Having your student loans wiped out may sound too good to be true. But it can happen.
Student loan borrowers may be eligible for forgiveness, cancellation, repayment or discharge programs. However, qualifying for these programs can depend on many factors, including the types of loans you have, your federal loan repayment plan, where you live and your profession.
Learn about the different programs, what it takes to qualify and how much debt you may be able to have forgiven or repaid on your behalf.
Types of Federal Student Loans
It’s important to know what federal loans you have before considering student loan forgiveness. Each federal forgiveness program has different eligibility criteria and may only be available on certain types of federal student loans.
— Direct loans: Direct loans are federal student loans made through the William D. Ford Federal Direct Loan Program. These are commonly referred to as Stafford loans or direct Stafford loans. You may have subsidized or unsubsidized direct loans. Direct PLUS Loans, which are issued to graduate or professional students and parents of students, are also part of the program. If you consolidate federal loans with the Direct Consolidation Loan program, your new loan is also part of this program. However, whether it qualifies for forgiveness could depend on the types of loans you consolidated.
— Federal Perkins loans: Perkins loans may be offered to undergraduate, graduate and professional students who have an exceptional financial need.
— Federal Family Education Loans: FFEL loans haven’t been available to new borrowers since 2010. FFEL loans included subsidized and unsubsidized Stafford loans, PLUS loans and FFEL Consolidation loans.
You may have multiple types of federal loans, such as a Perkins loan and several direct loans, and each loan could qualify for a different forgiveness program. It’s not an all-or-nothing opportunity; you may be able to have different loans forgiven using different programs.
[Read: The Best Student Loan Consolidation Lenders of 2018.]
If you’re unsure which loan types you have, the U.S. Department of Education suggests logging into My Federal Student Aid and reviewing the loans ‘ names. Generally, if the loan has “direct” in the title, it’s part of the William D. Ford Federal Direct Loan Program. You can contact your federal loan servicer if you have questions.
Private student loans aren’t eligible for federal forgiveness or cancellation programs, but you may have other options, such as state-specific student loan repayment programs or repayment programs available through employers or professional industries.
Federal Student Loan Forgiveness Programs
Federal Public Service Loan Forgiveness
Loan types: Direct loans are eligible for federal Public Service Loan Forgiveness, or PSLF. FFEL or Perkins loans are eligible for student loan forgiveness once they’ve been consolidated into a direct loan through the Direct Consolidation Loan program.
Eligibility requirements: In addition to having a qualifying loan, you must make 120 qualifying monthly payments while working full time with a qualified employer. After you make the qualifying payments, the remainder of your loan balance will be forgiven.
Qualifying employers are generally a tribal, local, state or federal government (but not government contractors), or a nonprofit organization with 501(c)(3) tax status. Some nonprofits without 501(c)(3) tax status may qualify. You may also qualify if you’re a full-time AmeriCorps or Peace Corps volunteer.
Full time is defined as the greater of 30 hours per week or your employer’s definition of full time. If you work part time for several qualifying employers, you could still be considered full time for PSLF as long as you work at least a combined 30 hours per week.
A payment must meet several criteria to count as a qualifying payment:
— You must pay at least the full amount due within 15 days of the bill’s due date.
— You must be employed full time with a qualifying employer when you make the payment.
— The payment must be made under the standard repayment plan or an income-driven repayment plan.
— The payment must have been made after Oct. 1, 2007.
— Your loan can’t be in deferment, forbearance or a grace period, and you can’t have in-school status when you make the payment.
Your payments don’t need to be consecutive to qualify. Also, while generally only your one required monthly payment counts toward the 120 qualifying payments you need, large lump-sum payments made after completing an AmeriCorps or Peace Corps could count as up to 12 PSLF payments. Payments made on your behalf as part of a U.S. Department of Defense student loan repayment program could also count as multiple payments.
One important point to remember is that payments made on an existing loan don’t carry over if you consolidate the loan. While you may want to consolidate a Perkins or FFEL loan into a Direct Consolidation Loan to make it eligible for PSLF, you may not want to include existing direct loans if you’ve already made PSLF-qualifying payments on them.
Also, payments made while on the 10-year standard repayment plan may count toward PSLF, but if you don’t switch to an income-driven plan, there won’t be a loan balance to forgive after 120 payments, which is 10 years of monthly payments. Therefore, PSLF may only be beneficial to someone who will make lower monthly payments on an income-driven repayment plan than on the standard 10-year repayment plan.
“You probably want to be in the income-driven repayment plan that gives you the lowest monthly payment,” says Stanley Tate, a student loan attorney based out of St. Louis.
Applying: Forgiveness is not automatic. You will need to apply for the program. To begin the PSLF process, you need to fill out and submit an Employment Certification form, or ECF. The Department of Education will then confirm that your employment and loans qualify you for PSLF. If they’re not already there, your qualified loans will be transferred to FedLoan Servicing.
Although it’s not required, you are encouraged to submit a new ECF each year and when you change employers. Doing so will help ensure you get credit for all qualifying payments. After your servicer receives each ECF, it will send you a letter showing how many qualified payments you’ve made.
[Read: The Best Private Student Loans of 2018.]
“After you make 120 qualifying payments, you still have to submit the PSLF application,” says Andrew Weber, owner and certified student loan counselor at MyCreditCounselor.net. He warns that you can’t assume your application will be approved. “It’s up to the Department of Education to make the final decision.”
Even if your loan servicer says you’re doing everything right, you may want to double-check the rules and requirements, and keep copies of your loan payments and employment history. Several state attorneys general and the federal Consumer Financial Protection Bureau filed lawsuits against a leading student loan servicer, alleging it may have misled or misinformed borrowers, which could affect their ability to qualify for the PSLF program.
If your remaining loan balance is forgiven through the PSLF, the forgiven amount isn’t considered income and you won’t have to pay federal income taxes on it.
Federal Income-Driven Repayment Plans
Loan types: Direct loans made to students are eligible for all four income-driven repayment plans. FFEL, Perkins and parent loans may be eligible after they’re consolidated into a Direct Consolidation Loan.
Eligibility requirements: There are four income-driven repayment plans that you may be eligible for depending on the type of loan you have, your income, where you live and your family size. If you make payments on an income-driven repayment plan for 20 to 25 years, your remaining loan balance is forgiven. However, unlike with PSLF, the forgiven amount may be taxable income.
— Pay As You Earn Repayment, or PAYE, Plan: Your remaining balance is forgiven after you make payments for 20 years.
— Revised Pay As You Earn, or REPAYE, Plan: Your remaining balance is forgiven after you make payments for 20 years if you have undergraduate loans or 25 years for graduate loans.
— Income-Based Repayment, or IBR, Plan: Your remaining balance is forgiven after you make payments for 20 years if you were a new borrower on or after July 1, 2014. Otherwise, your balance is forgiven after you make payments for 25 years.
— Income-Contingent Repayment, or ICR, Plan: Your remaining balance is forgiven after making payments for 25 years.
The repayment estimator tool on StudentLoans.gov can help you estimate your monthly payment with each plan. Generally, it will be 10 to 20 percent of your discretionary income, which the Department of Education defines as the difference between your annual income and 100 to 150 percent of the poverty guideline for your family size and state.
To qualify for PAYE or IBR, your monthly payment amount must be lower than what you would pay if you use the 10-year standard repayment plan. The PAYE plan is only available if you were a new borrower (didn’t have an outstanding federal student loan balance) as of Oct. 1, 2007, and received direct loan disbursement on or after Oct. 1, 2011.
Applying: You don’t have to apply for forgiveness under an income-driven plan. However, you do need to submit an income-driven repayment plan request to your loan servicer every year. You can do so online or by mail, and request a specific plan or opt to let your loan servicer choose the plan that will result in the lowest monthly payment.
You’ll need to include a copy of your most recent tax return or tax return transcript. If you’re applying online, you’ll be able to transfer your tax information directly from the IRS. If your income changed significantly or you haven’t filed a tax return in the previous two years, you may have to submit other forms of income verification, such as recent pay stubs.
Federal Teacher Loan Forgiveness
Loan types: FFEL and direct loans are eligible, but PLUS loans aren’t. If you have a Direct Consolidation Loan or FFEL consolidation loan, only the portion that repaid an eligible loan can receive forgiveness.
Eligibility requirements: You need to be a full-time teacher for five consecutive years at an elementary, middle or high school, or an educational service agency that serves low-income students to qualify.
If you’re eligible, you could get up to $5,000 in student loan debt forgiven. If you’re a special education teacher, or teach math or science, you may be able to get up to $17,500 forgiven.
To qualify, you must also be considered a highly qualified teacher, which means:
— You have at least a bachelor’s degree.
— You’re fully certified by your state.
— You’ve never had your certification or license requirements waived on an emergency, temporary or provisional basis.
There are additional requirements for some new teachers.
To see if your school qualifies, you can check the Teacher Cancellation Low Income School Directory, which the Department of Education updates every year.
Eligible loans must have been made before the end of your five years of qualifying teaching service. If your loan was disbursed after Oct. 1, 1998, you can’t have had an outstanding FFEL or direct loan balance when you took out the loan you want forgiven. Additionally, you won’t be eligible if you had an outstanding FFEL or direct loan balance as of before Oct. 1, 1998.
Applying: To apply for teacher loan forgiveness, you need to complete and submit an application form to your loan servicers after you complete the required five-year commitment.
Federal Perkins Loan Cancellation
Loan types: Perkins loans
Eligibility requirements: The Perkins loan forgiveness program allows you to get a percentage of your loan amount canceled for each year of service you complete in a qualified service role, including:
— U.S. armed forces members who served in a hostile fire or imminent danger pay area
— Full-time firefighters, law enforcement officers, corrections officers, nurses and medical technicians
— Full-time attorneys working in a federal public or community defender organization
— Peace Corps or AmeriCorps VISTA volunteers
— Teachers
— Child or family services workers
Each year of service may result in a portion of the loan, plus interest, being canceled. The maximum cancellation amount ranges from 50 to 100 percent, depending on your service area.
Tate says that if you teach at a public school and have direct and Perkins loans, it’s worth exploring whether consolidating your Perkins loan makes sense when you know you’re eligible for forgiveness under the PSLF program. “Perkins loan forgiveness happens much sooner than does PSLF forgiveness,” says Tate. “But you have to ask: Is that quickness worth the cost and hassle?”
If you have Perkins loans and direct loans, you’ll have at least two repayment plans and your loans may be serviced by different companies. Your monthly payments might go down if you consolidate, says Tate, and you’ll no longer have to deal with deadlines and paperwork for different loans.
Applying: There isn’t a uniform application process for the Perkins loan cancellation programs. Although Perkins loans are part of the federal student aid program, your school lends the money. You should contact your school to learn how to apply for cancellation.
Additional Student Loan Forgiveness Programs
Student Loan Repayment for Military Members
Military branches offer a variety of student loan repayment assistance programs that may help you repay part, or perhaps all, of your student loan debt. The details and eligibility requirements can vary.
For example, the National Guard‘s student loan repayment program may require you to enlist for at least six years. Current National Guard members may also be eligible if they re-enlist or extend their term of service. You could receive up to $50,000 total, disbursed in annual payments that are the greater of $500 or 15 percent of your approved benefit. The program won’t repay private or state student loans, though — only federal student loans.
The Army’s loan repayment program for active-duty members who are part of the officer candidate program or contracted for a selected military occupational specialty may help repay federal, state and private student loans. You could receive the greater of $1,500 or 33 1/3 percent of your original unpaid principal each year. The payments count as income for the year, and the Army may send you a W-2 form and withhold taxes from your loan repayment amount.
There are also occupation-specific military student loan repayment programs, such as the Air Force’s JAG Corps repayment program for attorneys. It could help eligible enlistees repay up to $65,000 worth of undergraduate, graduate and law school debt. Payments are made over three years, starting at the end of the first year of your four-year commitment.
State-Specific Student Loan Repayment Programs
Many state government and state-specific organizations have student loan repayment programs that help members of certain service professions. The programs are most often available for professionals in health care, education or law. Some programs are restricted to professionals who serve low-income or rural populations.
Texas, for example, offers up to $160,000 over a four-year period to primary care physicians who practice in a designated health professional shortage area for four or more years. And the State Bar of Texas has a loan repayment program for attorneys who help low-income Texans, awarding an average of $89,000 in student loan repayments.
Farther north, the Finance Authority of Maine’s Alfond Leaders student debt reduction program will repay up to $60,000 (paid in two installments over 10 years) to residents who work for a Maine-based employer in a STEM occupation. And New York state has a Young Farmers Loan Forgiveness Incentive Program for farmers in the state that could repay up to $50,000 for loans that were taken out to attend an approved state college or university for an undergraduate degree.
You should research online whether there are any student loan repayment programs in your state, or a state you’d consider moving to, that apply to you.
Profession-Specific Student Loan Repayment Programs
No matter where you live, you may be eligible for student loan repayment programs based on your profession. Like the state-specific programs, profession-specific programs tend to help those who work in health care or law.
Some of these programs are run by government agencies, such as the federal Health Resources & Services Administration. This agency has a variety of opportunities, including one for primary care medical, dental, and mental or behavioral health clinicians; another for registered nurses and advanced practice registered nurses; and five different options through the National Institutes of Health.
Many law schools also have loan repayment assistance programs for graduates who work in the public sector or in a low-paying field.
There are also a few student loan repayment programs outside of health care and the law. The Specialty Equipment Market Association offers $5,000 if you work for a SEMA member company, earned a degree or certificate with at least a 2.5 GPA, and have a passion for the automotive industry.
Employer-Specific Student Loan Repayment Programs
Partially due to the increasing student loan burden that many recent graduates face, some employers offer student loan repayment assistance as part of their employee benefits package.
The companies with these programs range from multinational financial services firms to book publishers and fintech companies, including some student loan refinancing companies. Many are household names, including Fidelity Investments, Penguin Random House, SoFi, PwC, Staples and Peloton.
Depending on the program, the employer may make monthly or annual payments toward an employee’s loan, or match a portion of the employee’s student loan payment. Often, there’s a cap on how much the employer will pay each period and overall.
The federal government also has a student loan repayment program, which permits government agencies to repay up to $10,000 per year, or $60,000 total, on an employee’s behalf.
Federal Student Loan Discharge
There are also situations that could lead to your federal loans being discharged. As with forgiveness, you won’t need to repay the discharged balance. However, the discharged amount could still be taxed.
— Closed school discharge: If you couldn’t complete your program because your school closed while you were enrolled, or if it closed shortly after you withdrew from the school, up to 100 percent of your direct, FFEL or Perkins loans could be discharged.
— Total and permanent disability discharge: If you become permanently and totally disabled, up to 100 percent of your direct, FFEL or Perkins loans could be discharged.
— Discharge due to death: If you die, up to 100 percent of your direct, FFEL or Perkins loans could be discharged. A Parent Direct PLUS Loan could also be discharged if the student or the parent dies.
— Discharge in bankruptcy: In rare cases, you may be able to get a direct, FFEL or Perkins loan discharged if you declare bankruptcy.
— False certification of student eligibility or unauthorized payment discharge: You may be able to get direct and FFEL loans discharged if your school falsely certified your ability to benefit from the education or your eligibility for an occupation, if the school signed your name on an application or promissory note, or if you were a victim of identity theft.
— Unpaid refund discharge: You may be able to get direct and FFEL loans discharged if you withdrew from a school and it didn’t refund the proper amount. Only the unpaid portion is dischargeable.
— Borrower defense discharge: If you apply for a borrower defense discharge, also known as borrower defense to repayment or just borrower defense, you may be able to get direct and FFEL loans cleared if the school misled you or violated state consumer protection laws.
Review the Tax Implications
There may be different tax implications depending on the forgiveness, cancellation, repayment or discharge program. For instance, the debt that’s forgiven or repaid on your behalf could be treated as taxable income for the year. If you have $20,000 forgiven, the $20,000 could be added to your income for the year and lead to a large tax bill.
[Read: Getting Student Loans Without a Co-Signer.]
If you can’t pay your entire tax bill, you can sign up for a payment plan with the IRS. However, you may still have to pay additional penalties and interest. While the taxes, penalties and interest may add up to much less than the forgiven student loan debt, netting you an overall gain, you still want to be prepared. You can research a particular program online, or contact the organization that runs the program, to learn more about the tax implications.
Tate says there may be an exception that allows you to exclude phantom income — that is, the income from forgiven or discharged debts — from your tax liability if you were considered insolvent at the time the loans were forgiven. The IRS has an insolvency worksheet you can fill out to see if you may qualify.
Watch Out for Scams
Weber says you may want to be wary of companies that charge you a one-time or monthly fee to complete your application for a federal student loan forgiveness program or to change repayment plans. “All they’re doing is filling out an application that you can fill out for free,” he says. “If someone is charging you for forgiveness, that’s not the Department of Education.”
That’s not to say it never makes sense to pay someone to help you understand your options and avoid a potential mistake — such as consolidating a loan you’ve been making PSLF-eligible payments on. But if you do, look for someone with specialized knowledge, such as a student loan attorney. You could also reach out to a student loan counselor at a nonprofit credit counseling organization or contact your student loan servicer to discuss your options.
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Student Loan Forgiveness: The Complete Guide originally appeared on usnews.com
