The Real Story on Student Loan Forgiveness
If you have student loans, you’ve probably heard or seen the advertisements about how you can have your loans forgiven. Similar to the commercials for Obama Mortgage Forgiveness, these claims state that a law was passed enabling people to discharge their student loans. Is the claim too good to be true?
First, everyone with federally backed student loans may be able to have a portion of their student loan debt forgiven - eventually. That being said, many people may not qualify for these programs.
There are certain programs and certain payment plans that lend themselves to student loan forgiveness. Typically, the borrower will have to repay part of the debt even if it’s forgiven. The only case this is not true, is for someone who is permanently disabled. Although even here, you may have to pay taxes on the amount of debt forgiven. You can learn more about a disability discharge by visiting this website.
Income Driven Repayment Plans
The most common forgiveness programs center on repayment plans. Many income-driven repayment plans allow for student loan forgiveness after you have made payments on the loans for a certain period of time. Here is a list of income driven plans that include forgiveness.
Income contingent repayment plans – after making acceptable payments for 25 years, the debt may be forgiven. Tax ramifications may apply.
Income based repayment plans – again, after 25 years, the debt may be forgiven. There are tax ramifications for these plans.
New Income based repayment plans (you are considered a new borrower if all of your loans were taken out after July 1, 2014.) – After 20 years the debts may be forgiven. The forgiven amount will be counted as taxable income.
Pay as You Earn repayment plans – after 20 years the debts may be forgiven. The remaining balance is not considered taxable income.
Revised Pay as You Earn plans – for undergraduates, debts may be forgiven after 20 years. Graduate students will see loans forgiven after 25 years. The remaining debt is not considered taxable income.
It is important to note that not all types of student loans qualify for all repayment options. You may have Federal Perkins loans, FFEL loans, Direct loans, Plus loans and more. At the bottom of this article is a link to the National Student Loan Data System. There you can determine what types of loans you have.
Military service is also a way to have some or all of your student loan debt reduced. There are guidelines around what service qualifies both on the military side and the federal government side. Visit the Consumer Financial Protection Bureau's website to learn more.
Working in public service is also a great way to have loans forgiven. Under the Public Service Loan Forgiveness (PSLF) program, people employed in targeted sectors can have their loans forgiven after making 120 acceptable payments on their loans. The requirements for this type of forgiveness are:
Employed in a 501(c) 3 not-for-profit organizations, including churches*, or other not-for-profit organizations providing public services, or all levels of government organizations.
Working full-time (at least 30 hours) for a qualified employer
Make 120 payments on a federal Direct Loan (other loans may be consolidated into a Direct Loan to qualify) (payments do not have to be consecutive)
Using a qualified repayment plan such as a standard or income-driven plan (see 1 – 5 above). Please note that a standard repayment plan will repay a loan in full after 120 payments – the same number as a PSLF.
Payments made prior to October 1, 2007, will not qualify.
At this time, PSLF will not result in taxable income once the forgiven debt is discharged by the government.
There is an Employment Certification Form you and your employer can complete on the Federal Student Aid website. Once you are finished, return it to your servicer. We recommend you complete the form every year. We also recommend you keep your tax returns for each year and a final paystub for each year or each employer that you have during the repayment period.
As you can see, there are options for having a portion of your student loans forgiven. It depends on the type of loans you have, your income, possibly your employer and the repayment plans you select. To find out if you qualify, talk to your servicer – the party that manages your loans. Through them, you can apply for different repayment options and learn about other options you may have.
If you are preparing for college and need help deciding how you are going to pay for a higher education, read our blog, Creative Ways to Pay for College for some tips!
If you need additional help, contact our certified student loan counselors. They can answer questions and be your advocate for finding the best repayment option for you. Call 800-895-4795 today.
Published May 4, 2016.