Finance Friday – Student Loan Forgiveness

Greetings all. Sorry for the lack of recent Finance Fridays. It’s been a busy few weeks in El Casa de Snark. However, we’re back and better than ever and this week we’re covering a frequently asked for topic.

PUBLIC STUDENT LOAN FORGIVENESS

What is it?
Public student loan forgiveness is when some of your federal loans are paid off for you by the government. Again, this only applies to federal loans and not private loans.

Who can get it?
Public student loan forgiveness is meant for people who work in government organizations (federal, state, local or tribal) and non-profit institutions. Not all non-profits apply so you’ll have to contact your lender to see if yours does.

What loans qualify?
The terms of this deal are limited to only Direct loans. So Perkins loans or Federal Family Education Loans don’t apply. Drag right? However, there’s a loophole. If you consolidate everything into a direct loan (see our previous post on loan consolidation for details) then the combined loan IS eligible for this program.

How do I qualify?
You have to meet one of the requirements below:

  1. You are a full-time employee. In this case full-time is defined by your employer. For example, if your employer says full-time is an average of 36 hours a week (as it is for many nursing jobs) that counts.
  2. You work 30 or more hours per week. So there’s still hope for you part-time folks!

What do I have to do?
You have to make 120 on-time payments (10 years worth). These don’t have to be consecutive by the way though that’s the quickest way to get to this point.

Sweet, I’ll put my loans on forbearance or deferment and start racking up my months!

Not so fast there hombre. Forbearance and deferment don’t count. Also, payments you make while in school don’t count. This is strictly an after-graduation thing.

Well, fine then. I’ll split my payment in half and do it twice a month!

Sorry, you only get credit for one payment a month.

Well that’s lame. Instead, I’ll just make my monthly loan payment as small as possible.

Soooo, remember the disappointment from the previous question? Second verse, same as the first. You can’t just pick and choose how much you have to pay. Instead, you have to sign up for a qualifying payment plan.

Ugh, I’m already bored and getting a headache.

Hang in there, we’re almost done. If you recall in our post about how loans work that your monthly payment is dependent on three key things: how much money you owe, the interest rate and over how long a time span you’re paying back the loan. If you owe $50,000 and decide to pay it back over 10 years instead of 30 your monthly payment is going to be way higher.

Booooored…

Just a few more minutes, I promise.

There are two types of payment plans that qualify: Income Driven Repayments and the 10-year Standard Repayment plan.

I don’t like the sound of this Income Driven thing…

It’s not as bad as it sounds. Basically, the amount you pay per month is dependent on how much money you make. There are four basic plans: REPAYE, PAYE, IBR and ICR. The details of each of these vary but basically they all take your total adjusted gross income for the year and multiply it by 10%. That’s how much you’ll pay per year.

My adjusted what?

Gross Income. How much money you made last year after certain deductions. You can find it on your tax return labeled as ‘Federal Adjusted Gross Income’ or ‘Federal AGI.’

So I have to do math? You said there’d be no math!

Relax there dear reader. You live in the internet age so all the math has been done for you. Go to this calculator here.

  • Click proceed
  • Put in your loans
  • Put in your income
  • Revel in your internet wizardry

This calculator will show you what your monthly payment will be under all the different options and if you’ll actually have any payments forgiven.

Do I have to pay taxes on the amount forgiven?

Whoa, that’s a super savvy question reader. To answer your question however, no you do NOT pay taxes on forgiven loans through public student loan forgiveness (PSLF).

For more information about PSLF click here.  Quick things to remember:  You have to have made the 120 payments before applying for PSLF.  Also, you have to be working at the public service organization while applying – you can always submit an Employment Certification Form to verify your site is eligible.  In the meantime though, you can contact your lender to make sure you are on an appropriate payment plan.

Now there are other income based loan forgiveness programs the government offers. They are similar to PSLF in that you pay a percentage of your income but you don’t have to work for the government to qualify. Generally you have to make payments for longer (20-25 years). The big downside is that the amount forgiven is considered taxable income. So if $60,000 of your loans are wiped away the government looks at that like you made an extra $60,000 that year and you gotta pay taxes on that $60,000.

Is there anything else I should know about?

There are other programs that may be worth your time.

  • If you’re a nurse there’s a program called NURSE Corps. You agree to work in poor urban or rural areas for two years and, in exchange, 60% of your remaining loan balance is paid. If you opt-in for a third year another 25% of the original amount is paid.
  • If you’re a physician you can apply to the National Health Service Corps. You commit to working for three years in primary care at an underserved NHSC site. In exchange you can get up to $120,000 worth of loans repaid.
  • Lastly, if you’re a full-time nurse with a Perkins loan you can apply to have the balance cancelled. (One of the snarkynurses did this – all payments were deferred and in 5 years all her Perkins loans were cancelled – Don’t miss out on this opportunity!!) … Contact your student loan vendor for details.

That wraps up this week’s post. Please email us if you have questions.

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