When student loan debt is out of sync with income, it can cause borrowers to abandon a career in a low-paying profession. For example, a public defender or prosecutor may have more than $100,000 in law school debt, but a much lower starting salary, yielding a debt-to-income ratio of 2:1 or more. They may be able to manage for a few years using the economic hardship deferment or forbearances, but eventually the reality of the student loan debt forces them to get higher-paying jobs in the private sector. Alternate repayment plans like extended repayment or income-based repayment may reduce the monthly payments to affordable levels, but require the borrower to be in debt for decades. A study by Jesse Rothstein and Cecelia Rouse of Princeton University found that every $10,000 in student loan debt reduces the likelihood that the student will pursue a public service career by more than 5 percent. Loan forgiveness programs, on the other hand, remove the student loan debt as a disincentive to pursuing a public service career.
There are several student loan forgiveness programs that pay off (or cancel) all or part of a borrower’s federal student loans in exchange for service in a particular occupation or volunteer service. The goal of such programs is to encourage individuals to pursue a particular career path, especially one that involves a low salary or high student loan debt. There are also loan forgiveness programs for occupations of strategic importance to the United States or where there is a national or regional shortage of qualified workers.
Other options for eliminating student loan debt include student loan cancellation and discharge, which release the borrower from the obligation to repay the debt, and student loan settlements, which accept a lump sum payment from a defaulted borrower in exchange for cancellation of the remaining debt. These options do not depend on the borrower working in a particular occupation.
Loan forgiveness that requires the borrower to work in a particular occupation is tax-free under current law. Other types of debt cancellation are treated as income to the borrower, leading to a potential tax liability.
There are two types of student loan forgiveness programs, up-front forgiveness and back-end forgiveness. Up-front student loan forgiveness cancels part of the student loan debt for each year of service, as it occurs. For example, a typical loan forgiveness program might forgive 20 percent of the borrower’s student loans or $7,500, whichever is less, for each year of service up to five years. Loan Repayment Assistance Programs (LRAP) are an example of such loan forgiveness programs. Back-end student loan forgiveness cancels all remaining debt after a number of years of service. Public Service Loan Forgiveness is an example of a back-end loan forgiveness program.
Since back-end loan forgiveness does not provide partial forgiveness for borrowers who don’t fulfill the service requirement, borrowers should think carefully before committing to such an all-or-nothing benefit. Borrowers who are unsure about their commitment to a back-end loan forgiveness program may be better off with an up-front loan forgiveness program.
Public Service Loan Forgiveness forgives the principal and interest balance on a borrower’s federal direct student loans after the borrower has made 120 qualifying payments (= 10 years) while working full-time in a public service job. The loans must be repaid in income-contingent repayment (ICR), income-based repayment (IBR) or pay-as-you-earn repayment (PAYER) to earn some forgiveness. The loans may also be repaid under standard 10-year repayment (or other repayment plans with monthly payments that equal or exceed the monthly payment under the standard repayment plan), but this merely preserves previously-earned forgiveness for borrowers who no longer qualify for ICR, IBR or PAYER. Federal student loans in the Federal Family Education Loan Program (FFELP) may be consolidated (or reconsolidated) into the Federal Direct Loan program to qualify for public service loan forgiveness, but payments made prior to consolidation do not count toward the 120-payment requirement.
Public service jobs include working for a 501(c)(3) tax-exempt organization, as well as public school teachers and librarians, early childhood education (including Head Start, licensed or regulated childcare facilities and state-funded pre-K), military service, public safety and law enforcement (including police, fire fighters and EMT), emergency management, social work in a public child or family service agency, public services for individuals with disabilities or the elderly, public librarians, AmeriCorps, Peace Corps, public interest law (including prosecutors, public defenders and certain types of legal advocacy on behalf of low-income communities), public health, working in a tribal college or university and working for city, state or federal government (except for work as a member of Congress).
Public service loan forgiveness provides forgiveness for a broad group of occupations. There are several other loan forgiveness programs that are restricted to borrowers who are pursuing particular occupations. Most of these occupations are also eligible for public service loan forgiveness.
The Federal Perkins Loan Program provides loan forgiveness for a variety of other occupations in addition to forgiveness for teaching, volunteer work, health professions, public interest law and military service. These include full-time law enforcement and corrections officers, full-time fire fighters, full-time EMT, full-time faculty at tribal colleges and universities and full-time librarians serving in low-income schools.
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