This Federal Employment Perk Can Help You Become Debt-Free

 October 25, 2019
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If you’re interested in public service, becoming a federal employee can be a terrific career choice. Federal employees earned an average of $94,463 in 2018.

Federal employees enjoy valuable health benefits and access to a federal employee student loan forgiveness program as they try to become debt-free.

If you have federal student loans, working for a government agency can help relieve the burden. You might be able to get as much as $60,000 in help paying off your loans. Here’s how it works, and what to do if you think you’re eligible.

What is the federal student loan repayment program?

The government launched the federal student loan repayment program as an employee incentive. Agencies can use it to recruit and retain top talent.

Under the program, the government agency you work for will make payments — possibly as a lump sum — to your student loan servicer. You could receive up to $10,000 a year (for a lifetime maximum of $60,000) to help pay off your student loans.

In return, the agency will ask you to sign an agreement stating you’ll continue to work there for at least three years. If you leave your job early or if you’re fired for misconduct or poor performance, you’ll likely have to reimburse the agency for any money it has already paid. If you take unpaid leave, the time away from work does not qualify as part of your service term.

Only federal student loans are eligible for this repayment program. If you’re a federal employee and have parent PLUS loans for your child, you still qualify for the program.

Unlike some forgiveness programs, the rules do not require you to have completed your degree to qualify. However, some agencies do ask for a degree to be eligible for the program, so ask your employer if you qualify based on their unique requirements.

Any federal employee is eligible unless your role is confidential or involves policy-making duties. You must be in good standing with your employer and show acceptable performance at all times.

Schedule C employees, such as lobbyists, do not qualify. Members of Congress are also not eligible, but their staff members could qualify.

Also, the money you receive from your employer is included in your gross income and is subject to employment taxes. For example, you could receive a $10,000 benefit, but if you owe $3,000 in taxes, the agency will only make a $7,000 payment to your servicer.

A 2019 U.S. Office of Personnel Management (OPM) report to Congress for the calendar year 2017 — the latest data available — noted that 34 agencies provided 10,206 employees with more than $74.9 million in student loan benefits that year. The U.S. Department of Defense paid out the most at more than $18 million. Here’s a brief look at the top payments by agency in 2017:

  • Department of Defense: $18 million
  • Department of Justice: $15 million
  • Department of State: $10 million
  • Securities and Exchange Commission: $6.8 million

How to apply for the federal student loan repayment program

There isn’t a formal application for this federal employee repayment program. Instead, ask your employer or potential manager for more information if you are employed by a federal agency or are interviewing with one for a job.

Your employer will consider your request. Whether it issues the funds to you is decided on a case-by-case basis.

If the agency does decide to move forward — and it is not one of the 30-plus agencies that already have a forgiveness procedure in place — it must prepare a plan that describes how the agency will implement the program and disburse the money.

Federal student loan repayment program vs. Public Service Loan Forgiveness

Depending on your career, you might also qualify for another federal student loan forgiveness program: Public Service Loan Forgiveness (PSLF).

In this program, your loans could be forgiven if you work for a nonprofit or government agency and make 10 years of qualifying payments. Payments made on an income-driven repayment (IDR) plan count toward PSLF.

In some cases, the federal student loan repayment program can be a better choice than PSLF. Recent reports have shown that 99% of applications for PSLF have been denied, making your chances to qualify for this program exceptionally low. In 2018, 54,184 people applied for PSLF, but just 661 individuals were approved.

The rejection rate, as well as other factors, may make federal student loan repayment program a better option. Those benefits begin with the ability to pay off your loans quicker. Because you can receive up to $10,000 a year for six years, you could use that money to pay off your loans ahead of schedule. Depending on your loan amount, you could be debt-free in just a few years, whereas you’d have to make payments for a decade with PSLF.

Let’s say you’re a new federal employee making $40,000 — well under the $94,463 average. You have $34,722 in student loans at a 3.9% interest rate. If you are married with one child and your spouse has no income, you could qualify for Pay As You Earn (PAYE).

On the PAYE plan, your payment would start at $67 a month, and you’d pay $55,061 over the more than 20 years. If you qualified for PSLF, you’d make 120 payments over 10 years and save $7,418.

If you signed up for PAYE and pursued the federal employee repayment program, your payment would still be $67 a month. However, you could get $10,000 a year for six years, which might cover the full cost of your loans (depending on your tax situation).

While it would take 10 years to eliminate your loans with PSLF, you’d be debt-free in fewer years with the federal employee repayment program — and you’d spend less of your own money. Note that if you start with the average federal employee salary, you’ll qualify for certain income-driven plans but not PSLF.

These savings mean you have more that you could use for other goals, such as saving for retirement or building an emergency fund.

Even better, you don’t really have to make a choice. You could pursue PSLF while inquiring about the federal employee student loan forgiveness program. Your time working for a government agency could still qualify for PSLF, even if you receive the money to pay back your loans. Pursuing both can help protect you in case your employer denies you for the repayment program.

Managing your student loans

If you’re struggling to repay your student loans and work for a government agency, student loan forgiveness for federal employees might sound too good to be true. However, this repayment program is real, so ask your employer today if you’re eligible to receive the funds for your loans. Speaking up could save you money.

Want more ideas for student loan forgiveness? Check out this complete list to find even more options.

Anne Bouleanu contributed to this report.