Student Loan Forgiveness Programs
Student loans can be hard to get rid of. Unless you die or become disabled, the ONLY ways you can get rid of your student loans is to either pay them off or have the loans forgiven.
Many students are graduating with crippling levels of student loans. The cost of servicing these loans can be prohibitive and life-altering. Some student put off getting married, having a family, or buying a home!
What’s the “out” in these situations? What can you do if your loan balance is so high relative to what you’re making that paying the loans off is not an option?
Loan forgiveness might be your best solution. Employing a loan forgiveness strategy isn’t for the faint of heart. But if done right it can save you thousands of dollars.
What is Loan Forgiveness?
I’ll cover the main student loan forgiveness programs in this post. But first, let’s make sure you understand what loan forgiveness is.
When you have your student loans forgiven, the Federal Government cancels your debt. You no longer a) have any student loan balance on your credit report, or b) have to pay these loans back. Your debt is wiped away like it never happened.
It’s a great deal for students, but it’s also a relatively new and untested strategy. Meaning, few students have actually gotten their loans forgiven thus far. In fact, as of December 31, 2018, only 338 people actually had their loans forgiven and discharged under the Public Service Loan Forgiveness Program, which we’ll talk about in a bit. 338!
That doesn’t mean Loan Forgiveness isn’t a good strategy. You just have to understand that it’s an untested strategy. And you have to do everything exactly right to get your forgiveness approved.
Who’s Able to Have Loans Forgiven?
Student borrowers who took out Federal Student loans (Direct Loans, Stafford Loans…either subsidized or unsubsidized) are eligible to have their loans forgiven. This only applies to Federal student loans. Private student loans are NOT eligible for loan forgiveness, which is a good reason to avoid them.
Parent borrowers who took out a Parent PLUS loan are NOT eligible for loan forgiveness, even though these are Federal loans. So if you’re a parent with a lot of student loans from sending your children to college, you’re out of luck.
3 Loan Forgiveness Programs to Consider
There are 3 main loan forgiveness options I’m going to cover in this post.
The first loan forgiveness program is open to all Federal Student loan borrowers (except parent borrowers.) There isn’t a name for this kind of loan forgiveness, but it’s out there. Loans under this program are forgiven in 20 or 25 years as long as you are on the right kind of Federal student loan repayment plan.
The second program we’ll talk about is the Teacher Loan Forgiveness program. As the name applies, this program is only available to teachers. And it’s only for teachers that teach in schools that serve low-income families. I’ll show you how you can find out whether your school is a low-income school.
Finally, there’s the Public Service Loan Forgiveness Program (PSLF). This is the one that’s most in the news these days. The program is 10 years old and borrowers in the program are starting to apply for forgiveness. PSLF isn’t limited to teachers but also to government workers, non-profit workers, and other public service companies.
Loan Forgiveness Program For All Student Loan Borrowers
The first kind of Loan Forgiveness we’ll look at applies to most student loan borrowers. You don’t have to work in a specific type of job (like teaching) to earn loan forgiveness in this program.
Eligibility: You must be a student borrower, not a parent. Your loans (generally) need to be Direct Loans or Direct Consolidation Loans. Sometimes they’re called Stafford Loans. There are older types of loans that might not qualify so you’d need to check on your own situation.
Finally, you must be on the right kind of Federal Student loan repayment plan. The three most common plans are:
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-based Repayment (IBR)
Years until loans are forgiven: Depending on the repayment plan you’re on, your loans will be forgiven after 20 or 25 years. For example, if you’re eligible for the PAYE plan your loans would be forgiven after 20 years. If you’re on the REPAYE plan and have graduate school loans, you’d earn forgiveness in 25 years.
Once you reach the 20 or 25-year mark for having loans forgiven, the Federal Government would send you a letter informing you that your loans are eligible for discharge. You don’t even have to request forgiveness…they do it for you. Once they’re forgiven and discharged, you stop making payments and these loans are GONE for good!
Caveats for this type of loan forgiveness: There are two very important things you need to know about going for this type of loan forgiveness.
First, you must be on the right kind of repayment plan and stick with it for 20 or 25 years. I outlined the repayment plans that are eligible for loan forgiveness above. But it’s critical to remember that you have to be on one of these plans and make payments for the next 20 or 25 years.
My advice: get on a plan and stick with it. Don’t switch from one payment plan to another. Be careful when consolidating your loans as this might restart the loan forgiveness clock. In short, get on a plan and put it on auto-pilot for the next 2 decades!
Second – and this is absolutely critical to understand – you WILL owe taxes on the amount that’s forgiven in 20-25 years. The IRS treats loan forgiveness as INCOME in the year your loans are forgiven.
For example, if you had a student loan balance of $100,000 in 20 years and get your loans forgiven, the IRS is going to treat that $100,000 as income. Meaning, you’ll owe taxes on it. And these taxes might be big as this will push you into a higher income tax bracket. I’m talking tens of thousands of dollars big. So you must be very careful with this and have a plan to save for these taxes that you’d owe.
Teacher Loan Forgiveness Program
This loan forgiveness program is more straight-forward. What’s unique about this forgiveness program is that there’s a limit on how much you can have forgiven. Either $5,000 or up to $17,500 if you’re a “highly qualified” math, science, or special ed teacher.
Eligibility: You must meet two requirements to be eligible for the Teacher Loan Forgiveness Program. First, you must be a full-time teacher for five (5) CONSECUTIVE years. Second, you must be employed by a school that’s designated as one serving low-income families.
To find out if your school is recognized as a school serving a low-income community, visit the Teacher Cancellation Low Income (TCLI) Directory here.
Amount forgiven: If you’re a teacher at a low-income school but aren’t a highly-qualified teacher teaching math, science, or special education, you’re limited to $5,000 of loan forgiveness. If you’re a highly-qualified teacher teaching math, science, or special ed, you can receive up to $17,500 of loan forgiveness.
One benefit to this program is that the forgiven loans will NOT be taxable to you, unlike the program above.
There are two things you should be aware of with the Teacher Loan Forgiveness Program.
First, the only loans you can have forgiven are Direct Loans for undergraduate school. Graduate PLUS loans are NOT eligible for forgiveness under this program.
Second – and this is very important to understand – if you take advantage of the Teacher Forgiveness Program, this will affect you if you’re also trying to get Public Service Loan Forgiveness (PSLF).
For example, if you teach 5 years and have loans forgiven under the Teacher Loan Forgiveness Program, you’re still eligible to have the rest of your loans forgiven under PSLF. But the “clock” for PSLF starts AFTER you receive loan forgiveness under the Teacher Loan Forgiveness Program. Those 5 years you made payments won’t count towards the number of payments you have to make to receive PSLF. You’ll have to make another 10 years of payments.
From a strategy standpoint, if you’re eligible for PSLF it might be best to go for that and skip this program. That way, you can have all your loans forgiven in 10 years instead of 15.
Public Service Loan Forgiveness Program
PSLF, for short, is one of the more popular loan forgiveness programs out there for two big reasons.
One, loans can be completely forgiven after 10 years, not 20-25 years like the other program I noted above.
Second, you won’t face a big tax bill when your loans are forgiven. Even if you owe – say $200,000 of loans – you won’t owe a dime to Uncle Sam (IRS) on the day your loans are forgiven. This makes this program hugely attractive relative to the first option above.
Eligibility: They key to qualify for PSLF is that you need to have the right kind of job. Those include:
- Federal, State or Local government organization (i.e. school districts, governmental departments)
- A public child or family service agency
- 501(c)3 non-profit organization EXCEPT those engaged in religious activities
- Tribal college or university
- Private organizations that provide public services (i.e. public safety, public health, early childhood education) AS LONG AS they aren’t for-profit businesses.
There are nuances within each of these job categories. Check with your HR department to see if your employer qualifies for one of the above types of organizations eligible for PSLF.
Repayment Plans: To qualify for PSLF, you must be enrolled in one of these Federal student loan repayment programs:
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-based Repayment (IBR)
Repayment Period: This is extremely important to understand. You MUST make 120 payments under one of these plans before you’re eligible for loan forgiveness. In other words, you must be employed in a public service organization for 10 full years AND make all your required student loan payments.
Unlike the Teacher Loan Forgiveness Program, you don’t have to be employed for 10 consecutive years. But you will have to be employed for 10 total years.
To prove your employment, you have to fill out a Public Service Loan Forgiveness Employer Certification Form every year. If you missed previous years, you can always go back and file this form for those years. But it’s best practice to put a reminder in your calendar to do this every single year. That way, you don’t have to go back to an old employer and have them confirm your previous employment with them.
Eligible Loans: Your loans must be Direct Loans (sometimes called Stafford Loans). They can either be Subsidized or Unsubsidized. Be careful if you’re consolidating older types of loans (i.e. Perkins or FFEL). When you consolidate these loans with other Direct Loans, it resets your number of payments back to zero.
One thing most people don’t realize is that you don’t have to get a teaching degree to receive loan forgiveness under PSLF. So if you racked up $150,000 of student loans as a mechanical engineering major and then decided you wanted to teach high school math, you can still get all those loans forgiven after 10 years of teaching.
Concluding Thoughts on Loan Forgiveness
I’ve given you the basic rules for each of the loan forgiveness programs out there and the key things you need to know about them. Student loans are complex, and there are dozens of exceptions and other rules that you need to be aware of.
That’s why I’d suggest working with someone who’s well-versed in student loan repayment strategies. Making a mistake on your repayment strategy can cost you thousands of dollars if you’re not careful. In a worst-case scenario, you could end up owing a lot more if you don’t follow the forgiveness rules closely.
Pursuing loan forgiveness can be a good strategy if you have a lot of student loans and your income isn’t high. So if you’re struggling with student loan debt, it might be a good idea to consider one of these loan forgiveness strategies. But please get in touch with a student loan expert. He or she can walk you through your options, pointing out the pitfalls and opportunities with each of those opportunities.
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