to choose which repayment plan you want to be on (likely SAVE for most people now, see below). You will then be prompted to connect your IRS tax return to the student loan portal to pull the documents over. If you are married, you will have to have your spouse cosign the IDR request to verify that information is correct (note that this is not cosigning on the loans themselves). Then there is a very long page of legal verbiage, followed by your current information, and finally a review and signature on the last page. While not required, it’s a good idea to send in new employer certification forms once you have consolidated just to be sure. Also be aware that while this is being processed your payment history will go down to 0 for a time (but, don’t worry, it will be changed once it’s all processed).

Step 3: Make Sure You Are On REPAYE (newly renamed SAVE)

The Biden Administration just made major revisions to the REPAYE program, including renaming it SAVE, that will make this the income-based repayment program to be on for almost every educator. If you are currently on REPAYE, you should be automatically transitioned to SAVE. If you are on another income-based repayment plan (PAYE, IBR, ICR), you will likely will want to switch to the new SAVE plan immediately. Login to studentaid.gov/idr/ and click on “Switch Your Plan” and then follow the instructions (you can see a demo here). It’s unclear when they will change the name ‘REPAYE’ to ‘SAVE’ on these screens, so if it still says REPAYE, switch to that. If it says SAVE, switch to that.

Note: There are some exceptions to the “switch immediately” advice. If you were making student loan payments prior to Covid and have not consolidated your loans since then, then your loan payments are currently based on your 2019 tax data. If you have had a significant increase in income (AGI) since then, or have gotten married and your spouse has a large income and you filed “married filing jointly” in 2022, then you likely will want to wait to switch until the next time you are required to certify your income. That way your payments will continue to be based on your 2019 income for now, and then when you have to certify your new, higher income you can make the switch then. (And, as indicated below, if you have a spouse who makes a decent income, you will likely want to file “married filing separately” for as long as you have federal student loans.) You can find your next recertification date in your account, but this will not be “restarted” until six months after payments resume on September 1, 2023. So, for example, if your next recertification is scheduled for any time before March 1, 2024, you actually will not have to recertify until that month in the following year (September 2024 through February 2025, depending on your month).

Step 4: Optimize To Lower Your Student Loan Payments

Your student loan payments are based on your federal adjusted gross income (AGI) minus 225% (was 150% until the new SAVE plan) of the poverty level guidelines for your family size. They then calculate 10% of this “discretionary income” as your loan payment.

Note that that will drop to 5% for undergraduate loans and a weighted average of 5% and 10% if you have both undergraduate and graduate loans on July 1, 2024).

This means that anything you can do to lower your AGI on future tax returns will also lower your student loan payment (and you may actually be able to get your payment to $0, even while it still counts toward your 120 payments until full forgiveness). Here are three things to look at carefully.

• If you are married, you are most likely going to want to start filing your federal taxes as “married filing separately” going forward. This is because your student loan payment will then be based on your income only, not your combined income with your spouse. If your spouse doesn’t work or makes a very low income, then it’s possible you will still want to file jointly. This is because if you file jointly you will be able to count your spouse as part of your family size when deducting the 225% of poverty level amount. If your spouse doesn’t make any or much money, this additional deduction can outweigh their additional income.
  
• You want to take advantage of any and all pre-tax deductions from your paycheck. These include items like health/dental/vision insurance premiums, medical FSA or HSA deductions, dependent care spending account deductions, and pre-tax contributions to 401ks/403bs/457bs. Some things to think about is perhaps switching some of those things from your spouse’s employer to yours, although this very much depends on the details. (This also includes traditional, pre-tax IRA contributions, but if you are filing married filing separately, you are unlikely to be able to make these.)
  
  For example, perhaps you have been contributing some money to an FSA from your paycheck and some from your spouse. Unless your spouse also has student loans, it would make more sense to make all the FSA contributions from your paycheck. Similarly, if you are currently paying for your kids’ medical/dental/vision insurance through your spouse, it could make sense to switch those to your coverage even if the cost is slightly more than with your spouse (you have to do the math to see if it’s worth it). And, depending on whether your spouse gets a match to their 401k/403b/457b, you may want to temporarily “redistribute” some of your spouse’s retirement contributions to your paycheck from theirs (assuming the financial dynamics in your relationship allow this), as it will lower your AGI and therefore lower your student loan payment (e.g., increase your contributions into your account(s) from your paycheck and decrease your spouse’s contributions into their account(s) if you still need that money to pay the bills).
  
  For all of these pre-tax deductions, you can think of them as not only saving on taxes, but giving you an immediate 10% return on investment because of your lower student loan payment. (That will change to 5% return on investment July 1, 2024, for undergraduate loans, and a weighted average between 5% and 10% if you have both undergrad and graduate loans.)
  
  Here is a sample spreadsheet that you can choose File→Make a Copy and then adjust to reflect your specific numbers to do some “what if” planning to see how it would affect your student loan payment if you did some of the optimizations above.

So, please, please, please go through these steps if you have federal student loans. And please share with anyone else you know (educator or not) who has federal student loans. Some folks will see their student loans immediately forgiven, some will see payments drop to $0 (at least for a while, and then be very low until forgiveness), while still others will see them drop by over 50% from the current amount. These simple steps could save you thousands (or perhaps tens of thousands) of dollars. 

Bonus Step 5 for Colorado Educators

Make sure you also apply for Colorado Educator Loan Forgiveness. While applications are currently closed, they will open up again later this year (you can contact them to ask if they can tell you a specific date they will open). While many folks think they won’t qualify because of the titles of the two programs that refer to “rural schools”, it also includes “hard to fill positions” which includes broad categories like “elementary teacher” and “counselor”. The application is quick and simple, so even if you aren’t sure if you qualify, go ahead and complete the application whenever it opens back up again.

Note: Many thanks to David Gourley for helping me with the details of this post.