Contrary to the gloom about student debt that often lurks in personal finance articles, there are several mechanisms in place to help you pay off your student loans without causing you financial ruin. Specifically, there are governmental safety nets in place for those who choose careers in which the rewards are not primarily monetary. Student loan holders who enter certain professions may be eligible to have a percentage of their federal loans forgiven.
College Cost Reduction And Access Act of 2007
If you work in the public sector and have a Federal Direct Loan, then you might be able to benefit from the College Cost Reduction and Access Act of 2007.
Who Can Qualify?
Those eligible for loan forgiveness under this act include “public service” workers which includes individuals with careers in public health, early childhood education, social work for public family service agencies, public defense and other public interest legal work, public and school library sciences, law enforcement and public safety, public service for the elderly and the disabled, emergency management, and non-profit or government work. Finally, full-time teachers at tribal post-secondary institutions as well as post-secondary teachers working in high-need subjects (such as math, foreign languages and nursing) are also eligible.
Which Student Loans Qualify?
Loans eligible for forgiveness under the act include subsidized and unsubsidized Federal Direct Stafford Loans, Federal Direct PLUS Loans and Federal Direct Consolidation Loans. Holders of FFEL loans can consolidate them into Federal Direct Loans to take advantage of the program.
If you qualify for loan reduction under the act, you can receive full forgiveness on the remaining principal and interest on your qualified student loans. To qualify, you must work at least 120 months or ten years in a public service position. During these ten years, you must make 120 monthly payments on your loan. Loan payments made before October 1, 2007 do not count toward the 120 payments. Additionally, periods of loan deferment or forbearance do not count toward the 120 payments.
Career-Specific Loan Forgiveness Programs
If you’re unsure about devoting a decade of your career to public service but you still want to do public service work, there are shorter-term public service options that also offer loan forgiveness programs. Here are a few:
AmeriCorps volunteers can receive as much as $7,400 in stipends and $4,725 toward student loans after 12 months of service. Peace Corps volunteers are eligible to have 15 percent of Perkins loan debt forgiven for each year served, up to a maximum of 70 percent. Do 1,700 hours of service work with Volunteers in Service to America (VISTA) and earn $4,725 for loan payoff.
Teachers can also benefit from loan forgiveness before a decade of service. The National Defense Education Act provides for forgiveness of Perkins Loans for educators teaching grades K-12 in schools with a high proportion of low-income students. After the first and second years of teaching, educators are eligible for 15 percent of Perkins Loan cancellation; after the third and fourth year, 20 percent; and 30 percent after five years. There are several other loan forgiveness options available to educators. Consult the American Federation of Teachers for more details.
Legal And Medical Work
Budding lawyers and doctors who serve low-income or otherwise high-need communities can also qualify for sector-specific loan programs. Check the American Bar Association or the Department of Health and Human Services, respectively, for information. Veterinarians who pledge to work for at least three years in a region where there is a shortage of animal doctors can benefit from the US Department of Agriculture’s Veterinary Medicine Loan Repayment Program (VMLRP), which forgives $25,000 of loans per year during the period of service. The annual application deadline is June 30.
During the past few years, non-profit educational institutions have begun to offer similar loan forgiveness options to their alumni: the law schools at Harvard University and the University of Virginia are a couple of notable examples. Investigate any options offered by your alma mater.
Income-Based Repayment Plan
Another option for loan forgiveness over the long-term is the Income-Based Repayment Plan, known in the educational financing industry as IBR. IBR is part of the College Cost Reduction and Access Act of 2007.
IBR reduces your monthly student loan payment to an amount that is more manageable given your income and family size. Therefore, the lower your income or the larger your family, the lower your monthly loan payment will be. After a certain amount of monthly payments, the balance of your loan can be forgiven.
Who Can Qualify?
If you have high student debt and a low income, you can benefit from IBR. Eligibility for this program is contingent upon annual earnings so you must re-apply for IBR each year.
Which Student Loans Qualify?
Federal student loans such as the Stafford, GRAD PLUS, and consolidated loans (that do not include Parent PLUS loans) are eligible. Loan holders who qualify for the federal program can apply via their student loan servicing company. Usually extra documentation is required, such as the most recent federal income tax return.
If approved, loan holders pay a reduced monthly loan payment that is adjusted each year for changes in income and family size. After a specified amount of loan repayment, the rest of your loan can be forgiven. If you work in the public sector, your loan forgiveness can kick in after ten years of monthly repayment. If you work in the private sector, you will need to have 25 years of monthly repayment before the balance on your federal loans is forgiven.
Loan Forgiveness Tax Liability
Generally speaking, if you benefit from student loan forgiveness and work in the public sector, you will not be taxed on the forgiven amount of the loan.
However, if you work in the private sector, the loan amount forgiven after the 25-year period of IBR is considered taxable income. Student loan forgiveness that results from death and disability, unpaid refunds, closed schools and false certification is also taxable.
If you took out large federal student loans, keep these programs in mind when decide your profession after graduation. They could end up saving you a lot of money.