Student Loan Forgiveness

Student debt has reached an all-time high in the U.S. of late, with an estimated 40 million people now owing an average balance of $29,000, according to credit report company Experian. However, under certain circumstances, federally backed student loans—such as Direct Subsidized Loans and Federal Perkins Loans—can be discharged or forgiven.

The prospect of your student debt evaporating may seem like a dream come true. In reality, though, not that many people end up being eligible. Requirements vary depending on the type of loan, but most offer forgiveness for those employed in certain public-service occupations. There are also repayment plans that include forgiveness of some debt. And there are important rules to know to make yourself eligible for these programs.

For a federal education loan to be discharged, there must be circumstances beyond the borrower’s control that prohibit repayment. Most loans can be discharged in the following situations:

• Permanent disability of the borrower
• Closure of the school during the time of study
• Falsification of the loan qualifications by the school
• Use of identity theft to secure the loan
• Failure of the school to refund required loans to the lender
• Death of the borrower

"Circumstances beyond the borrower's control" do not include things like having to drop out of college before graduation or inability to find a job after graduation. However, there is a possibility that they could include a school using illegal recruiting tactics, such as guaranteeing the student a well-paid job upon graduation. In June 2015, for example, the U.S. Department of Education promised debt relief to students of the bankrupt for-profit Corinthian Colleges schools (click here for more information on how to apply), which made such promises.

Student loan forgiveness can be earned in two ways: by working in public service or by making payments through income-contingent payment plans for a (long) period of time. Each has its own conditions, requirements, and limitations. Neither route is quick or easy.

The Public Service Loan Forgiveness Program (PSLF) is designed specifically for people who work in public service jobs, either for the government or for a nonprofit organization. You may also be able to get all or part of your loan forgiven through certain types of volunteer work, military service or medical practice.

In order to get some debt forgiven under the public service program, you must first make 120 qualifying payments (meaning, paying the minimum amount due on time). These payments must be made while you are working for a qualified employer—generally, a federal, state, or local government organization or a nonprofit organization with tax-exempt status. In effect, you qualify after 10 years on the job and 10 years of payments.

Potentially-eligible positions include those in nursing, government, police, fire, and social work. Only payments made after October 1, 2007, qualify towards earning eligibility.

If you aren’t working in a public service position, you may still be able to get some of your student debt forgiven—but it will take longer. Federal income-based repayment plans allow for some debt forgiveness after a minimum of 20 years (terms and conditions vary by program).

Only direct loans made by the federal government (the William D. Ford Federal Direct Loan Program) are eligible for student loan forgiveness. Non-federal loans (those handled by private lenders and loan companies) aren’t part of this program. If you do not have a William D. Ford Direct Loan and, instead, borrowed through the Federal Family Education Loan Program (FFEL) or Perkins Loan Program, you are allowed to consolidate these debts into a Direct Consolidation Loan. This new consolidated debt loan would then be eligible for public service loan forgiveness, under the same terms as those described above. Keep in mind that only payments made on the combined loan count toward the 120-payment minimum; earlier payments made on the old loans don't get considered.

As with anything related to the federal government, the terms related to student loan forgiveness are subject to change. Regardless of any alterations that may be on the horizon, Mark Kantrowitz, senior vice president and publisher of Edvisors.com and author of "Filing the FAFSA," warns borrowers against betting their financial future on the hope of debt forgiveness, especially the kind that's tied to public service. For one thing, there's a rigid time limit: “Public service loan forgiveness occurs after 10 years of full-time service. It is an all-or-nothing benefit, so borrowers who stop working before reaching the 10-year mark will get no forgiveness.”

Your eligibility for student loan forgiveness not only depends on the type of student loan, but on the type of service.According to the Federal Student Aid website, PSLF-qualifying jobs consist of “any employment with a federal, state, or local government agency, entity, or organization or a not-for-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code (IRC)."

Here are some further particulars about the sort of work that qualifies:

• AmeriCorps VISTA, AmeriCorps NCCC, or AmeriCorps State and National programs. Volunteers for these can receive up to $5,775 toward repaying qualified student loans (loans backed by the federal government) through the Segal AmeriCorps Education Award.
• Army National Guard. The Army National Guard's Student Loan Repayment Program, can help you earn up to $50,000 toward loans. Covered loans include Federal Direct Loans, Perkins Loans, and Stafford Loans.
• Peace Corps. Volunteers can have 15% of their Perkins Loan balance will be forgiven for each year of service.
• Full-time elementary- or secondary-school teacher in a low-income community. Such teachers can have 15% of their Perkins Loan forgiven for years one and two of employment, 20% in years three and four, and the remaining 30% in year five. Federal Direct Subsidized and Unsubsidized Loans, and Subsidized and Unsubsidized Federal Stafford Loans, may also be forgiven for those who teach an understaffed subject such as math, science, or special education—or work in a school in a low-income neighborhood. Click here for the latest details on these programs.

Income-driven repayment plans, designed to help graduates who are having trouble making payments within the standard 10-year time frame, also include forgiveness for borrowers not in the public sector after a certain period of time. The plans have a two-pronged appeal: the possibility of lower monthly payments now, plus the chance for balances to be forgiven later.

These plans include:

• Income-Based Repayment (IBR): Maximum monthly payments will be 15% of discretionary income. Forgiveness eligibility after 25 years of qualifying payments.
• Income-Contingent Repayment: Payments are recalculated each year based on gross income, family size, and outstanding federal loan balance. Forgiveness eligibility after 25 years of qualifying payments.
• Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE): Maximum monthly payments will be 10% of discretionary income. Forgiveness eligibility after 20 years of qualifying payments. The government may even contribute part of the interest on the loan.
• If you work for a federal agency, your employer may repay up to $10,000 of your loans per year, with a maximum of $60,000, through the Federal Student Loan Repayment Program.

Your student loan servicer handles the repayment for your federal student loans, so work with the servicer to enroll in a repayment plan or change your current plan. You can usually do this online via the company’s website. To apply for the public service forgiveness program, both you and your employer need to complete and file a specified form.

Income-based repayment can also have a downside: More interest will accrue on your loan because the repayment is stretched over a longer period of time. “Loan payments under IBR and PAYER can be negatively amortized, digging the borrower into a deeper hole,” Kantrowitz notes. “Borrowers who expect to have a significant increase in their income a few years into repayment should perhaps prefer a repayment plan like extended repayment or graduated repayment, where the monthly payment will be at least as much the new interest that accrues and the loan balance will not increase.”

"Remember, payments change annually based on income. When your income rises, your payment can, too,” notes Reyna Gobel, author of "CliffsNotes Graduation Debt: How to Manage Student Loans and Live Your Life." Even if you succeed in lowering monthly payments, don't go on a spending spree with the newly available funds, she adds. “If you're currently racking up more debt because you expect these plans in the future: stop! You never know what will or won't exist for graduates if the law changes in the future. Ask yourself, 'Could I afford to repay this on a regular extended repayment plan?' If not, you could be getting yourself into very high debt and a difficult situation." 

All is not perfect with forgiveness plans, either. The sorts of service jobs that offer student loan forgiveness often come with lower pay than regular, private-sector positions. You might be able to repay your loans more quickly through a job with greater earning potential, even if it doesn't offer loan forgiveness.

If you do have all or part of your student loans forgiven, be aware that the IRS may consider the forgiven debt to be income and you may have to pay tax on that amount. Also, if you choose to participate in any loan-forgiveness program, make sure to obtain written verification before you begin of what amount will be forgiven and under what circumstances.