What is Student Loan Forgiveness? A Guide to Federal and State Programs That Make Debt Disappear

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Eric Tyson Author and Personal Finance Counselor Read bio

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Jeff Ostrowski Read bio

Americans are borrowing heavily to educate themselves. Student loan balances topped $1.5 trillion during 2018, according to the Federal Reserve. Amid the mounting debt is a glimmer of good news for borrowers: The federal government is poised to let borrowers off the hook for billions in outstanding balances. The Government Accountability Office reported in 2016 that the U.S. Department of Education would forgive more than $100 billion in student loans, a total that has risen since then. Can you get a piece of the action? This guide will walk you through the various loan forgiveness programs offered by states and the federal government.

Map: Student Loan Forgiveness Programs by State

Many states offer loan forgiveness programs to encourage debt-strapped professionals to work as doctors, nurses, lawyers and teachers in underserved areas or in low-paying jobs. A caveat: These programs change frequently, and some quickly hit capacity depending on funding levels. And a bit of advice to help you find programs that apply to your career: In addition to state loan forgiveness programs, some universities and nonprofit foundations offer loan assistance.

Understanding Student Loan Forgiveness Programs

Once you’ve taken a student loan, you’re stuck with it. Even when a borrower files for bankruptcy, student debt is unlikely to be forgiven. That’s what makes student loan forgiveness so appealing. These programs — which are offered by the federal government and states — let qualifying borrowers walk away from their outstanding balances. With college costs increasing far more quickly than wages, forgiveness programs are an attractive option for a growing number of borrowers. A word to the wise: You’ll still be required to make minimum payments on your loans as you meet the qualifications for forgiveness programs. Typically, you’ll have to work for years in a certain category of job.

In general, forgiveness programs aim to achieve some socially desirable goal, such as encouraging borrowers to teach, or to work as doctors in underserved communities, or to serve in the military. If one of those paths sounds like your dream job, you’re in luck. Borrower beware, however: The process of winning forgiveness is neither quick nor simple. Borrowers must navigate a thicket of idiosyncratic guidelines regarding such issues as the maximum amount of the balance forgiven and the steps a borrower must complete to qualify for forgiveness. “There’s a dizzying array, and each one has unique rules,” says Eric Tyson, author of “Personal Finance in Your 20s & 30s For Dummies.” “When you take all the national programs and layer on all the state programs, there are not dozens but hundreds of combinations and permutations.”

While the most common forgiveness programs promise to erase your debt in a decade or two, there also are ways to extinguish your debt should tragedy strike. The federal government “discharges” debt if the borrower dies or is stricken with total and permanent disability. And if the school you attended while running up the debt shuts down — a fate that has befallen some struggling for-profit schools — you can apply for the federal government’s closed school discharge.

Complicated rules, billions of dollars at stake — what could possibly go wrong? Plenty. A number of unscrupulous players have popped up to fleece borrowers by charging fees for navigating loan forgiveness programs, the U.S. Department of Education warns. Scammers use breathless language to entice borrowers into forking over cash for phantom services related to loan forgiveness. “There’s nothing a student loan debt relief company can do for you that you can’t do for yourself for free,” the Education Department says. In addition to potential scams, borrowers also must take into account another pitfall: The amount of any balance forgiven under some forgiveness programs might be considered taxable income. To give an exceedingly simplified example, if your $40,000 of student debt is forgiven and you’re in the 25 percent tax bracket, you’ll owe the IRS $10,000.

Federal Programs

The federal government is the biggest player in student lending, and it offers the most widely applicable forgiveness programs.

One of the most common ways to discharge student debt is through the Public Service Loan Forgiveness Program. Getting your debt erased by this method is a long haul: You’ll need to make 120 monthly payments while working for 10 years for what the U.S. Department of Education considers a “qualifying employer.” This category includes just about any job in government, at the federal, state, local or even tribal level. Teachers, planners, librarians, engineers and other types of public-sector workers qualify. Prosecutors and public defenders, for instance, can have their law school loans erased if they work as public-sector attorneys for a decade.

Many nonprofit positions also qualify for the Public Service Loan Forgiveness Program, although there are exceptions, including labor unions, partisan political organizations and nonprofits not considered 501(c)(3) organizations by the IRS. To qualify for Public Service Loan Forgiveness, you’ll need to work full time, defined for the purposes of this program as at least 30 hours a week. In one of many caveats, time spent on religious instruction, worship and other explicitly faith-based activities doesn’t count toward the 30 hours a week.

The Public Service Loan Forgiveness Program also places a number of conditions on what can be considered a “qualifying payment” toward the ultimate goal of 120 monthly payments. You only get credit for one payment per month, for instance, no matter what amount you pay. And any payments made while you’re in the grace period, deferment or forbearance don’t count toward the 120 monthly payments. In one borrower-friendly policy, the Department of Education doesn’t require you to make 120 monthly payments in a row. So if you work in a public-sector job, move to the private sector, and then move back to government employment, your previous payments while you worked for a qualifying employer still count toward your 120-payment total. In another twist, AmeriCorps or Peace Corps volunteers can use their Segal Education Award or Peace Corps transition payment to make a single lump-sum payment that can count for up to 12 qualifying Public Service Loan Forgiveness payments.

If all of these caveats apply to your situation, you’ll need to take a few steps. First, you must submit the Public Service Loan Forgiveness Employment Certification form. If your employer meets the guidelines, your loan automatically will be transferred to FedLoan Servicing. You’ll also switch your repayment plan from the standard 10 years to an income-driven repayment plan that extends the term to 20 or 25 years. And you’ll need to file a new certification form if you switch employers. Debt forgiven under the Public Service Loan Forgiveness Program isn’t taxable, so you need not worry about a nasty surprise after 10 years.

The federal government also offers a Teacher Loan Forgiveness Program worth $5,000 for most educators. To receive this benefit, a teacher must complete five years of teaching service and be considered “highly qualified” — meaning you have a bachelor’s degree and a state teaching certification. This program is more generous for certain types of teachers — namely special education teachers and high school math and science teachers. Educators who fit that description can receive up to $17,500 in loan forgiveness, the Education Department says. You can’t receive Public Service Loan Forgiveness and Teacher Loan Forgiveness for the same periods. This guide offers more details about student loan forgiveness for teachers.

Ideally, a college degree more than pays for itself in the form of earnings that afford a comfortable living, along with money left over to pay off the student loan. However, many borrowers misjudge the value of their degrees. For borrowers in this category, the federal government offers another type of loan forgiveness program: The Department of Education operates a variety of income-driven repayment plans that adjust payments for borrowers of modest means.

These plans — known as Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) — require borrowers to pay no more than 10 percent to 15 percent of their discretionary income. The amount of the required payment varies by income and family size — some borrowers might pay nothing. Income-driven repayment plans require borrowers to “recertify” their incomes and family sizes annually. Borrowers who qualify for these plans are placed on repayment plans lasting 20 or 25 years. If the borrower still owes at the end of that term, the outstanding balance is forgiven. A downside to this program is that forgiven debt is taxable. These programs became available in 2007, so the first tax bills won’t come due until 2027 at the earliest. Even so, many are bracing for a wave of surprise tax bills in the future, The Wall Street Journal reports.

Lastly, the U.S. Department of Health and Human Services’ National Health Service Corps offers up to $75,000 in loan repayment over three years for doctors, nurses, physician assistants and addiction counselors.

Expert Q&A

Eric Tyson Author and Personal Finance Counselor View Bio

What’s the biggest challenge students face in navigating forgiveness programs?

It seems to me the hardest part is to understand the myriad rules and regulations that each of these programs has. Each state can have their own specific requirements. Massachusetts, for instance, has a student loan forgiveness program for certain types of health professionals, but to qualify, you have to work in an area deemed to have a shortage of people in those jobs. So you might have to work in a rural area. People just really have to spend the time to learn about the specific programs that are out there.

What advice do you give borrowers about these programs?

On the surface, loan forgiveness sounds attractive. But 10 years is a long time. That’s a nice benefit, but at what cost? Most of these specific jobs or careers that qualify for loan forgiveness tend not to be among the higher-paying ones, so this is a way to effectively boost the pay. I don’t think people should contort their career choice to do one of these forgiveness programs. While the dollar amounts that are forgiven aren’t chump change, they’re not enormous amounts of money. But if you were otherwise were thinking about going into a particular job or pursuing a particular career, then it can make sense. For people who become doctors and are willing to go into the Armed Forces, you can have more than $100,000 forgiven. Of course, the military probably pays doctors less than they could make in the private sector.

What’s the biggest mistake you see borrowers make in navigating loan forgiveness programs?

Possibly distorting your career choices in a way you might not be happy about longer-term. You might be working in a job for 10 years that you otherwise hate.

The IRS considers some forgiven debt taxable income. How should borrowers plan for the tax liability?

It’s surprising and disappointing that these programs could ultimately lead to a tax bill for people. It’s got to be a nightmare to figure this out. Tax issues add another whole layer of complexity. These programs grab people’s attention: “You could have $25,000 of student debt forgiven.” But there are a lot of caveats. You have to meet all the requirements, and $25,000 is not the actual benefit. When you factor in taxes, the $25,000 benefit might become $20,000, or $17,000. Most people who find themselves in that boat are going to need the services of a tax professional.

It sounds like you’re warning students to be cautious about counting on loan forgiveness programs.

There’s no harm done in people looking at the programs that might be out there and then considering it. But there’s so much people don’t know when they’re making these decisions. Your average 18- or 19-year-old really doesn’t have a clue about what they want to do five years out. It’s such an imperfect process. You don’t really know until your senior year what kind of job offers you might get, and what employers are coming to the career fair at your school. The most important question is, Who’s willing to give you a job and what kind of pay can you get? But for most people, when they’re at the beginning of their educational decisions, jobs are still mostly a theoretical thing. With all the caveats that go along with these loan forgiveness programs, the odds of you wanting to do a particular job and then qualifying for the forgiveness are probably not that high.

What If You Don’t Qualify for Forgiveness?

Because the eligibility rules for loan forgiveness programs are so persnickety, not everyone qualifies. If you don’t merit student loan forgiveness but you’re struggling to make your payments, there are several options. Among them:

  • The Graduated Repayment Plan.

    This federal government program is designed for borrowers who have modest paychecks now but expect their incomes to increase over time. This program reduces your monthly payment for two years. Then, your payment will increase every two years. One downside: While this type of plan offers flexibility, it also carries higher interest charges over the life of the loan than if you were to stick with the Standard Repayment Plan.

  • The Extended Repayment Plan.

    This federal government offering is available only to borrowers who owe more than $30,000. This option lowers your monthly payment by lengthening the term of repayment. Your monthly bill will be more manageable, but you’ll pay more in interest over time than if you were to stay with the 10-year Standard Repayment Plan.

  • Employer assistance plans.

    With unemployment at rock-bottom rates in 2018, more employers offered student loan assistance as a recruiting tool. In one particularly generous example, the U.S. Navy’s Health Professions Loan Repayment Program offers up to $40,000 a year for doctors who go on active duty. The benefit is subject to income tax withholding. The Department of Justice’s Attorney Student Loan Repayment Program, for its part, matches up to $6,000 a year in loan payments. If you’re considering taking a job, check to see if the employer offers this perk.

  • Consolidate.

    If you’ve taken multiple federal loans, you can combine them into one federal loan with a single interest rate and a single monthly payment. That by itself won’t give you a financial cushion, but consolidation also gives you the option of extending the term of your loan. By lengthening your repayment schedule, you’ll lower your monthly payment — but at the expense of boosting the total interest you pay over the life of the longer loan.

  • Refinance.

    Another option is to switch your federal loans to a private lender. You might be able to pay a lower interest rate, although this option requires that you have a steady job and stellar credit. Refinancing with a private lender can reduce interest expenses and improve your customer-service experience. But if you fall on hard times, private loans don’t offer the same options for income-based repayment plans, deferment and forbearance. Among the lenders marketing student loan refinances are major banks and specialty lenders such as Earnest, SoFi, Education Loan Finance, LendKey and PenFed Credit Union.