Student Loan Forgiveness

Do I Qualify for loan forgiveness or loan repayment programs?

As you graduate college, your goals quickly shift and you start to look more towards the future.  You may be weighing where you should start your career, what type of budget you should set, and how you should start reducing your debt and paying off your student loans.  I often get contacted by recent graduates to determine if they qualify for loan forgiveness or loan repayment programs. These programs can be complex and difficult to navigate.  Here are the details of the current programs available to help you reach your financial goals using loan forgiveness.

In terms of paying for college, many students and families do not understand that your income, tax status, employer, consolidation, repayment, and loan forgiveness are all intertwined. As an example, only certain loans qualify for loan forgiveness, and you need to use certain repayment methods to qualify for Public Service Loan Forgiveness (PSLF). Where you work or the company’s financial structure will also limit your ability to qualify for many of the accelerated forgiveness timeframes.

There are different loan forgiveness programs that a borrower needs to consider.  Some states or organizations offer certain programs that may impact federal forgiveness programs.  Under the federal program, borrowers need to be aware that some overlap and could cause the forfeit of time earned for a more generous program.

Create a Plan

It’s important to create a plan to maximize your benefits for loan forgiveness and understand where you are in the loan forgiveness process and the financial impact of a career change.

We’ve discussed the importance of taking an inventory of your student loans and understanding the different types of loans. In most cases, it’s best to consolidate your loans under the direct federal program. This would be the first step to maximizing your potential for loan forgiveness if you are just starting the forgiveness process.  If the borrower has been enrolled in the PSLF program then consolidation will need further review.

To get an inventory of your federal loans, borrowers should go to the National Student Loan Data System (NSLDS).  Using their FSA ID or electronic signature to sign in to the NSLDS, the borrower will access a download of all their federal loans.

Eligibility for Public Service Loan Forgiveness (PSLF)

Moving all of your federal loans to the direct program will qualify you for the Public Service Loan Forgiveness program if your employment fits the other criteria. There are other forgiveness programs that will forgive federal student loans that do not need to be direct student loans. These methods are primarily for people working in the areas of education and health care.

Once you start your career, talk to the human resource department at your company to get the detailed information on which options or programs are available to you. Some companies have additional programs that may allow you to reduce your student debt more quickly. Confirm whether the company you work for is a government agency or a nonprofit organization. A nonprofit company will typically have a tax file structured code that is called a 501c3 organization.

You need to confirm the non-profit status since many governments and nonprofits outsource various services to private industries. Working in a hospital or a government facility does not necessarily qualify your loans for loan forgiveness programs.

Choosing the right career path can significantly impact your options in loan repayment and forgiveness.  When considering different positions, you may have potential opportunities at non-profit organizations and private or for-profit organizations.  As an example, a nurse may have the choice to work at a non-profit hospital or in a private doctor’s office. The nurse who works for the non-profit hospital will qualify for PSLF after 120 on-time payments while a nurse who works for a private doctor will not qualify for loan forgiveness until after twenty or twenty-five years depending on which repayment method he or she uses under current law.

It is recommended that the borrow submit their PSLF employer verification form to FedLoan Servicing.  This will confirm that your employer is valid and your on-time payment will qualify to your PSLF credits.

Requirements of PSLF

Once you have confirmed that your job qualifies for the PSLF program, the complexity of the program is often misunderstood.  As stated above, only direct federal loans under the student’s name will qualify for forgiveness. Along with this, the borrower must use one of the five repayment method list or a combination of them.

Loan forgiveness is limited to the following five repayment methods:

• Standard repayment (ten-year only)
• Income-based repayment (IBR)
• Income-contingent repayment (ICR)
• Pay as you earn (PAYE)
• Revised Pay as you earn (REPAYE)

After making 120 (ten years) on-time direct federal loan payments using one of the five methods listed above, a borrower will qualify for PSLF. The 120 payments do not need to be sequential. In order to qualify for loan forgiveness, you must be working full time for the government or a nonprofit organization that is approved by FedLoan Servicing.

Be aware that some nonprofit positions do not satisfy the loan forgiveness employment requirement. It is important to check with your employer to verify your eligibility. Currently, Fed Loan Servicing handles all public service loan forgiveness clients.

The first borrowers that qualified for PSLF were approved in October of 2017.

There are a few exceptions to both the accelerated and normal forgiveness programs. Businesses that are for-profit, labor unions, some political organizations, and some religious organizations do not qualify for PSLF. This is another reason to verify with your employer.

Income-Driven Methods and Loan Forgiveness

Under current law the loan forgiveness process also forgives federal loans after twenty or twenty-five years, depending on the repayment method. You will still need to document that you have been repaying for a certain amount of time, but that is all. This additional documentation is only needed for the income-based repayment (IBR), income-contingent repayment (ICR), pay-as-you-earn (PAYE) and revised-pay-as-you-earn (REPAYE) methods. The other methods, such as standard, extended, and graduated, do not have forgiveness because the debt will be repaid within the timeframe selected.

The biggest difference between this loan forgiveness and PSLF is the amount that is forgiven is taxable under current law.  Depending on the projected amount this could be a significant amount of money. The forgiven amount will be added to your current income which could increase the tax rate in the year it is forgiven.

Some people will need to continue to use the IDR method just to stay current.  Proper planning for the tax consequence should be done.

Volunteer Services

Another great way to accelerate your repayment process is to do volunteer work through one of the national organizations. AmeriCorps, Peace Corps, and Volunteers in Service to America are all organizations that offer additional loan repayment contributions against your student debt. In addition, your service time will count toward the federal public service timeframe of 120 payments if you select the proper repayment method.

Teacher Programs

There is a series of additional loan forgiveness programs specifically for teachers. They vary by the school district and also by the subjects taught. Many of the enhanced teacher loan forgiveness programs require the teacher to be in the classroom, so administrators and counselors typically do not qualify for these accelerated loan forgiveness programs.

If you are a teacher working in a qualifying school for at least five consecutive years you should check out the Teacher Cancellation Low Income Directory to see if your school qualifies for any national loan forgiveness programs.

The borrower’s loan forgiveness amount can vary and it is dependent on the subject area they teach. For example, secondary school teachers who teach math, science, or special education could receive up to $17,500 in loan forgiveness.

To be eligible for teacher forgiveness the only loans eligible are subsidized and unsubsidized direct loans and subsidized and unsubsidized federal Stafford Loans.  PLUS loans are not eligible for these forgiveness programs.

To recap the teacher requirements:

As stated above, the teacher must first have the correct federal qualifying loans.  In addition, the teacher must meet the below requirements for loan forgiveness:

• The teacher must teach in a qualifying organization. These include elementary and secondary schools as well as education service agencies and it must serve low-income people.
• The teacher cannot have loans that were originated before Oct. 1, 1998.
• The teacher’s loans must not be in default.
• The teacher must work full time as a teacher for five consecutive years.
• The teacher has to have state certification or a teaching license.

After working for five consecutive years the teacher can complete the Teacher Loan Forgiveness Application and return the application to their loan servicer.

The one warning for the federal teacher loan forgiveness program.  If the teacher decides to take that loan forgiveness, then the PSLF credits will restart.  Teachers will need to evaluate the cost benefits of taking the earlier amount and forfeit the credit earned.

Record Keeping

Excellent record-keeping is important when considering loan forgiveness.  To qualify for the various loan forgiveness programs, proper documentation is required. This is often overlooked; loan forgiveness is so far into the future that people don’t often think about it right away. As an example, the first PSLF payment to the servicers was not made until 2017. This process is different from any other financial process you face. While you only need to maintain tax records for seven years, for the Public Service Loan Forgiveness program, you will need to document your work history for the duration of the 120 on-time payments.  This may go beyond the ten years depending on your employment.

To qualify for the program, the records you keep must prove that you were employed full time while making the payments. Your W-2 and tax forms do not validate your level of employment; they only display the amount of money you made in a specific tax year.  The form that is required is called the Certification of Employment for Public Service Loan Forgiveness. This form is available on the government website.

It is recommended that you have the form completed each year or each time you change jobs or positions while repaying your student loans. It is critical that you maintain this documentation along with your repayment history to properly qualify for the various forgiveness programs available. It is highly recommended that you maintain both paper and digital copies of these forms.

You may need to keep these records for longer than ten years. For example, imagine you work for a nonprofit company right out of college and then decide to work in the private sector for two or three years. After those two or three years, you decide to return to a nonprofit or government area of employment. In this case, you would need to maintain employment records for more than twelve or thirteen years in order to qualify for the forgiveness program. In addition, you will need to prove that you are a full-time employee. The employer would sign off the form or HR department as you changed each of those jobs. Only nonprofit or government jobs would need to be documented.

Due to current economic conditions, companies or organizations you work for may not exist by the time you qualify to apply for loan forgiveness. This is where having both the form and your tax information to confirm employment is critical each year.

Attorney Loan Forgiveness

Changes in the subsidized loan program for postgraduate studies have significantly raised the cost of borrowing money for any of the postgraduate programs. This is especially true for students attending law school. In 2010 subsidized Stafford loans for postgraduate studies were eliminated. Due to the high cost of law school, this added significant interest cost to students financing their postgraduate studies.

After graduating from law school, you may still qualify for the federal Public Service Loan Forgiveness program. There are other programs offered for lawyers who serve in the public interest and similar organizations. These programs are offered by some law schools and various legal organizations.  A good place to also look is your national and state programs.

Other repayment programs to review are listed below:

• Department of Justice Attorney Student Loan Repayment Program
• John R. Justice Student Loan Repayment Program 
• Herbert S. Garten Loan Repayment Assistance Program

As stated earlier some of these loan forgiveness programs can be considered income and may have an impact on your loan repayment method.

Income-Driven Repayment and Negative Amortization

Negative amortization can occur when the payment on the student loan is less than the interest that accrues each month. This causes the balance on the loan to increase.  When a borrower decides to pick an Income-Driven repayment plan they need to understand that negative amortization is being added to the loan total. This means that picking that lowest payment may end up costing the borrower more money at the end of the payment. However, this is often not explained to the borrower when selecting their repayment options.  Loan servicing companies typically recommend the lowest payment so that the borrower will stay current.  Without proper information, this lack of awareness could increase your loan balance significantly.

Tax Impact of Loan Forgiveness

One disadvantage of many of the loan forgiveness programs is that the forgiven, canceled or discharged student debt may be taxed as income.  For example, your employer pays a portion of your student loans and pays the amount directly to the loan servicer. On your W2 Tax form that amount will appear and will become income.  The student-loan forgiveness amount is taxable.

There can be exceptions.  This tends to occur if the loan forgiveness program required you to work for a certain type of employer to qualify.  Currently, the Public Service Loan Forgiveness program is an exception and is not taxable.