How to Qualify for Student Loan Forgiveness

Recent University graduates have enough to deal with as they try to enter the workforce. Lack of experience in their field, relocating to new cities, and entry-level wages are difficult enough — but when the average borrower now leaves school with approximately $37,000 to $40,000 in debt, the burden can feel insurmountable.

To qualify for student loan forgiveness, you must typically work in a specific public service field for a set period or enroll in an Income-Driven Repayment (IDR) plan. Most programs require you to have federal Direct Loans and consistently meet monthly payment requirements over 10 to 25 years.

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Student-loan have been ballooning for years and have now overtaken credit card debt as the second-largest source of consumer debt.

Once you graduate, or don’t graduate, you have to start repaying your debts immediately, even if you are not able to find a job using your new-found credentials.

There are some plans that President Obama has pushed for to put off the financial albatross.

Deferment is an option for those who have financial problems such as losing their job, student loan refinancing can help lower your payments initially, eventually someone has to pay the piper…but does it have to be you?

The Consumer Financial Protection Bureau announced last year that people who are working for a public service employer “may be eligible for existing student loan repayment benefits.” That is great news for the 25% of the population that falls into this category.

When you consider the numbers involved, you can save $1000 of dollars in forgiveness, cancellations or discharges with just a few hours of research and form filing, it might be the most productive activity that a young graduate can engage in.

The Federal Loan Program Families

The first thing you should know is that Student loan forgiveness programs focus on federal student loans  —  including Direct Loans, Perkins Loans and Federal Family Education Loan (FFEL) Program loans. But if you have opted for a private loan, there is no dedicated program to deal with those. Also, some forgiveness programs apply only to Direct loans and others only to Perkins loans.

There is a reference chart made available from the U.S. Department of Education that provides information on all of the conditions that affect cancellations of loans and covers all types of federal loans. This chart will also give you appropriate links to the applications that must be completed. Here are the basics:

You can receive 100 percent forgiveness for student loans on Direct Loan, FFEL program and Perkins loans under one of the following conditions:

• Total or permanent disability or death (also referred to as discharge rather than forgiveness)
• Bankruptcy (though only in rare cases)
• School of attendance closing before graduation
• False certification of loan by school

Teacher Forgiveness

The best way to qualify for student loan forgiveness is to find a job as a teacher for a nonprofit organization or in the public service sector.

Full-time teachers who have worked for five consecutive years with a designated elementary or secondary school or educational service agency that services low-income families can qualify for up to $5,000 of their total outstanding loan amount after they complete their fifth year of teaching. This amount grows to up to $17,500 for elementary or secondary teachers for special needs students or secondary math and science teachers.

Holders of Perkins loans can receive up to 100 percent cancellation of their loans under very similar conditions. But the requirements also include teachers of infants, toddlers, children, or youth with disabilities and mathematics, science, foreign languages or bilingual education teachers.

The formula is simple:

• first and second years  —  15 percent canceled per year
• third and fourth  —  20 percent canceled per year
• fifth year  —  the final 30 percent

Public Service Employees

Public-service employees with Direct Loans, including PLUS loans, can also take advantage of forgiveness programs. If you have Perkins or FFEL loans, and work in the public sector, you can consolidate your loans in the Direct Loans program and then apply.

To qualify, you first need to work full-time with a federal, state or local government organization, or some not-for-profit organizations. Not-for-profit organizations that have been designated as tax-exempt by the IRS qualify and private not-for-profit employers can qualify if they serve the public interest and have no affiliation with labor unions or partisan politics.

To qualify you have to:

• Make 120 on-time, full, scheduled, monthly payments on your Direct Loans (starting October 1, 2007)
• Make the payments under a repayment plan that qualifies
• While working full-time at a qualifying public-service organization

To qualify you must fill out the employer certification form and send it to the federal loan servicing agency. Because you must make 120 monthly payments, it will take 10 years to qualify for the program, but after you make these payments, the remaining balance of the loan is completely forgiven and there is no maximum amount!

Employer Qualifies? Federal, State, Local Government Yes Non-Profit 501©(3) Yes Non-Profit in Public Services Maybe, see below.

Income-Driven Repayment (IDR) Forgiveness

If you don’t work in public service, you can still have your loans forgiven through IDR plans (such as SAVE, PAYE, or IBR).

• Timeline: After 20 or 25 years of qualifying payments, any remaining balance is forgiven.
• Mechanism: Your payments are capped at a percentage of your discretionary income. If your income is low enough, your payment could be as low as $0, and those months still count toward forgiveness.

Core Discharge Conditions

Outside of career-based forgiveness, you can receive 100% discharge of your federal loans under specific, often difficult, circumstances:

• Total or Permanent Disability or Death: Known as a discharge rather than forgiveness.
• Bankruptcy: Possible, though it remains a high legal bar to prove “undue hardship.”
• Closed School Discharge: If your school closes while you are enrolled or shortly after you withdraw, you may be eligible to have 100% of your loans wiped away.
• False Certification: If the school falsely certified your eligibility for a loan.

It’s extremely important to take the time to research everything that you need to do it qualify for student loan forgiveness and take the steps that will qualify you for whatever program you intend to use. Many borrowers wrongfully believe that by simply becoming a teacher or working in the public sector, they will have their loans forgiven. This is just not the case. You must know which type of loan, employer and job qualifies you for the program.

FAQ

Can I get forgiveness if I work for a for-profit company?

Generally, no. Career-based forgiveness like PSLF requires employment at a government or non-profit entity. However, you can still qualify for IDR Forgiveness after 20-25 years regardless of who your employer is.

Do I have to pay taxes on the forgiven amount?

Under current federal law (through 2025), forgiven student loans are not treated as taxable income. However, unless the law is extended, IDR forgiveness (the 20/25-year track) may be taxed as a “tax bomb” in the future. PSLF is always tax-free at the federal level.

What is the “SAVE” plan?

The SAVE (Saving on a Valuable Education) plan is the newest IDR option. It offers the lowest monthly payments, stops interest from growing if you make your monthly payment, and provides a faster path to forgiveness (as little as 10 years) for those with original loan balances of $12,000 or less.

Does my loan forgiveness happen automatically?

No. You must proactively apply. For PSLF, you should submit an Employment Certification Form (ECF) annually to ensure your payments are being counted correctly toward your 120-payment goal.

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