Loan Forgiveness Can Bring a Bright FutureThere are ways to help offset the rising cost of college. While borrowing for college can seem right as you sign the signature line, it can seem overwhelming when you’ve graduated and have to start making those monthly payments.
One of the best ways to minimize this hit to the wallet is to see if your loan qualifies for loan forgiveness. Yes, under certain circumstances Uncle Sam will reduce or completely eliminate a student’s educational debt.
There are four ways to qualify:
Perform specific volunteer work. For information contact:
Americorps at (800)942-2677
Peace Corps at (800)424-8580
Volunteers in Service to America (VISTA) (800)942-2677 or (202)606-5000
Sign on for military service:
Army National Guard offers eligible students up to $10,000 through their Student Loan Repayment Program
Teach or practice medicine in specific underserved communities:
The National Defense Education Act offers loan forgiveness for Perkins Loans when students become full-time teachers in school serving low-income families. Receive 15% loan reduction for serving one to two years, 20% for third and fourth years, and a fifth year nets another 30%.
Many law schools forgive loans when students serve to aid in the public interest, or serve in nonprofit positions.
The US Department of Health and Human Services offer loan forgiveness programs through the National Health Service Corps and the Nursing Education Loan Repayment Program to doctors and nurses who practice a specific amount of time in areas lacking medical care.
The National Institute of Health (NIH) uses their NIH Loan Repayment Program to help students who are conducting medical research. As much as $35,000 per year is available to the researcher.
Many hospitals are now using loan forgiveness programs to aid in recruitment of medical professionals.
The American Association of Medical Colleges (AAMC) maintains a database of all medical repayment programs available to students in all areas of the country.
Meet other criteria as specified by the education loan forgiveness program:
Private colleges offer repayment programs for students receiving specific degrees.
Perkins and Stafford Loans can be reduced up to $17,000 for secondary math/science teachers and elementary/secondary special education teachers who commit to teaching full time for five consecutive years in a qualifying low-income school.
The best way to find out about all programs available is to contact your high school counselor or the financial aid professional at your college of choice. At that same time, these professionals can give more insight about how the 2009 changes can impact or help you.
The current problems with the College Cost Reduction and Access Act of 2007 are time and salary related. First, according to Diane Auer Jones, assistant secretary for postsecondary education, the way the law is currently set up, loans can only be forgiven after a student makes 10 years of payments. However, since all federal loan programs have a 10-year payout, the loan would be paid off before forgiveness could start.
The “teach grants” program offers $4,000 per year to help pay off loans but, to qualify, teachers must be employed by “high need” schools. The problem is that these needy schools do not readily hire newly graduated teachers, so Jones is concerned that as much as 80% of students expecting to teach for loan forgiveness will have to instead pay their loans back with interest.
Likewise, the public service options make for a tricky conundrum as well. Robert Shireman, director of the Project on Student Debt, warns the jobs that qualify are those that offer low pay, so even if part of the loan is forgiven, a significant amount of a graduate’s net salary will still go toward loan charges. In addition, if you marry and your spouse has a high income, you may become ineligible for the loan forgiveness program.
With these concerns raised, and Congress already looking at the problems, there’s hope everything will be taken care of before it impacts any student. Researching this option could truly be a way for good students to have a brighter, less indebted future, but until everything is worked out, you should stay on top of any changing legislation before enrolling at a college or university that may leave you with high debt at the end.
FACTS AT A GLANCE
Public Service Loan Forgiveness
The College Cost Reduction and Access Act of 2007 established a new public service loan forgiveness program. This program discharges any remaining debt after 10 years of full-time employment in public service.
The borrower must have made 120 payments as part of the Direct Loan program in order to obtain this benefit. Only payments made on or after October 1, 2007 count toward the required 120 monthly payments. (Borrowers may consolidate into Direct Lending in order to qualify for this loan forgiveness program starting July 1, 2008.)
The public service loan forgiveness program has several restrictions:
n Term: The forgiveness occurs after 120 monthly payments made on or after October 1, 2007 on an eligible Federal Direct Loan. Periods of deferment and forbearance are not counted toward the 120 payments. Payments made before October 1, 2007 do not count. Likewise, only payments on a Federal Direct Loan are counted.
n What is forgiven? The remaining interest and principal are forgiven.
n Employment: The borrower must be employed full-time in a public service job for each of the 120 monthly payments. Public service jobs include, among other positions, government, military service, public safety and law enforcement (police and fire), public health, public education, public early childhood education, public child care, social work in a public child or family service agency, public services for individuals with disabilities or the elderly, public interest legal services (including prosecutors, public defenders and legal advocacy in low-income communities), public librarians, school librarians and other school-based services, and employees of tax exempt 501(c)(3) organizations. Full-time faculty at tribal colleges and universities, as well as faculty teaching in high-need areas, also qualify.
n Eligible Loans: Eligible loans include Federal Direct Stafford Loans (Subsidized and Unsubsidized), Federal Direct PLUS Loans, and Federal Direct Consolidation Loans. Borrowers in the Direct Loan program do not need to consolidate in order to qualify for loan forgiveness. Borrowers in the FFEL program will need to consolidate into Direct Loans.
Note: Go to web site for information about Parent PLUS loans and Perkins loans and Grad PLUS loans.
Eligible Repayment Plans: Borrowers may use income-based repayment, income contingent repayment, standard repayment or a combination of these repayment plans. Payments made under other repayment plans (e.g., extended repayment and graduated repayment) do not count. To maximize the amount of forgiveness, borrowers should use income-based repayment.
If a borrower were to use only standard repayment for repaying their loans there would be no balance remaining after 10 years and so no debt to cancel. Standard repayment is only provided as an option to address situations when a borrower is unable to continue under income-based repayment because they no longer have a partial financial hardship and the payments under income-contingent repayment exceed standard repayment. In such a situation the borrower would use standard repayment for the remaining payments and obtain some loan forgiveness at the end of the ten years of payments.
Bottom Line Advice
Although the details may seem complicated, the advice for taking advantage of this program is more straightforward.
n Borrowers who will be employed in public service jobs and who have loans under the FFEL program should obtain a Federal Direct Consolidation Loan as soon as possible.
Parent PLUS borrowers who entered repayment on or after July 1, 2006 will need to consolidate their PLUS loans even if they are already in the Direct Loan program.
Borrowers should start off with income-contingent repayment, if they can. They should switch to income-based repayment as soon as it becomes available on July 1, 2009, if they can. (Consolidation loans that include Parent PLUS loans are not eligible for income-based repayment.)
Under current law, the amount of any debt discharged is probably treated as taxable income, leading to a big federal income tax bill after 10 years. But the savings for students who pursue public service jobs will exceed the tax liability. It is possible that Congress will decide to exclude such loan forgiveness from taxable income before this becomes an issue in 2017. It is also possible that the public service loan forgiveness qualifies for an exclusion from income under IRC Section 108(f), although this has not yet been determined by the IRS.
Another flaw is an inherent marriage penalty in the design of the income-based and income-contingent repayment plans. These plans combine the income of both spouses, leading to a much higher monthly payment. Borrowers who pursue public service careers but marry a spouse with a high income will find their public service loan forgiveness to be severely limited. On the other hand, borrowers with large families are more likely to benefit.
The public service loan forgiveness program is targeted at students who pursue public service careers and who have high debt and low income. Borrowers with low debt or high income will not benefit as much.