Student Loan Forgiveness Programs And How They Work

For many college graduates, student loan debt is a burden that can follow them for years or even decades after receiving their diplomas.

For a lucky few, though, relief may be possible, thanks to a few different programs that allow student loan debt to be forgiven for eligible borrowers. Let’s take a look at how these programs work, and who qualifies for forgiveness.

Student loan forgiveness programs give students who qualify the option to have their federal loan repayments canceled or discharged.

Only certain borrowers qualify for student loan forgiveness, and it’s only available on federal loans. If you have private student loans, those loans won’t be eligible for forgiveness.

Let’s talk about the difference between forgiveness, cancellation and discharge. They all essentially mean the same thing – that you are no longer required to make payments on your student loan debt – but refer to slightly different situations.

When your student debt has been forgiven or canceled, you’re no longer required to make payments because your job has qualified you to have your debt forgiven – certain teachers, for example, can qualify for forgiveness because their job provides a valuable public service.

When your student debt has been discharged, it’s due to other circumstances, such as a total and permanent disability, that prevent you from being able to repay the debt.

Whichever of these words is used, the result is the same: You’re free from the obligation to pay the remaining balance on your student loans.

Ridding themselves of monthly student loan payments is likely something every borrower would like to do, but who is eligible for this option?

For the most part, loan forgiveness or discharge is limited in scope and is only available to government or nonprofit employees or teachers who meet certain requirements and those who are experiencing certain types of hardship.

Even those who believe themselves to be eligible for these programs may have a hard time getting approved; for example, a very small percentage of those who applied for the Public Service Loan Forgiveness Program have been accepted.

The requirements for each type of forgiveness or discharge are different. Let’s take a look at all the different programs that are available for borrowers at the federal level, and how you can qualify.

Here are some of the options available to student loan borrowers for loan forgiveness at the federal level.

Public Service Loan Forgiveness (PSLF)

PSLF offers loan forgiveness to public servants who have made 10 years’ worth of student loan payments.

More specifically, you’ll need to have made 120 qualifying monthly payments while working full-time for a government or nonprofit organization.

Studentaid.gov states that the nonprofit you work for typically has to be a tax-exempt, 501(c)(3) organization for your work there to qualify, and that organizations that don’t meet this criteria rarely qualify.

For the purposes of qualifying for PSLF, you’re considered a full-time employee if you work the greater of at least 30 hours per week or enough hours to meet your employer’s definition of full-time. You can also meet this criteria if you work multiple part-time jobs that equal an average of 30 hours per week, provided that each job is considered a qualifying employer.

This type of forgiveness is only available to those who have loans under the Direct Loan Program. However, if you have student loans with a different federal loan program, you can consolidate those loans into a Direct Consolidation Loan and become eligible. The catch is that only the payments you make on your Direct Consolidation Loan will be counted toward your 120 qualifying payments, so any payments you made prior to consolidating your loans won’t count.

To qualify for PSLF, you also must be on an income-driven repayment plan.

Studentaid.gov recommends that those who are working toward qualifying for PSLF submit an Employment Certification Form each year and any time they change employers to keep track of their progress. To begin the form and find out whether you could qualify for forgiveness, you can use the PSLF Help Tool.

Teacher Loan Forgiveness

Teachers with Direct or Federal Family Education Loans may be eligible for up to $17,500 forgiveness. What’s more, depending on their eligibility, an individual could potentially qualify for forgiveness under both the Teacher Loan Forgiveness Program and PSLF.

To be eligible for this type of forgiveness, you’ll need to have been a full-time teacher for 5 consecutive years at an elementary or secondary school that serves low-income students. You can find out if your school qualifies by checking if it’s listed in the Teacher Cancellation Low Income Directory.

How much you could receive depends on the subject you teach. Secondary-level math or science teachers and elementary- or secondary-level special education teachers are eligible for up to $17,500 in forgiveness. If you teach a different subject, you can receive up to $5,000 in forgiveness.

What about qualifying for both Teacher Loan Forgiveness and PSLF? It’s possible, but it’s important to note that you can’t use the same period of time to qualify for both programs. So, if you used 5 consecutive years of teaching to qualify for Teacher Loan Forgiveness, the payments you made on your loans during those years won’t count toward the 120 monthly payments you need to qualify for PSLF.

As soon as you’ve completed 5 consecutive years of teaching, you can apply for this program by submitting an application to your loan servicer.

Federal Perkins Loan Forgiveness

The Federal Perkins Loan Program provides Perkins Loan borrowers an opportunity similar to those provided by the PSLF and Teacher Loan Forgiveness Programs, both of which aren’t made available to Perkins borrowers.

Borrowers with these types of loans who work in a public service position may be eligible for partial or full cancellation of their loans if they meet certain criteria.

Borrowers who are eligible include elementary or secondary teachers who serve students from low-income families or students with special needs, or those who teach math, science, foreign languages or bilingual education. Teachers of other subjects may be eligible depending on their state’s need for teachers in a particular subject.

Additionally, public servants such as firefighters, law enforcement officers, librarians, military servicemembers, nurses and others may be eligible for cancellation.

If you work in a qualifying field, a portion of your loan can be cancelled for each year you are employed full-time in your job. Typically, you can receive up to 100% cancellation after 5 years of employment, though the amounts differ for some fields.

To apply for this type of cancellation, you’ll contact the school you received your loans from or the loan servicer.

Loan Forgiveness For Income-Based Repayment

Income-driven repayment plans allow borrowers to make monthly payments on their federal loans that are based on a percentage of their income, helping to ensure that their monthly payments don’t exceed what they can afford. Repayment periods on these plans range from 20 – 25 years, after which any remaining balance on your loans will be forgiven.

However, forgiveness on these types of plans isn’t guaranteed; if your income is high enough for you to completely pay off the balance by the time you’ve reached the end of your repayment period, you won’t receive any forgiveness, as there isn’t a balance to forgive.

There are four different plans available for income-driven repayment: REPAYE, PAYE, IBR and ICR. Any borrower with eligible loans can make payments under the ICR and REPAYE plans. Borrowers are only eligible for PAYE and IBR plans if the monthly payment you would make under one of these plans is less than the monthly payment you would make under the Standard Repayment Plan.

One very important note: Forgiveness on an income-driven repayment plan is taxable. While some types of forgiveness, cancellation and discharge aren’t considered to be taxable income, the amount of your loan that is forgiven at the end of your income-driven repayment period will be considered part of your annual income, and taxed accordingly.

Typically, you’ll contact your servicer or the school that gave you the loan if you believe you qualify for some type of forgiveness.

Keep in mind that refinancing your student loans will make you ineligible for any loan forgiveness program. If you want to keep the potential benefits that come with having federal loans, you’ll have to stick with those loans (though you can consolidate federal loans into a Direct Consolidation Loan).

These are some of the circumstances under which you can be granted a discharge:

• Closed school discharge: You may be eligible for discharge if your school closed while you were enrolled or within 120 days of your withdrawal. However, if you’re able to transfer your credits to another school, you won’t be eligible for discharge.
• False certification discharge: You may be eligible for discharge if the school falsely certified your eligibility for the loan, or if they signed your name to the loan or accepted funds without your knowledge or permission and didn’t give you access to those funds.
• Unpaid refund discharge: You may be eligible for discharge if you withdrew and your school didn’t return your loan funds to the servicer. In this case, only the portion that the school didn’t return would be discharged.
• Borrower defense to repayment: You may be eligible for discharge if your school defrauded you or engaged in certain types of illegal misconduct.
• Bankruptcy: In rare cases, you may be eligible for discharge if you have declared bankruptcy and you can demonstrate that repayment would cause you “undue hardship.”
• Permanent disability: You may be eligible for discharge if you become totally and permanently disabled. To qualify, you’ll need to provide documentation certifying your disability.
• Death: Federal student loans will be discharged if the borrower dies, or if “the student on whose behalf a PLUS loan was taken out” dies; in other words, if your parents took out a loan on your behalf to pay for your education and you pass away, the debt would be discharged.

In addition to these options provided at the federal level, you may find that organizations in your state have their own programs available for graduates who are seeking assistance or forgiveness on their student loan debt. However, do thorough research on any programs you come across and watch out for scams that prey on those who are struggling to keep up with their student loan payments.

If you’re a current student, start thinking about ways you can prepare for loan repayments while you’re still in school. Though student loan debt can be a burden, there are things you can be doing now to lessen that burden once you’re out and ready to join the workforce.