Contents
Introduction
Borrowers with federal student loans (but not private student loans) have some options for loan forgiveness.
Debt forgiveness (also known as debt cancellation) is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.
Debt forgiveness (also known as debt cancellation) is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. It may occur as a gift from a sovereign entity or as a legal decision made by a court. In these cases, it means that some or all of what is owed is not paid back to creditors. Debt forgiveness can also be an informal process where creditors consent to write off some or all of what is owed to them.
Public student loan forgiveness programs have been in place since the 1970’s.
The first public student loan forgiveness program was created in 1976. The program was expanded in 1990, and again in 1998. It has been expanded several times since then, but not much has changed in the basic structure of the program: if you make payments on your federal student loans for a certain period of time and have no delinquencies or defaults on your account, any remaining debt can be forgiven at any point after that time period expires.
Income-based repayment caps monthly payments.
- Income-based repayment caps monthly payments at 15% of discretionary income. This means that if you make $50,000 per year and have an adjusted gross income (AGI) of $35,000, your monthly payment will be capped at 15% of your AGI, or $4,250 per month. If your AGI were higher than $35,000 but still within 150% of the federal poverty line for a family of four ($65,120), then your payment would be capped at 10%. Discretionary income is defined as the difference between adjusted gross income and 150% of the poverty line for a family of four.
If a borrower makes 20 years of income-based payments and has remaining loans forgiven, any remaining debt will be forgiven tax free.
If you have outstanding student loans and are on an income-based repayment plan, the government might forgive your remaining debt. This can happen if you’ve been working in a public service job for at least 10 years, or if you’re owed a disability discharge.
If this happens to you, all of the forgiven debt will be tax free. You’ll be able to exclude it from your income as if it never happened in the first place.
Income-Contingent Repayment ties monthly payments to income and family size.
If your income is low, federal student loan repayment plans can help. Income-Contingent Repayment (ICR) ties monthly payments to income and family size. If you’re working 30 hours or more per week, you may get some debt forgiven after 20 years of on-time payments.
You must have a partial financial hardship to qualify for ICR. Examples of acceptable hardships include:
- High unemployment rates in your area
- Disability (if you are unable to work)
- Severely low income (less than 150% of the poverty limit for your state)
Public Service Loan Forgiveness forgives remaining federal loans after 120 qualifying payments to government or non-profit employers.
The Public Service Loan Forgiveness program is a federal program that forgives federal student loans after 120 qualifying payments. To be eligible for this forgiveness, you’ll need to be on an income-driven repayment plan and working in a government or non-profit job. Your eligible loans are subsidized and unsubsidized Direct Loans (including Direct Consolidation Loans), Federal Family Education Loans (FFEL), and Federal Stafford Loans.
Teachers with Perkins loans can get 15% of their loans forgiven each year for up to five years if they work in low-income schools and teach certain subjects.
If you are a teacher and have Perkins loans, you may qualify for partial debt forgiveness. Under the Teacher Loan Forgiveness Program, teachers who work in low-income schools and teach certain subjects can receive up to 15% of their loan forgiven each year for up to five years. To qualify, teachers must teach full time at an elementary or secondary school that serves low income students (or has an average family income that is less than 150% of the poverty line), teaches one of the following subject areas: mathematics; science; special education; foreign languages; bilingual education; or reading specialists.
Federal borrowers with defaulted loans may qualify for loan rehabilitation through a one-time program.
If you’ve defaulted on your student loans, you may qualify for loan rehabilitation through a one-time program. The program requires that you agree to make nine on-time, voluntary payments of at least $5 each and contact your lender within 120 days after the date of your last payment to get instructions on how to apply for forgiveness.
Federal students loans are eligible for forgiveness if:
- They were borrowed directly from the Department of Education or an eligible institution;
- The borrower entered into an income-driven repayment plan and made a minimum of 20 years’ worth of payments; and
- The remaining balance is less than $10,000.
Borrowers with federal student loans (but not private student loans) have some options for loan forgiveness.
If you have federal student loans, there are a few options for loan forgiveness.
- Public Student Loans: Federal Perkins and FFEL loans, including those from the William D. Ford Federal Direct Loan Program, can be forgiven after 10 years of payments if you’re an employee at a nonprofit or government organization.
- Private Student Loans: If your employer does not offer other types of repayment plans, or if you decide to leave public service after making 120 on-time monthly payments (10 years), then you can request that your private loans be discharged.
Conclusion
If you want to handle your student loans on your own, there are a few options for debt forgiveness. If you go this route, make sure that you understand what type of debt forgiveness program you’re eligible for and how it works. For example, some programs require that you make 20 years of payments before any balance is forgiven while others allow borrowers to receive tax-free forgiveness if they work in public service jobs or meet certain income requirements.