How Does Student Loan Forgiveness Work
By Joe Messinger, CFP®
August 1, 2018
After the classes are done, the careers and the student loan repayment begins. Hopefully, graduates find fulfilling jobs and are able to maintain their loan payments (perhaps because they heard our message about not taking out more loan debt than they could afford). In some cases of hardship, loan payments are being missed, and borrowers need to look at all their options. In a previous blog, we talked about deferment, forbearance, loan cancellation, and loan default. We have also talked about consolidation loans and repayment plans. Today, we’ll take a closer look at student loan forgiveness–what it means and when it is available.
Loan Forgiveness, Cancellation, and Discharge
These three terms seem to mean the same thing, but not quite. The federal government uses the term forgiveness or cancellation to refer to situations where borrowers are no longer required to make payments on their loan due to their job. If the borrower is no longer required to make payments on a loan because of a certain situation like a disability, the government uses the term discharge.
Loan discharge can take place in situations of total and permanent disability, death, closed school, program false certification of student eligibility (the school approved you for the loan when they shouldn’t), unauthorized signature/unauthorized payment (like in cases of identity theft or the school signed the paperwork on your behalf), or unpaid refund (you withdrew from school, but the school didn’t pay back the loan to the government). Loan discharge can take place for bankruptcy but only in extremely rare cases. This website has more detail about the various discharge situations.
Loan discharge can apply to federal direct, FFEL, and Perkins loans. Parents who take out PLUS loans can also be eligible for discharge when: the parent or the student dies, the parent (not the student) becomes totally and permanently disabled, or the loan is discharged in bankruptcy. The PLUS loan can also be discharged for the school closure/unauthorized/unpaid refund reasons above.
When can loans be forgiven?
The federal government has two programs for loan forgiveness: Teacher Loan Forgiveness Program (TLFP) and Public Service Loan Forgiveness (PSLF). In a previous blog, we dug deeper into the teacher program and how it works. The other program is Public Service Loan Forgiveness (PSLF). This program can be confusing so we’ll try to simplify it.
What qualifies as “public service”?
The PSLF is available to employees of the government (federal, state, local, or tribal) as well as most non-profit organizations (tax exempt/not-for-profit 501(c)(3) and not tax exempt/not-for-profit in certain qualifying services like emergency management, public libraries, public health, etc.). Labor unions and political organizations are not included and neither are those elected to the US Congress.
Not sure if your employer is included as public service? Click here and read the section about “Qualifying Employment.” The type of job does not matter. Only the type of employer matters for qualification.
Under the PSLF, the federal Direct Loan is forgiven after 120 qualifying loan payments have been made under a qualifying repayment plan for anyone working full-time for a qualifying employer (discussed above).
To be considered “full-time,” you must meet your employer’s definition of full-time or work more than 30 hours per week (whichever is greater). If you have several part time jobs that qualify, an employee may meet the full-time definition if the sum of hours worked per week is more than 30.
Note that only Direct Loans can be forgiven. If you have other types of federal loans, they may be included by consolidating them.
The loan must be part of a qualified repayment plan.
What does this mean? The borrower must change their repayment to an income-driven repayment plan in order to qualify for forgiveness. Making regular payments on a loan will not count towards the 120 magic number. The payments must be made as a part of an income-driven plan. Income-driven plans take your family size and income into consideration when calculating monthly payments. An example would be payments set at 10% of your discretionary income. Income-driven plans also extend the number of years for repayment from the typical 10 to 20.
If this seems confusing, consider this. Before the government will forgive your loan, 120 monthly payments need to be made. 120 payments equals ten years. Typical loan repayment would be done in ten years, and you would have nothing left to repay. Using an income-driven plan, extends the term and allows for some remaining balance to be forgiven.
- Made after Oct. 1, 2007 (The first loans to be forgiven started in 2017–10 years of qualified payments.)
- Under a qualifying repayment plan (income-driven)
- For the full amount due as shown on your bill (Do not pay more than the amount shown–it doesn’t carry forward.)
- No later than 15 days after your due date (Signing up for automatic debits can help with due dates.)
- While you are employed full-time by a qualifying employer
Qualified payments do not need to be consecutive. Borrowers may work for several different employers over the years. Qualified payments cannot be made while in school, during the grace period, or during forbearance or deferment.
What is the application process?
The best bet is to refer to the federal government’s webpage for complete instructions. In general, you will be required to submit a certification form from every qualified employer during your 120 monthly payments. After 120 payments have been made, you can submit the PSLF application form. The forms can be found on the government’s site.
What are the odds of having my loan forgiven?
Hard to say. Because we have just passed the 10-year mark for the program, borrowers are just now getting started applying for PSLF. Student Loan Hero says that fewer than 1,000 have been approved so far. In addition, the future of the program is not guaranteed as Congress and the President have both proposed scrapping it.
Borrowers need to be aware that electing the income-driven repayment option extends the repayment period to 20 years. They need to carefully track employment perhaps submitting the certification form every year they work for a qualified employer.
In the perfect situation, PSLF might be a good idea, but be sure to dot your i’s and cross your t’s to meet all the requirements for qualification.
September 21, 2018