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A health savings account (HSA) and a Health Maintenance Organization (HMO) are both meant to help with medical costs, but there are vast differences between the two. An HSA acts as a personal saving account, where you can set aside tax-free dollars to be used toward out-of-pocket health care expenses. An HMO is typically a low-cost health insurance plan.

It’s tough to directly compare an HSA vs. HMO, as they serve different functions. But understanding how each works, and their pros and cons, can help lower medical costs and keep more money in your wallet. Here, you will learn:

•   How an HSA works

•   How to set up an HSA

•   The pros and cons of an HSA

•   How an HMO works

•   How to set up an HMO

•   The pros and cons of an HMO

•   The key differences of an HSA vs. HMO

•   How to fund healthcare costs.

What is a Health Savings Account (HSA)?

A health savings account (HSA) allows individuals to put away pre-tax dollars to be used for future medical purposes. These funds can be used for copays, dental and eye care, and a host of other expenses not covered by a healthcare plan.

Here’s the catch: You have to be enrolled in a high-deductible health plan (HDHP). An HDHP is geared to offer you lower monthly health-insurance payments. The downside, however, is that you could get hit with a lot of out-of-pocket expenses before meeting the plan’s high deductible.

That’s where a Health Savings Account (HSA) comes in. The money in your HSA can help bridge the gap between your high deductible and your pocketbook.

How Does a Health Savings Account Work?

A Health Savings Account works similarly to other kinds of saving accounts. You can transfer funds and pay bills online. You are free to withdraw HSA funds at any time to pay for health costs not covered by your HDHP.

Employers can contribute to your HSA, with direct deposits made straight from payroll. HSA funds can be used for you or any family member covered by your HDHP.

The money in your HSA can remain in the account and roll over every year, accumulating tax-free interest. You can even use your HSA for retirement. After the age of 65, you can start withdrawing from your HSA with no penalty.

There are rules and limits to an HSA. For tax year 2025, the IRS limits contributions to no more than $4,300 for individuals and $8,550 for families with HDHP coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. For 2026, HSA contribution limits are $4,400 for individuals and $8,750 for families. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.

How to Set Up an HSA

Setting up a tax-advantaged HSA is pretty straightforward. If you are self-employed, take the time to compare different HSAs online. Many of them have reasonable fees (or none) and minimal requirements.

If your HSA is offered directly through your employer, that makes the decision easy.

The steps to enroll in an HSA are not unlike opening a bank account. You’ll need proof of a government-issued ID, your Social Security number, and proof of your enrollment in a HDHP.

Once you have set up an HSA, you may be able to opt for regular, automatic deposits straight from your paycheck or your bank account, and start reaping the benefits of using a health savings plan.

Pros of an HSA

A health savings plan provides a range of advantages, including:

•   Covering out-of-pocket medical expenses, including dental costs, copays, new eye glasses, and hearing aids. The IRS has a lengthy list of all the goodies you can buy with your tax-free dollars.

•   Lowering taxable income. HSA contributions go into your account before taxes, so you could pay less taxes down the line.

•   Investing for the future. You can opt to have your HSA money invested in chosen mutual funds once you reach a minimum requirement balance.

•   Covering health expenses for your family. HSA benefits anyone who is currently covered by your high-deductible savings plan.

•   Rollover contributions. Unused contributions don’t vanish. They roll over into the next year, growing and accumulating tax-free interest.

•   Retirement savings. Any unused funds can be used to boost retirement savings. They can be withdrawn after the age of 65, and spent as you please. You can put the money toward a beach vacation or any other purpose.

•   Portability. If you move or change jobs, the money is still yours. You don’t have to surrender it.

Cons of an HSA

There are some potential disadvantages to having an HSA, including:

•   Penalties for non-qualified expenses. Before the age of 65, the IRS can impose a substantial 20% penalty on monetary amounts spent on unapproved purchases. This money will also be viewed as taxable income.

•   Monthly/annual fees. Some health savings accounts may charge a low monthly service fee. Service fees tend to be no more than $5 per month. Some HSAs allow you to invest in mutual funds after your balance reaches a certain amount. If you choose this option, you will probably be charged an annual account management fee.

•   Unable to contribute. Budgets can get tight. There are times when you might not be able to regularly contribute money to your HSA.

•   Tracking for your taxes. HSA expenditures and contributions must be reported on your tax return. Keeping tabs on those transactions can be tedious.

•   Monetary losses. As with an IRA or 401(k), if you choose to invest your HSA money in mutual funds, your balance can experience gains and losses as the market fluctuates. These investments are not FDIC-insured like bank accounts are.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

What is a Health Maintenance Organization (HMO)?

A Health Maintenance Organization (HMO) is a type of health insurance plan. An HMO tends to offer lower monthly or annual premiums and a specific pool of doctors. If you stay within their network of healthcare providers, you may have lower out-of-pocket costs and, unlike with a HDHP, a lower deductible or even no deductible at all.

How Does a Health Maintenance Organization Work?

A health maintenance organization (HMO) plan consists of a group of insurance providers who have contracted certain doctors and hospitals to work with them. These medical professionals and facilities agree on a payment rate for their services, which can translate into reduced costs for you.

As long as you use the doctors in the HMO network, you are eligible for medical services that cost less. HMOs typically require a referral from an in-network primary care physician in order to receive low-cost services from specialists, such as an oncologist or gynecologist.

Many health insurance companies offer HMO plans as a coverage option. An individual can choose the HMO plan and go through the steps of enrollment, either on paper or via an online form. The process includes selecting your primary care physician.

Pros of an HMO

The advantages of enrolling in an HMO plan can include:

•   Lower monthly premiums versus other insurance plans.

•   Lower out-of-pocket expenses when you see your GP or specialists, have tests done, and access other kinds of medical care.

•   Lower prescription costs for your medications.

•   Fewer medical claims, as the paperwork is filed in-network.

•   Appointing a primary care doctor, whose office may coordinate and advocate for your various medical services.

Cons of an HMO

There are disadvantages of having an HMO, including:

•   Limited access to doctors and facilities. You must stay within their network of providers or risk paying out-of-pocket, except in the case of certain emergencies.

•   A new primary care doctor. If your current doctor isn’t in the HMO’s network, you’ll have to find a new primary care physician. For some people, this may be a difficult switch to make.

•   Referral requirements. To see a specialist and have your HMO pay for those services, you’ll need referrals; you can’t just look up a specialist and see them.

•   Strict definitions. There are times when you must very specifically meet requirements to have medical services paid for. This can be important to know during emergencies and other medical situations.

Can You Have Both an HMO and HSA?

Yes. There is no real rivalry happening with HMOs vs. HSAs, as they are so different. But if you are wondering if you can have an HSA with an HMO, here’s what you need to know. You can use an HSA with an HMO, as long as the HMO qualifies as a high-deductible health plan (HDHP). Since HMOs are often low cost healthcare plans, an HMO may not qualify as an HDHP. Check with your particular plan to see.

Key Differences Between an HMO vs HSA

•   An HSA acts like a savings account, an HMO is a health plan offering savings through lower-cost healthcare options.

•   An HSA does not offer a network of doctors, but can offer investment opportunities and help you save for retirement.

Recommended: How to Save for Retirement

Ways to Fund Healthcare Costs

Besides enrolling in a low-cost HMO, or opening an HSA, there are other ways to save money and pay for medical expenses.

Flexible Spending Account

A flexible spending account (FSA) acts very much like an HSA. It is similar to a savings account, and can be used for medical expenses and saving for retirement.

An FSA, however, can only be obtained through an employer. Self-employed people cannot have an FSA.

Money Market Account

A money market account works like a traditional checking or savings account. You could use the money for healthcare costs, or any other purchases. Money market accounts can offer a higher interest rate than other saving accounts, but there may be a higher minimum account balance required and more costly fees.

Savings Account

A traditional savings account can be set up with a bank or a credit union. Funds in a savings account can be spent on anything. But savings accounts may offer lower interest rates than other types of saving options. However, high-yield savings accounts may help close that gap somewhat.

The Takeaway

Enrolling in a health savings plan (HSA) or a health maintenance organization plan (HMO) provides different advantages, with the same goal in mind: saving you money on healthcare costs. Enrolling in one (or both) can bring a sense of security for you and your family and help you hold onto more of your hard-earned cash.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Is an HSA better than an HMO?

An HSA isn’t better; it’s just different. An HSA is a kind of savings account for people enrolled in a high-deductible healthcare plan and is used to pay for medical costs. An HMO is a low-cost health insurance plan that gives you access to a specific network of healthcare professionals.

What happens to an HSA if you switch to an HMO?

You can keep and use an HSA with any type of health plan, as long as it qualifies as a high-deductible health plan (HDHP). If not, you can keep and access the money in the HSA, but you can no longer contribute to it.

What happens to my HSA if I cancel my insurance?

You can continue to use the money in the HSA account, but can no longer contribute to it until you’re enrolled in another HDHP.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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SOBK0324004
CN-Q425-3236452-107

Tax credits and tax deductions work differently, with deductions lowering your taxable income and credits actually reducing the taxes you owe.

To be a little more specific, deductions can decrease the amount of income you have to pay taxes on, which can lower your final bill. Tax credits are a dollar-for-dollar reduction in what you owe — and might even get you a bigger tax refund.

It’s possible you may be able to claim both deductions and credits. Read on to understand more about how both options work.

What Are Tax Credits?

Tax credits represent a dollar-for-dollar reduction in your overall tax burden. They directly lower the tax amount you owe to Uncle Sam.

For example, if you owe $1,500 in taxes but qualify for a $500 tax credit, your total tax bill will decrease by $500, meaning you’ll only have to pay $1,000. That can leave more money in your bank account.

How Do Tax Credits Work?

When filing your taxes, you can use IRS resources, tax software, or a certified accountant to research tax credits for which you may be eligible. If it’s your first time filing taxes, these resources can be especially helpful.

Even if you don’t owe anything in taxes, it’s worth looking into tax credits. Why? Because some tax credits are refundable, meaning the government might owe you money:

•   Refundable tax credits allow your tax liability to go below zero. For example, if you owe $100 in taxes but receive a $500 refundable tax credit, the government will actually owe you $400.

•   Nonrefundable tax credits do not work that way, unfortunately. If you qualify for a nonrefundable tax credit, the best it can do is eliminate your tax liability (meaning you owe nothing). But even if the credit is large enough to wipe out what you owe and there’s still money left over, you don’t get to stash that money in, say, your savings account.

Tax credits are not for everyone. Each credit has specific requirements to qualify.

And if you’re wondering what happens if you miss the tax deadline, tax credits would still apply for the year that you’re filing your taxes.

Common Tax Credits

Your tax software or accountant should know the full list of tax credits to look out for, and the IRS website features the whole list. (You can also learn important information from an online tax help center.)

Before diving into your taxes, however, it’s a good idea to note some of the most common tax credits for which you may qualify:

•   Earned Income Tax Credit: Commonly called by its initials (EITC), this refundable tax credit is for low- to moderate-income workers. The amount you might qualify for and your eligibility can vary depending on whether you have dependents and/or have a disability.

•   American Opportunity Tax Credit: This education tax credit is partially refundable. Students (or parents claiming a student as a dependent) can claim this tax credit for the first four years of higher education. It’s $2,500 per eligible student, but once your tax bill hits zero, you can earn 40% of whatever remains (up to $1,000) as a tax refund.

•   Child Tax Credit: Even if a child isn’t enrolled in higher education, parents have access to a handy tax credit. The Child Tax Credit is a refundable tax credit for parents (with dependent children) who meet income requirements.

•   Child and Dependent Care Credit: Parents have access to yet another potential tax credit, this time for those who pay for babysitters or daycare. The credit amount depends on such factors as your income, child care costs, and number of children requiring care.

You can use tools on the IRS website to discover if you qualify for these and other tax credits.

What Are Tax Deductions?

Tax deductions are another way to reduce your tax burden, but they work differently. While a tax credit discounts your final tax bill after all the calculations, a tax deduction reduces the amount of income eligible for taxes.

The more deductions you have, the less money you have to pay taxes on. This can result in a lower overall tax bill, but it cannot result in a tax refund.

How Do Tax Deductions Work?

Here’s an example to understand how tax deductions reduce what you owe:

If you made $110,000 in 2025 you would owe 24% in federal taxes based on your marginal tax bracket. But if you have $20,000 in tax deductions, you would lower your taxable income to $90,000, which puts you at both a lower base to calculate taxes ($90K vs. $110K), and you would be in the 22% tax bracket, which is capped at $103,350 for single filers in 2025.

As you can see, when calculating how much a tax deduction will save you, it’s important to know which tax bracket you’re in — your tax bracket represents the percentage at which your income could be taxed. In general, the more money you make, the higher the tax rate.

Common Tax Deductions

Nearly every tax filer is eligible for the standard deduction. Without inputting any information accounting for business expenses, medical costs, charitable contributions, student loan interest payments, and other eligible deductions, you can simply subtract the standard deduction amount from your taxable income.

For the 2024 tax year (which will be filed in April of 2025), the standard deduction is:

For the 2025 tax year (which will be filed in April of 2026), the standard deduction is:

•  $15,750 for single taxpayers (and married, filing separately)

•  $31,500 for married taxpayers filing jointly

•  $23,625 for heads of household

For the 2026 tax year (which will be filed in April of 2027), the standard deduction is:

•  $16,100 for single taxpayers (and married, filing separately)

•  $32,200 for married taxpayers filing jointly

•  $24,150 for heads of household

Many people choose to take the standard deduction, but if you qualify for various deductions that would amount to more than the standard deduction, it’s worth itemizing your deductions.

Working with a personal accountant or tax preparation software may be your best bet for determining which deductions you qualify for. Here are some of the most common types of deductions:

•   State and local taxes

•   Business expenses (if you are self-employed)

•   Mortgage interest

•   Property taxes

•   Qualifying medical expenses

•   Charitable contributions

•   Student loan interest.

You can explore even more tax deductions on the IRS website.

If you run your own business, it’s wise to look into common tax deductions for freelancers.

Pros and Cons of Tax Credits

Tax credits are largely a good thing, as they reduce your overall tax burden. But they also have some drawbacks. Here’s a closer look at the pros and cons:

Pros

First, consider these upsides of tax credits:

•   Reduces your tax bill, which could leave more money in your checking account

•   May result in a refund

•   Often designed for moderate- to low-income families.

Cons

Next, the potential downsides of tax credits:

•   Strict eligibility requirements

•   Can delay your refund when you claim them.

Recommended: How to File for a Tax Extension

Pros and Cons of Tax Deductions

Similarly, tax deductions serve a useful purpose in filing taxes, but they also have their own set of pros and cons.

Pros

Here are the potential advantages of tax deductions:

•   Reduces your tax bill

•   The standard deduction is easy to claim

•   Useful for self-employed individuals with business expenses.

Cons

Also be aware of the possible downsides:

•   Lots of paperwork (itemized deductions)

•   Weighing the standard vs. itemized deduction can be complicated

•   Won’t generate a refund.

Tax Credits vs Deductions: What’s the Difference?

Let’s break down the differences between tax credits and tax deductions in chart form:

While nearly everyone can qualify for the standard deduction, tax credits can actually be the more effective way to lower your tax bill. But the best part? You can utilize both tax strategies when you file.

Tips for Using Tax Credits and Deductions

Preparing to file your taxes? Here are some tips for using tax credits and deductions:

•   Research eligibility requirements online: The IRS website has useful tools to help determine if you qualify for specific tax credits and deductions.

•   Gather all your paperwork: Taxes require a lot of forms, documents, and receipts. When claiming credits and deductions, it’s important to have the paperwork (whether printed or digital) to prove your eligibility.

•   Consider using tax software or an accountant: Taxes can be overwhelming. If your situation is complex (maybe you are confused by, say, your payroll deductions), you may benefit from tax software (TurboTax, H&R Block, and TaxSlayer are popular brands) or a tax professional.

One last note: If you do wind up with a tax refund, you might put it in your emergency fund or, if you don’t have one yet, start one. Experts say to aim to have three to six months’ worth of living expenses set aside in case of job loss or unexpected major bills.

The Takeaway

Tax credits and tax deductions can both lower your overall tax burden. Tax credits reduce what you owe dollar-for-dollar, while tax deductions reduce the amount of income you owe taxes on. If you’re eligible, you can take advantage of both tax strategies when you file.

While you are getting your taxes organized, don’t overlook the value of a banking partner that makes it easy to manage your finances.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Between a tax deduction and tax credit, which lowers your bill more?

A tax credit lowers your tax bill dollar-for-dollar and may even result in a refund. A tax deduction only reduces the amount of money you owe taxes on. For example, a $1,000 tax credit takes $1,000 off your tax bill. A $1,000 tax deduction reduces your taxable income by $1,000; the actual reduction in tax depends on your tax bracket.

Do more people utilize tax credits or tax deductions?

Most tax filers can claim the standard deduction, but not everyone qualifies for tax credits. So it is more likely that you’ll use a tax deduction on your tax return than a tax credit. That said, it is possible to use both credits and deductions to lower your tax bill.

Can I claim both deductions and tax credits?

Yes, you can claim both tax deductions and tax credits on your tax return, as long as you qualify for the deductions and credits you claim.

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOBNK-Q424-081
CN-Q425-3236452-100

If you work in public service for a government agency or nonprofit, you may be able to have the remaining balance on your federal student loan forgiven after a certain number of payments through the Public Service Loan Forgiveness Program (PSLF).

Created by the Education Department (ED) in 2007, PSLF is intended to help public-service professionals who may earn lower salaries and struggle to repay their federal student loans. In this context, many teachers, firefighters, and social workers qualify.

However, it’s important to be aware that on October 2025, acting on an executive order signed by President Trump, the ED announced a final rule to the PSLF program, which may exclude some borrowers starting on July 1, 2026.

Below is the latest information borrowers need to know about PSLF eligibility and student debt forgiveness.

What Is Public Service Loan Forgiveness?

The PSLF program provides professionals working full-time in public service with a way to ease the burden of their student loan debt. After making 120 qualifying monthly payments under an eligible repayment plan, such as income-driven repayment, and by working full-time for a qualifying employer, the remaining balance of a borrower’s federal Direct Loans will be forgiven.

What Are Public Service Loan Forgiveness Jobs?

Borrowers working as teachers, firefighters, first-responders, nurses, military members, and doctors may qualify for PSLF. But with this program, it is not only the type of job you have that determines if you can get forgiveness, but also the type of employer.

Currently, qualifying employers include federal, state, local, tribal government and non-profit organizations. (As noted above, the new final rule may affect which organizations qualify, starting July 1, 2026.)

To find out if your employer currently qualifies for PSLF, you can use the Federal Student Aid employer eligibility search tool.

Who Is Eligible for the Public Service Loan Forgiveness Program?

The way that PSLF works is that borrowers must meet certain eligibility criteria to qualify. These criteria include:

Work for a Qualified Employer

Part of PSLF eligibility requires working for a qualified government organization (municipal, state, federal, military, or tribal) or a qualified 501(c)(3) non-profit organization. Full-time AmeriCorps or Peace Corps volunteers are also currently eligible for PSLF.

Some other types of non-profits also qualify, but labor unions, political organizations, and many other non-profits that don’t have 501(c)(3) status do not qualify. Working for a government contractor doesn’t count; you have to work directly for the qualifying organization.

Only full-time workers are eligible — that is, workers who meet their employer’s definition of full-time or work a minimum of 30 hours per week. People employed at multiple qualifying organizations in a part-time capacity can be considered full-time as long as they’re working a combined 30 hours per week.

Having Eligible Loans

Only federal Direct loans, including Stafford loans, Grad PLUS loans (but not Parent PLUS loans), and Federal Direct Consolidation loans, are eligible for PSLF.

If you hold Federal Family Education Loans (FFEL) or Perkins loans, you need to first consolidate them into a Direct Consolidation Loan for them to be eligible for PSLF. Just be aware that unless your Direct Consolidation loan was disbursed on or before October 1, 2024, any payments you made on the FFEL Program loans or Perkins Loans before you consolidated will not count toward the 120 qualifying payments for PSLF.

Private student loans are not eligible for PSLF.

Recommended: Student Loan Forgiveness Guide

Applying for Public Service Loan Forgiveness

To apply for the PSLF program, you’ll need to take the following steps:

1. Consolidate FFEL Program and Perkins Loans

As noted above, borrowers with FFEL Program and Perkins Loans must consolidate them with a Direct Consolidation Loan to be eligible for PSLF.

However, as mentioned, payments on FFEL and Perkins loans included in a Direct Consolidation Loan that was disbursed on or after October 1, 2024, will not count toward PSLF. Your payment count on the new Direct Consolidation Loan will start at zero.

2. Sign Up for an Income-Driven Repayment Plan

There are now three available income-driven repayment plans to choose from — Pay As You Earn (PAYE), Income-Contingent Repayment (ICR), and Income-Based Repayment. These plans are designed to make student loan debt more manageable by giving you a monthly payment based on your discretionary income and family size. You must enroll in one of these plans to qualify for PSLF.

Note that any borrowers on the SAVE (Saving on a Valuable Education) plan have been placed in forbearance due to a court injunction; the time in forbearance does not count toward PSLF. Those who are eligible need to switch to one of the other three IDR plans to continue making qualifying PSLF payments.

3. Certify Your Employment

To certify your employment, use the PSLF Help Tool. You can either print out the form for you and your employer to sign and then send it in for approval, or you can sign the form electronically and the Education Department will email your employer and request their electronic signature.

4. Make 120 Qualifying Monthly Payments

You must make these qualifying payments while you’re employed by a qualified public service employer. If you switch employers you can still qualify as long as you continue to work for a qualifying organization — but you will have to certify your employment with your new employer.

5. Apply for Forgiveness

After you make your final payment toward PSLF, you will need to fill out and submit a PSLF form for forgiveness.

Current State of the Program

Because the program was created in 2007, the first borrowers to qualify for loan forgiveness applied in 2017. However, early estimates by the Government Accountability Office (GAO) reported the denial rate as more than 99%. At the same time, many borrowers weren’t even aware that the forgiveness program existed.

In 2022, the Biden administration worked to address these issues by introducing a “limited PSLF waiver,” which allowed student loan holders to receive credit for payments that previously didn’t qualify for PSLF. That was later followed by an IDR account adjustment program. In October 2024, the administration said that more than 1 million public servants had received debt relief through PSLF.

In March 2025, President Trump signed an executive order directing the Education Department to revise the PSLF program. In October 2025, the department announced the final rule to exclude organizations that have a “substantial illegal purpose.” Because the new rule changes the definition of a qualifying employer, it could restrict eligibility for PSLF. The rule is scheduled to go into effect on July 1, 2026, though legal challenges to the rule have been filed. For now, the PSLF program is not changing, and those enrolled in PSLF do not have to take any action, according to the ED.

Pros and Cons of the Public Service Loan Forgiveness Program

There are a number of advantages of the PSLF program, but there are some drawbacks as well. These are some of the benefits and disadvantages to consider.

Pros of PSLF

1.   The balance of your student loans is forgiven after a set period of time. This can result in significant debt relief for qualifying borrowers working in the public sector.

2.   The amount forgiven is typically tax-free when it comes to federal taxes. Because it generally isn’t considered taxable income, the amount forgiven under PSLF isn’t subject to federal taxes, unlike other loan forgiveness programs. (Some states may tax the amount, however.)

3.   By offering forgiveness, PSLF encourages professionals to work in public service roles. Professionals in qualifying jobs are making a difference, and your government appreciates it enough to give you a break on your federal student loans.

4.   Those pursuing PSLF may have lower monthly student loan payments than they would otherwise because they are on an income-driven repayment plan that bases their payments on their discretionary income and family size.

Cons of PSLF

1.   The rules regarding PSLF— including the types of loans, employers, and repayment plans that qualify — are strict.

2.   The time commitment is long-term. Borrowers in the program must be employed with a qualifying public service employer — potentially earning a lower salary than they would in the private sector — for at least 10 years.

3.   The process to enroll in PSLF and achieve forgiveness can be quite time-consuming and complex.

4.   There is some uncertainty regarding the program. The new final rule scheduled to be implemented by the Education Department on July 1, 2026 could restrict some public service organizations and their employees from PSLF.

Alternatives to the Public Service Loan Forgiveness Program

For borrowers looking for student loan debt relief, there are other options besides PSLF. For example, the Teacher Loan Forgiveness program is available to full-time teachers who have completed five consecutive years of teaching in a low-income school. And borrowers reaping their loans under an IDR plan are also eligible for forgiveness after 20 or 25 years.

These federal forgiveness programs do not apply to private student loans. If you are looking for ways to reduce your interest rate or lower your monthly payments for private student loans, refinancing your student loans with a private lender may be an option to explore. When you refinance, you replace your existing loans with a new loan that, ideally, has a lower interest rate, which could reduce your monthly payments potentially saving you money.

However, it is important to be aware that refinancing federal student loans with a private lender may make you ineligible for the Public Service Loan Forgiveness program as well as other federal benefits, such as income-driven repayment and student loan deferment.

The Takeaway

The Public Service Loan Forgiveness program is one way that eligible borrowers working in public service may be able to have their federal student loans forgiven. Although changes to the program are scheduled to take place in July 2026, for now, the program is proceeding as usual.

Borrowers whose student loans aren’t eligible for PSLF may want to consider different options, including other forgiveness programs or student loan refinancing.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Who qualifies for PSLF?

To qualify for PSLF, borrowers must have federal Direct loans and work full-time in public service for a qualifying non-profit or government agency. They must make 120 qualifying payments under an eligible repayment plan, such as income-driven repayment.

What types of loans are eligible for Public Service Loan Forgiveness?

Only federal Direct loans are eligible for PSLF. Other federal loans, such as Perkins Loans and Federal Family Education Loans (FFEL) must be consolidated into a federal Direct Consolidation Loan to be eligible.

What is the downside of Public Service Loan Forgiveness?

Some downsides of Public Service Loan Forgiveness include strict eligibility rules and a long-term commitment to working in public service — typically at least 10 years — before forgiveness may be achieved. Additionally, those employed in public service jobs may earn lower salaries than individuals employed in private sector jobs.

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