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Loan Forgiveness — Do You Qualify?

Do you ever look at your student loan debt and think, “I wish I could make this disappear.” Well you may be able to if you qualify for loan forgiveness. This is no magic solution and there are a lot of caveats but we can help you find out if you’re eligible.

First off, what is loan forgiveness? Loan forgiveness means you are no longer expected to repay your loan. Certain circumstances might lead to forgiveness, cancellation, or discharge of your outstanding federal student loan balance. (Loan forgiveness refers to student debt, there is no loan forgives for mortgages, car loans, personal loans, or credit cards.)

Ways Student Loans Are Discharged or Cancelled

Discharging of student loans also means you don’t have to repay the loan but under very specific circumstances:

  • 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 on someone else’s part to secure the loan
  • Failure of the school to refund required loans to the lender
  • Death of the borrower

Student Loan Forgiveness Programs And If You’re Eligible

Income-driven repayment forgiveness:

The federal government offers four main income-driven repayment plans, which allow you to cap your loan payments at a percentage of your monthly income. When enrolled in one of these plans, your remaining loan balance will be eligible for forgiveness after 20 or 25 years, depending on the plan.

Types of Income-Driven Repayment Plans

Income-Based Repayment
The biggest thing to keep in mind with Income-Based Repayment is that its features change depending on whether you took out your loans before July 1, 2014, or from that date on. Borrowing before that date will qualify you for Old IBR, which caps payments at 15% of your discretionary income and forgives your loans after 25 years of payments. New IBR improves on those numbers, shrinking them to 10% and 20 years, respectively.

Pay As You Earn
Pay As You Earn is an income-driven repayment plan that caps federal student loan payments at 10% of your discretionary income and forgives your remaining balance after 20 years of repayment. You’ll likely qualify for PAYE if you can’t afford your payments and didn’t start college until after 2007.

Borrowers who enrolled earlier may still be eligible if they did all of the following:

    • Took out federal student loans after Oct. 1, 2007.
    • Didn’t have a federal student loan balance when taking out those loans.
    • Received a direct loan on or after Oct. 1, 2011.

Pay As You Earn is best suited for those that have graduate school debt, expect their income to stay the same, and/or are married.

Revised Pay As You Earn
Revised Pay As You Earn, or REPAYE, is an income-driven repayment plan that caps federal student loan payments at 10% of your discretionary income and forgives your remaining balance after 20 or 25 years of repayment.

Revised Pay As Your Earn is best suited for those that don’t have graduate school debt, expect their income to rise, and/or are single and expect to stay that way.

Income-Contingent Repayment
Income-Contingent Repayment costs more each month than other income-driven repayment plans. ICR caps payments at 20% of your discretionary income and lasts 25 years. Still, this plan may be your best income-driven choice if you have parent PLUS loans or a consolidation loan that includes parent PLUS loans and/or if you want slightly lower payments to potentially pay less interest.

You can figure out what your payments will look like under different plans with the student aid loan simulator.  You can also call your servicer and have them place you on the plan you qualify for that has the lowest monthly payment.

Public Service Loan Forgiveness:

This type of loan forgiveness is available to government and qualifying nonprofit employees with federal student loans. Eligible borrowers can have their remaining balance forgiven tax-free after making 120 qualifying loan payments. Only loans that are part of the federal Direct Loan Program are eligible for PSLF, private loans are not eligible.

Teacher Loan Forgiveness:
Teachers employed full time in low-income public schools may be eligible for loan forgiveness after working for five consecutive years. They can have up to $17,500 in federal direct or Stafford loans forgiven. To qualify teachers must have taken out loans after Oct. 1, 1998.

Nurse Loan Forgiveness:

Nurses have two options for loan forgiveness as they also qualify for public service loan forgiveness. However, there is also the NURSE Corps Loan Repayment Program which pays up to 85% of qualified nurses’ unpaid college debt.

State-sponsored Repayment Assistance Programs
Depending on what state you live in, licensed teachers, nurses, doctors, and lawyers may be able to take advantage of programs assisting with repaying debt or forgiving it completely. Contact your state’s higher education department to find out if you qualify for a program.

Military student loan forgiveness and assistance
Military personnel in the Army, Navy, Air Force, National Guard, and Coast Guard may qualify for their own loan forgiveness programs. In the National Guard, for example, qualifying soldiers and officers could receive up to $50,000 to pay off federal student loans through the Student Loan Repayment Program.

Additional student loan repayment assistance programs (LRAPs)

There may be other national or organizational student loan repayment assistance programs offered for public service professions so check with your employer to see if any programs exist. The American Bar Association has a list of state LRAPs for lawyers here.

Things to Remember

Legitimate federal forgiveness, cancellation and discharge programs are free through the Department of Education so if someone asks you to pay for your program, it’s probably a scam. It’s also good to keep in mind that forgiven, cancelled, or discharged debt is taxed as income unless you were required to work for a certain type of employer or in a certain profession to qualify for forgiveness (like the teacher repayment loan). These forgiveness programs are also not an option if you’ve defaulted on your federal student loans. Once your loans are in good standing, then you may apply for forgiveness or adjusted repayment plans.

Are you ready to take the next step for your financial plan? Schedule a FREE consultation with me to learn how you can optimize your budget by clicking HERE.

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