5/25/2012 2:41 PM ET|
Can your student loans be forgiven?
In some cases, the answer is yes. But here's another question: Are you sure that's what you want? The answer is hardly a no-brainer.
If you feel trapped under a mountain of student loan debt or worry about interest rates rising in the future, a loan forgiveness program may ease some of your burden.
Federal programs exist that will forgive the remainder of your federal student loan debt if you work in the public sector or for a registered nonprofit for 10 years and make your payments on time. Others allow you to stretch out your loan payments if your income falls below a certain level and will forgive the remainder of your debt after 25 years.
Which loans are eligible for forgiveness?
Federal student loans that qualify for relief include Stafford loans, Federal Direct PLUS loans and Direct Consolidation loans, according to Mark Kantrowitz, the publisher of FinAid, a financial aid information site.
Perkins loans are also supposed to have a forgiveness provision for borrowers who become certain types of teachers, but Congress has not funded this provision for several years, according to Kantrowitz. Thus, anyone seeking forgiveness for a Perkins loan would have to convert it to a Direct Consolidation loan before applying.
Money borrowed by parents usually cannot be forgiven, Kantrowitz says.
Forgiveness for public service
The Public Service Loan Forgiveness program is open to students who have Federal Direct loans who become police officers, firefighters, emergency medical technicians or public school teachers, as well as those who take other qualifying positions in the public and nonprofit sectors.
"The program is a back-end loan forgiveness program," Kantrowitz says. "You work for a certain number of years and any remaining debt is forgiven."
The program requires participants to work in public service for 10 years and to make 120 on-time loan payments, after which any remaining undergraduate and graduate debt will be forgiven. The program can identify whether your job makes you eligible when you begin working.
"You don't have to wait 10 years to find out if your job qualifies," Kantrowitz says. "There's a form you can have your employer complete that will say whether your service qualifies."
Stafford loan options
The Stafford program has its own set of loan forgiveness options. Provisions exist for those who volunteer with AmeriCorps, the Peace Corps or Volunteers in Service to America, serve in the National Guard, teach at schools with low-income students, specialize in teaching math or science at the secondary level or teach special education.
Stafford forgiveness is also available to law school students who work for public interest or nonprofit organizations, and medical students who practice as physicians for a certain time in communities that do not have "adequate medical care," according to the Stafford loan website.
The requirements and eligible amounts for Stafford loan forgiveness vary, depending on volunteer or teaching service. Also, you're not eligible for Stafford relief if you already participate in the Public Service Loan Forgiveness program.
Income-based loan relief
The Income-Based Repayment plan allows you to repay your Stafford, Direct and Consolidation loans based on how much you earn, as long as your loans are not in default.
The amount you pay annually will equal 15% of the difference between your adjusted gross income and 150% of the Department of Health and Human Services poverty guideline for your family size and state. The total is then split among 12 monthly payments.
Slowing down the payment of the loan will mean that it accrues more interest than if you paid it off under the regular terms, according to Kantrowitz. But if you participate in the plan for 25 years and meet certain requirements, the remainder of your loan will be forgiven.
Tax implications of loan forgiveness
The Public Service Loan Forgiveness program has no tax consequences -- the amount of your loan that is absorbed by the government is not considered taxable income, says Kantrowitz.
However, under the Income-Based Repayment plan, the forgiven portion of your loan is taxable. So if the government has forgiven $100,000 of your debt, you will have to pay federal tax on that amount as if it were income. In that scenario, someone in the 25% tax bracket would owe $25,000 in taxes, Kantrowitz says.
"The federal government is making payments to itself or lenders," Kantrowitz says. "The total amount the government is paying to cancel debt is treated as income to you."
Because the income-based plan just launched in 2009, the 25-year mark is still decades away. According to Kantrowitz, it's possible that the government will have to address the issue once these bills come due.
"What most likely is going to happen is, 25 years from now, there will be people faced with huge tax bills," Kantrowitz says. "There will be a hue and cry and Congress will pass something."
Still, borrowers who consider this option should note these potential tax consequences before applying.
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Our workforce is really hurting for engineers and people with other technical skills. I'm an electrical engineer, and I just hired two assistants with Associate's degrees in electrical technology from a two-year technical school. They both paid around 20,000 to go to school, and they're both starting in my company at 58,000 per year. Working Saturdays is voluntary, but every Saturday they work gets them another $300. Working every other Saturday for a year will jump their earnings to 65,800.
I think a big part of the problem is that so many people go to college just to get the degree instead of learning a career or trade. I'm not saying that's all of the problem, but a BA degree in Art History really doesn't have much use unless you want to teach Art History.
It would be nice if we could all just go to college and learn what we wanted to learn just for the sake of learning. Many college professors will tell you that you can do that, but it's probably not a good idea to listen to them. Most of them have been isolated from the real world for quite a while.
Can your student loans be forgiven? NO someone else will always get stuck paying for it.
maybe the 47% to 50% of the people who pay no fed taxes could start to chip in.
this is a perfect example of why the government should not have gotten involved to begin with. the debt is between us and the college/university. when the government pays off our loan to the university, the university is then free and clear and able to raise tuition at 5% per year (precisely what has happened the last 20 years). on the flip side, we now have an astronomical loan with the government that may or may not ever get paid. in the long run, it is us the taxpayers that eventually takes the hit.
if the government stayed out of it, universities would be forced to lower their tuitions to more realistic figures that people can actually afford. the government wouldn't lose money and in turn save us the tax payers more money in the long run. bottomline: we have seen time and time again that more government involvement leads to more and more wasted taxpayer dollars. just sayin
I borrowed federal money to fund my education in the early 70's and owing to various reasons never received a degree. I paid back every nickel and I believe anyone who borrowed should do the same. Rumor has it that many "professionals" think they should be exempted now that the money they borrowed has set them up in lucrative careers. They better than I, have the resources to pay their debt. NO EXCEPTIONS!
When you enroll in a proprietary college (particularly an on-line one), you're signing up for big debt. The admissions counselors (aka salespeople) will tell you that grants and loans will pay for everything; and they often don't divulge the full cost. If your loan is greater than your expected first year's salary--assuming you can get a job in the field--you definitely can't afford the debt. Pay as you go. Attend a low-cost community college or state university. Don't expect the taxpayer to pick up your debt when you can't afford to pay it back. It's not fair to responsible students who pay their way--plus our nation can't afford it.
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