It may be easier to get rid of your student loans than you ever thought possible! Money Girl answers a listener question and reviews seven facts you should know about wiping out education debt with different types of student loan forgiveness programs.
You may have heard about the lucky Morehouse College students who received a massive graduation gift from their commencement speaker, Robert F. Smith. The billionaire casually mentioned that he's picking up the tab for the entire 2019 graduating class's student loan debt.
That's the largest individual donation ever made to a historically black college. What an amazing gift! Smith made it possible for more than 400 students to begin exciting new chapters in their lives without being weighed down with the burden of education debt.
If you weren't as fortunate as the Morehouse grads and still have student loans, it's essential to understand how to pay them off quickly and for the least amount possible. Hands down, one of the best ways to say goodbye to student loans is having them forgiven.
I received a question about this topic from Tamara W., who says, "Talk to me about the Public Service Loan Forgiveness program. I've qualified, and they say my loans will be forgiven in five years, but I'm not so sure. I'm on the recommended income-based repayment plan and make the lowest qualifying payments, but my interest is skyrocketing and freaking me out. Should I also apply for the teacher forgiveness program?"
Thanks for your question, Tamara. In this post, I'll give you an answer and review seven facts you should know about student loan forgiveness. You'll learn the types of loans, borrowers, debt amounts, and payments required to qualify. Plus, we'll cover key considerations for anyone who'd like to have their education debt wiped out by a forgiveness program.
7 Facts to Know About Student Loan Forgiveness
1. Private student loans don’t qualify for forgiveness.
Unfortunately, unless you have a rich uncle or generous friends, there aren’t any forgiveness programs for private student loans. Private lenders are in business to make a profit, and they expect you to repay every penny that you borrowed.
But don’t make the assumption that every type of federal student loan is eligible for forgiveness. Keep reading to learn which borrowers and what types of loans qualify.
If you’re having trouble paying private student loans, there may be options to make your payments more affordable. For instance, you may qualify to refinance at a lower interest rate, which could reduce your monthly payment.
Some private lenders may offer deferment or forbearance to temporarily reduce or halt payments when you’re dealing with a financial hardship. For instance, SoFi offers unemployment protection that suspends your monthly payments for up to 12 months if you lose your job and your loan is in good standing.
Always contact your lender if you have difficulty making loan payments. They can help you understand your options and avoid becoming delinquent and hurting your credit.
2. There are different types of student loan forgiveness programs.
Multiple forgiveness and cancellation programs apply to borrowers who work in different locations and occupations. It’s easy to confuse the eligibility requirements and rules of loan forgiveness, but I’m going to clarify everything you need to know.
Here are some of the most well-known programs:
- Public Service Loan Forgiveness Program is available if you work for the government or a nonprofit, no matter what your job is.
- Stafford Loan Forgiveness Program for Teachers is for professional teachers who work at a nonprofit or a public school.
- Perkins Loan Cancellation is for certain public servants, such as teachers, law officers, military, medical providers, and firefighters. You must service low-income families, special needs students, or teach a subject with a shortage of qualified teachers.
So, if you’re a teacher at a nonprofit or a public school, you may qualify for more than one of these programs.
There are also state-sponsored student loan forgiveness programs, especially if you teach in a high-need area. To learn more, check out the American Federation of Teachers Loan Forgiveness and Funding Opportunities Database.
There are organizations such as Nurse Corps that offer scholarships and loan forgiveness to nursing students, faculty, and nurses who work in high-need areas.
3. Forgiveness typically requires paying loans for certain periods.
The Public Service Loan Forgiveness program wipes out your remaining balance after you pay your loans for at least 10 years or make 120 payments. You must work full-time for an eligible public service or nonprofit employer, but it doesn’t have to be consecutive years of service.
For instance, if you leave public service for some years and eventually return to an eligible employer, your previous qualifying payments still count toward the forgiveness requirement of 120.
With the teacher program, you must complete five consecutive years of work, with some exceptions, such as taking medical leave or being deployed for military service.
The second forgiveness program that I mentioned only requires qualifying teachers to make payments for five years. With the teacher program, you must complete five consecutive years of work, with some exceptions, such as taking medical leave or being deployed for military service.
While paying a loan for five years may sound better than 10 years, in some cases, it may actually cost more than the public service option. It depends on how much student loan debt you have. I’ll explain more about that in a moment.
Note that you can apply for both the public service and teacher programs, but your payments can only go toward one program at a time. For example, if you make payments for five years and apply for forgiveness under the teacher program, you’d have to make payments for an additional 10 years to apply for public service forgiveness.
Let’s get back to Tamara’s question. She mentioned being qualified for public service forgiveness and said it would take five years. But the public service option requires paying for 10 years. She may be confused or may have simply misspoken in her message. If Tamara is a teacher at a nonprofit or public school, she probably qualifies for the 5-year teacher forgiveness program, which we’ll cover in more detail.
4. The amount of forgiven student loan debt varies by program.
With the public service program, you can have any amount of student loan debt forgiven. For instance, if you have $500,000 in student loans, the program wipes them out after the 10-year payment requirement.
Having an unlimited amount of student loans forgiven is fantastic because it gives students a huge incentive to go into fields that require expensive education but may not pay big salaries.
However, the teacher program comes with a debt cap. It only forgives up to $5,000 or up to $17,500 of student loans. The amount of forgiveness you get depends on variables such as the subject you teach, your degree, and when you took out your loans. Highly qualified teachers—such as those in math, science, or special education—are eligible for the highest amount of forgiveness.
Highly qualified teachers, such as those in math, science, or special education, are eligible for the highest amount of forgiveness.
This means that teachers with higher amounts of student loan debt may come out ahead by applying for the public service program instead of the teacher program. Even though you must make payments for 10 years (instead of five years), it could cost less over the long run.
So, Tamara should definitely double check with her lender to review the benefits of each program and make sure she’s on a path to pay as little as possible.
The third program I mentioned only applies if you have a Perkins loan. These are available to both undergraduates and graduate students and are funded by schools using government funds.
The Federal Perkins Loan Cancellation program wipes out your student loans based on years of service, not on how many years you’ve made loan payments. It eliminates 100% of Perkins debt if you complete five years of qualifying public service.
If you work fewer years, a portion of your debt is still canceled according to this schedule of years of service completed:
- One year of service: 15%
- Two years of service: 15%
- Three years of service: 20%
- Four years of service: 20%
- Five years of service: 30%
In addition, AmeriCorps and Peace Corps volunteers qualify to have a maximum of 70% of their Perkins loans canceled after working four years.
5. Student loan repayment options affect forgiveness programs.
With the public service program, you must repay your loans under a qualifying repayment plan. Using an income-driven plan is a good idea because it limits your monthly payments from 10% to 20% of your discretionary income.
Tamara mentioned that’s she’s set up on an income-driven plan, which will allow her to pay as little as possible before applying for loan forgiveness. Just remember that the teacher program limits the amount of forgiven debt to as much as $5,000 or $17,500 depending on your situation.
Again, always be sure to compare the total amount you’d repay and choose the path that saves you the most. If you’re not sure, contact the lender that services your loans and ask for their guidance.
6. Not all federal student loans qualify for forgiveness.
Here are the types of loans that can be forgiven when your government or nonprofit work qualifies for the public service program:
- Federal Direct Subsidized Loans
- Federal Direct Unsubsidized Loans
- Federal Family Education Loans that are consolidated into a Direct Loan
- Perkins Loans that are consolidated into a Direct Loan
Note that once you consolidate loans, the clock restarts and you must make 120 new payments that the program requires.
For the teacher program, which is available when you work at a nonprofit or a public school, the following loans qualify for forgiveness:
- Federal Direct Subsidized Loans
- Federal Direct Unsubsidized Loans
- Federal Family Education Loans (without a consolidation)
And the Perkins program requires you to have a Perkins loan and work in certain fields for five years for 100% forgiveness or to volunteer for four years to have 70% of your debt wiped out.
In addition to these programs, you may be eligible to have any type of federal student loan discharged or canceled if your school closes, violates certain laws, or misleads you about the services you get by taking out education loans. Federal loans can also be discharged if you die, you took out a loan for someone who dies, or you become permanently disabled.
7. Income doesn’t affect your eligibility for student loan forgiveness.
With student loan forgiveness programs, there is no income limit or requirement to qualify. However, because your income affects your payment amount when you use an income-based repayment plan, higher income means you’ll have a smaller remaining loan balance to be forgiven.
There isn’t a formal enrollment into a forgiveness program. Once you make your final loan payments, you must submit a forgiveness application, and still be working or volunteering for a qualifying employer.
However, each year that you make qualifying loan payments or complete service, you can submit a certification to the Department of Education. This is a good way to stay on top of your progress, especially when you change jobs.
And when you finally get to celebrate making your final student loan payment after five or 10 years, another reason to raise a glass to Uncle Sam is that you won’t have to pay income tax on forgiven amounts. That’s not a benefit for most other types of forgiven debt.
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