Most individuals with student loans fantasize about the day when they make that final payment. In many cases, this can take decades to achieve; however, if you work in certain fields or are on a specific repayment plan, you may be able to claim your debt-free status sooner than you may think. The following looks at four loan forgiveness options that are available to those with federal student loans.
To take advantage of a loan forgiveness program, your loan must be in good standing. You will not be eligible if your loan has reached default status. This normally occurs if you have not made a payment for at least nine months. Also, forgiveness programs only apply to federal student loans. If you are having difficulty paying your private student loans, you should contact the lender to discuss your repayment options. Some private lenders will reduce interest rates or allow for interest-only payments for borrowers experiencing a temporary financial hardship.
Public Service Loan Forgiveness:
This program is available to military personnel, firefighters, nurses, teachers, and others who work in public service careers for at least 10 years. The program requires the borrower to be employed in public service when they apply for forgiveness after making 120 on-time loan payments. The borrower will also need to provide certification from their employer regarding their employment status. The program is available for loans taken out after October 1, 2007, so the first applications will be available in October 2017.
Borrowers who teach full-time in low-income public schools for five consecutive years can apply to have up to $17,500 in federal student loans forgiven. Individuals who owe more than this amount and plan on teaching for at least 15 years can apply for Public Service Loan Forgiveness at the end of the five-year period to have the rest of their loans forgiven.
Perkins Loan Cancellation:
This program is available to individuals who have Perkins loans and work in the public service sector. As a general rule, up to 100 percent of the loan amount can be canceled after five years. The loan is typically canceled in incremental amounts based on each year the borrower works in public service. Since Perkins loans are disbursed directly by the college or university, you must talk to your school’s financial aid office to obtain a loan cancellation application.
The federal government offers several different income-based repayment options that cap the monthly payment amount at a certain percentage of the borrower’s monthly income. Depending on the plan chosen, the remaining student loan balance is automatically forgiven after 20 to 25 years. Income-based repayment is designed for borrowers who have no other way to afford their student loan payments. It is important to keep in mind that you will accrue substantially more interest on an income-based repayment plan that with other plans. At this time, any amount forgiven is considered taxable income, so you also need to plan for the potential tax bill.
Even if you are on track for loan forgiveness at this time, it is important to continue to stay informed since the availability and eligibility criteria of these programs can change at any time.