Student Loan Forgiveness

Did you even know this is possible? Well it is in some circumstances so cross you fingers and let’s see if you fit into any of the ways to have all or part of your student loan debt forgiven.

Volunteering

With the Peace Corps you are able to defer payments of Stafford and consolidation loans and you are able to get cancellation of Perkins loan debt.  With the debt cancellation you can get up to seventy percent of the total debt canceled, 15% for each year of peace corps service.  Within the AmeriCorps program you can earn cash, up to $7,400 and a credit of $4,725 toward your student loan debt.  The AmeriCorps program lasts 12 months.  Volunteers in Service to America is a network of non-profit and community organizations where when you complete 1,700 hours of community service you can get $4725 credited toward your student loan debt.

Military Service

Depending on recruitment needs of the various branches of the military you can oftentimes enlist and get a student loan credit.  These programs come and go so you need to discuss them with a local recruiter.  One ongoing program is through the Army National Guard, they have a program where you can earn up to $10,000 in student loan money.  For further information and program eligibility you should seek out a local National Guard recruiter.

Teaching

If you are willing to teach school in certain low income areas you can earn significant credits toward your student loan debt, assuming it is a Perkins loan.  Under this program you can earn a 15% credit for each of your first two years of teaching, a 20% credit for each of your third and fourth years teaching, and a 30% credit for your fifth year teaching.  This is an incredible program that was designed to encouraged talented young teachers to lend their talents to schools that are in need of this type of youthful energy.

In addition to the above there are also many Federal Teaching Student Loan Forgiveness programs for both Stafford and Perkins loans.  The rules are similar to the above but the ways in which to qualifying are much more far reaching than simply teaching in select schools.  If you have the willingness to teach, it may be the best way to get your loans forgiven.

Law & Medical School Debt

There are numerous programs that offer significant medical and legal school debt forgiveness.  These programs are offered by various organizations within the government.  If you have this type of debt and are willing to direct your career in a way that will reward you with debt forgiveness, then you should check into these programs.  Even if you feel that you will not be willing to follow a loan forgiveness path, you should still look into the programs, some of them may be along a path you have already chosen for yourself.

Federal Worker Programs

Many Federal agencies have loan forgiveness programs that are specifically designed to recruit workers into public service.  These programs oftentimes range from $10,000 up to $60,000 in debt forgiveness.  These are programs that are certainly worth looking into especially if you are already planning to work for a Federal agency or department.

State Student Tuition Recovery Funds Overview

The State Tuition Recovery Fund (STRF) in any state is designed to be a resource and place for students to turn should they be victimized by one of many different circumstances relative to paying tuition for a state certified vocational, technical, or post secondary educational program or school.  These funds are managed by each state and the specific details for each state may vary.  Some of the anticipated uses for this fund are for students that have taken an economic loss relative to tuition, the following is a partial list of possible qualifying reasons for relief from this fund

1. School closure or the ending of the particular program for which the student had paid tuition.
2. If the school was expected to forward funds to other institutions or certification organizations including state testing agencies and yet failed to do so within 6 months of the school closing.
3. If the school failed to supply within 6 months of closure the materials and or equipment the student had paid the school to obtain as a part of the program.
4. The amount of excess or required funds that were provided by student loans for the student specifically and yet paid to the school and the school failed to give the student their allocated portion.
5. If the school breaches their contract with the student relative to the coursework and program expectations and design.
6. The school was fraudulent in their recruitment of students and made untrue claims.
7. If the student obtained a court judgment against a school and were unable to collect on that judgment.
8. If the quality of coursework significantly declined for a period of time prior to closure.
9. If the school collected advance tuition or offered reduced future tuition for prepayment.

For most states you must be a resident of that state in order to qualify for access to the STRF and you must have attended an institution that participated in the STRF program for that state.  In other words, the fund itself operates similar to an insurance fund.  If the school paid into the fund then the students of that school have the ability to seek economic recovery from that fund.

The STRF program will normally not pay for reimbursement if the reimbursement is being sought on behalf of a third party and not to the student directly.  For example, if the student had their tuition paid by their employer or some other agency and the student is seeking recovery that will be passed through to that employer or agency they are not eligible to seek that recovery from the STRF in most states.  The fund is designed for students themselves who have suffered a loss due to a schools fraudulent activity, negligence, or closure and it is not designed as a recovery mechanism for employers and agencies that have the ability to sustain economic loss easier than an individual student.  It is important to seek out the specific rules for the recovery fund in the state where the school is operating because each states specific rules may vary.

What are the differences between IBR and ICR repayments?

We talked quite a bit about Income based student loan repayment and Income contingent student loan repayment options in our previous articles. In this article let us take a look at the differences between the two.

The first level difference between these two programs is the underlying loans for which they are eligible.  The IBR is offered as an option to those that have had both Direct Loans as well as Federal Family Education Loans (FFEL) whereas the ICR program is only available for those with Direct Loans.  It is also important to note that in order to obtain approval to participate in the IBR program you must meet a standard of financial hardship.  This hardship is defined when the IBR calculated payment is greater than your standard payment under traditional repayment or if you are married and your combined required IBR payment is greater than your standard combined traditional payments.  This is a low standard for hardship because it in essence states that if the payment under IBR is less than your standard payment, you qualify.

With the IBR repayment program the overall debt owed in student loans is not considered as a part of the payment owed calculation.  The payment is strictly restricted to using overall family income in relation to the federal poverty level for a family of that size.  The ICR on the other hand does incorporate the total amount owed into its calculation.  This can be helpful for those with low income and it can make it so the payment is even higher than the payment under the traditional repayment plan for high income earners.  This is of course as it should be.  A high income earner with low debt should stick to the traditional repayment plan and not avail themselves of special payment programs.

In addition to the above, another primary difference to the two programs is that under ICR, if your payment is less than the accrued interest for that month, the interest is added to the principal of the loan until it reaches a 110% cap.  Under IBR the interest is not added to the principal as long as it is determined you are eligible for the program and you continue to have a financial hardship.  This is especially important when it comes to the 25 year and loan cancellation.  Should you reach the 25th year under these two special programs and the loan is canceled, you would likely be better off with the lowest unpaid balance between the two.  In order to plan for this possibility it is always best to discuss the tax implications of each plan with a tax professional.

The primary similarities between the two programs are that they are options that have been designed specifically with the low income borrower in mind.  Both plans have built in “fail safes” where if a high income earner wishes to participate, if qualified, their actual payment would be higher than if they did not participate in the program.  Both programs are not allowed under the Parent PLUS plan, and both programs do qualify for the ten year public service forgiveness program.  This is not to be confused with the 25 year cancellation pr gram that applies to both programs.  The final similarity is that under both IBR and ICR, the monthly payment for the borrower will be adjusted annually dependent upon their income and continued qualification.

What is Income Contingent Repayment?

Previously, we talked about the income based repayment (IBR) plan. Today’s article will highlight the income contingent repayment program. Under various student loan programs you will see this repayment option referred to as the Income Contingent Repayment Program (ICRP) and the Income Contingent Repayment (ICR) option.  These are the same programs, only with two different abbreviations.  The most commonly used is ICR, therefore we will use ICR to represent both ICR and ICRP

ICR is a program that is offered exclusively for Direct Loan program and direct Loan Program Consolidation borrowers.  The program is available for graduate PLUS borrowers but not for parent PLUS borrowers.  For the parent PLUS borrower that is looking for a new repayment plan, they should seek counseling from the loan issuer.  If the parent PLUS borrower wants to participate in the ICR program they can consolidate all of their PLUS loans into a Direct Loan and then qualify for the ICR program with the new Direct Consolidation Loan.

The payments under the ICR program cover a wide range depending on your underlying level of income.  If using the federal poverty guidelines you find that you and your family are below the federal poverty level your payments under ICR will be zero.  If your income is above the federal poverty level for your family size then the overall payment cannot exceed 20% of the amount that you earn that is above that level.  this does not mean that it will be nearly that high a percentage of your marginal income above the poverty level, it simply means that it will not exceed that 20%.

The specific amount that you will owe for each payment will be recalculated each year as you submit your proof of income to the lender.  Upon submission the lender will analyze your income and debt wand will determine a payment for that year.  This process will repeat for up to 25 years.  If you have not paid the loan off in full by the end of the 25th year, the remaining balance will be canceled.  This cancellation of the debt will have a tax consequence for you because the remaining balance will be shown as income to you for that year.  This will also impact any and all other programs and public assistance that you are receiving in the year of cancellation.  You should consult a tax advisor as well as talk to the overseeing agencies for other programs you are involved with to mitigate this impact.

Within the ICR program their is a single unique attribute that makes this option attractive to the low income borrower.  With this program the payments that are determined based on the current income for the borrower are oftentimes less than the interest accrual for that loan.  Under this circumstance the accrued interest is added to the balance of the loan.  This leads to the outstanding balance of the loan increasing each month.  Under the ICR program this increase in the overall balance of the loan is capped at 10%.  Therefore any interest accrual that is not covered with the monthly payment that is added to the principal above that 10% cap is waived.  This is an important feature to understand and will become particularly critical if the the borrower hits the 25 year cancellation for the loan.  This is because the amount of cancellation will have been limited to the original principal plus 10% and will not have been allowed to grow past that level.

What is Income Based Repayment?

Income based repayment (IBR) for student loans is just as the name implies, a repayment plan that is based on your income.  There are various types of repayment plans that are offered for each type of student loan, the income based repayment plan is primarily designed for those at a low level of income or for those that are having difficulty making their payments.  For those that are not having difficulty making payments or are at a high level of income, there are other repayment plans that they can utilize.

The IBR program that is available for federal student loans is available for the Federal Family Education Loan (FFEL) programs and all of the Direct Loan programs including the graduate PLUS program but not the parent PLUS program.  In order to qualify for this program the loan must not be currently in default.  This does not mean that it was never in default, it simply means that the payments must be current at the time of application.

How are the payment amount calculated?

The biggest factor within the IBR program is the way in which your payment is calculated.  The IBR program uses your income, your debt, and your amount owed in student loans to determine a specific payment plan given your overall financial situation.  For very low income earners, those below 150% of the federal poverty level, that select this repayment option the payment will be zero.  For those that are making more than 150% of the federal poverty level will have a payment that will be no greater than 15% of the amount of money that they make over the 150% of federal poverty level.  This payment is adjusted every year and can change relative to changes in your underlying income.

The IBR plan does allow for a consolidation analysis for those that are married and it does allow all of the federal poverty income calculations to be based on the total income for the family.  For special hardship considerations both spouses need to qualify for that hardship.  There are many factors that need to be considered when applying for the IBR plan when you are married.  The way in which you file your taxes and if you should consolidate your application or not can affect the resulting IBR payments.  It is best to seek counseling and advice of how applying under different circumstances will affect the analysis and your resulting payment.

For all loans that are issued prior to July 1, 2014 the loan will be completely discharged if the borrower makes payments within the IBR program for 25 years.  For loans issued after that date they will be discharged after IBR payment for 20 years.  When a loan is discharged it is different than if the loan is payed for you or forgiven.  Under this program if the debt is discharged or canceled it will have an impact on your taxes for the year of discharge.  For more information on how this may impact your tax return you should seek the advice of a tax professional.  You should also be prepared for ways in which this discharge may affect any other low income programs that you are qualified under.

We have talked about Student loan repayment quite a bit. Some of the articles that come to mind are the student loan employment repayment, Perkins loan repayment amongst many others. In this article, let us look at what your repayment options are when it comes to student loans. Looking at your repayment options might be especially helpful when it becomes difficult to make those loan payments and a default is staring at you in the face.

As with all types of loans it is best to work with your lender on repayment options prior to having missed any payments.  Stepping forward and not only taking responsibility for the situation but also showing the lender that you are planning ahead and are foreseeing a problem.  This shows them that you are responsible and that you intend on following through with any agreements you make.  Prior to default your repayment arrangements are made with a department within the lender that wants to work with you and is focused on customer service.  After default you are always forced to work with the lender’s collections department and the collections department is not as friendly nor are they willing to “help” in any way.  The collections department simply wants to collect payments.

The following is a brief summary of  federal student loan repayment options.  It is important to note that if you have a Perkins loan or a private loan that there are different options that relate to each of these.  To make some of the options and exceptions consult this outline:

1. Direct Loan
   1. Same as the options available for the Federal Family Education Loan (FFEL).
   2. The Exception is the Direct Loan Income Contingent Repayment Program (ICR).
   3. Public service forgiveness program is available.
2. PLUS Loan
   1. Similar options to other loans with some exceptions.
   2. Primary exception is the income based” options such as ICR and income based repayment (IBR) cannot be used with Parent PLUS loans.
   3. ICR & IBR are available to Graduate PLUS Loans.

Traditional Repayment

This is also referred to as the standard repayment plan.  This is the default plan should you fail to select another option.  Under this plan the loan can be amortized at a term between 5 and 10 years.  This is also the payment option that is automatically applied to all FFEL loans should you not respond to their request for you to select a repayment plan within 45 days of their requesting you to make a repayment plan selection.  Under this plan you will pay off the loan faster than any other available option but you will also have a payment that is higher than the other options.

Extended Repayment

This student loan payment option allows you to amortize your loan over a longer period of time than traditional options.  The extended repayment option allows the term of the loan to go up to 25 years.  It is only offered to those that owe over $30,000 in any one particular type of loan.  Borrowers that have a FFEL, a Direct Loan, or both you need to have an outstanding balance of $30,000 or more in each type of loan in which you wish to utilize the extended repayment option.

Graduated Repayment

This option is designed to be used by those that expect to have an increase in earnings over time.  The loan payment amount is increased every two years for the life of the loan.  The maximum term for a traditional graduated repayment option is ten years.  If you owe more than $30,000 and you qualify for the extended repayment option you may be able to use the graduated repayment option in conjunction with the extended repayment option.

Perkins Repayment

The Perkins loan has its own set of rules with regard to repayment.  With the Perkins loans the minimum payment is listed in the law that allows for Perkins loans.  As a result, the school that offered the loan is limited in the repayment options they can use.  There are special circumstances that qualify for special repayment treatment such as for those that are sick, unemployed, or are considered low income.  For Perkins loans it is best to seek counseling from the issuer in order to determine all of the available Perkins Loan Repayment options.

Income Based Repayment Options

There are two primary Income Base options when it comes to student loans.  The first is the Income Based Repayment option (IBR).  With this option your payment will be relative to your income.  This is particularly useful for those that have a low income.  If you are a high income earner, the resultant payment for this option can exceed the traditional repayment option.  Though it does allow a lower payment for those at a high income that also have high debts.  This option was designed for those at lower income levels.

The second income based option is the Income Contingent Repayment options (ICR).  This option is only available to Direct Loan borrowers.  Under this program your payment will never be more than 20% of the amount of income that you are earning above the federal poverty guidelines.  This program is designed for those that have a low income.  If you pay this low payment for 25 year, the remaining loan balance will be forgiven.

What is Student Loan Wage Garnishment?

Garnishment of your wages is one of the remedies that can be sought by the government to recover money owed on defaulted student loan debt.  The garnishment itself is normally deducted from your paycheck by your employer’s payroll department and the amount taken from your check is sent to the government as payment on your defaulted student loan.  The amount of the garnishment is not to exceed fifteen percent of what the government deems to be your disposable income.  The garnishment is not allowed to exceed thirty times the federally mandated minimum wage.

Courts & Judgments

To begin you must understand that the garnishment can be ordered by the government without judicial process and procedure.  Many students wrongly that believe that their wages cannot be garnished without a court judgment or court order.  While this is mostly true for other types of debt, for student loan defaults, the courts do not need to be involved.  This means that, unlike for other types of judgments and debts owed, you cannot avoid the garnishment by avoiding being served a summons for a court hearing.

Wage Garnishment Notification

The government is required to notify all borrowers that they are in default prior to the issuance of an order for a non-judicial garnishment.  This notification will have a time period within which the defaulted borrower can pay the debt, catch up on the defaulted amount, and resume payments, or dispute the garnishment or request a formal hearing.  Clearly if you comply with the notification and bring the loan up to date in payments or pay it off then you need to ensure that the government acknowledges that you have brought the loan to current status and to ensure that they discontinue their pursuit of a garnishment.

Disputing The Garnishment

If you wish to dispute the garnishment because you are disputing what you owe, disputing the loan debt, claiming the garnishment will create undue hardship, or for some other reason then you need to respond to the notification by following all of the procedures listed in the notification by which you are allowed to request a hearing.  If you fail to dispute the garnishment within the time specified in the notification then the garnishment will proceed.  You can still file an objection in order to dispute the garnishment but it is possible and in fact probable that the garnishment will begin prior tp the hearing date.  Garnishments will only continue for 60 days after a late dispute is filed.

Other Consequences

It is important to note that under the provision in most student loans the one that holds the loan can demand payment in full anytime the loan enters into default.  What this means is that you would not only be responsible for bringing the loan up to date and current, but that you would be responsible for paying the loan debt off in its entirety.  This is not a common practice because oftentimes the student that is in default is also not in a position to payoff the debt in full.  But you must understand that it is a possible consequence to any default.

What is Student Loan Employer Repayment?

There are two things that people are searching for when referring to student loan repayment.  The first is the specific programs offered by employers that will pay off or pay down your student loan and the second is those that want to know the repayment options available for a borrower when they are paying off their own loans.  This page covers both of these topics.

Private Sector Employer Repayment

When it comes to employers many have incentives that they can give prospective employees in their compensation plan that includes the repayment of their student loans.  These compensation packages are common for highly competitive industries where there is a shortage of workers or where there is high competition to attract the best and the brightest.  There is no limitation on the amounts that a private sector employer can offer to a job candidate as part of their overall compensation plan.

Public Sector Employer Repayment

These programs are not limited to the private sector, in fact the federal government offers more student loan repayment programs than any other employer.  The federal program allows different federal agencies and departments to payoff or pay down the federal student loans of the individuals that they are trying to recruit.  Oftentimes this repayment is tied to a particular employment contract or commitment of service.  The maximum amount of student loan repayment that can be offered by a federal agency or department is $10,000 per year of employment up to a maximum of $60,000 for a single person.

Borrower Repayment

If you are paying the loan back yourself, as the borrower, then you should know that your first payment normally starts six months after you leave school (for graduation or other reason) or reduce your class load to less that half that of a full time student if you have a federal direct or Federal Family Educational Loan.  If you have a federal Perkins loan then your first payment will start nine months after the conditions above are met.  For private loans the time between graduation or leaving school and your first payment varies, you need to consult your lender and your loan documentation.

For graduate and professional studies students under the Federal PLUS student loan program the first payment is due 60 days after the final reimbursement for the loan is made.  Even though payment is due, the PLUS student can apply for a payment deferment as long as they are still attending school.  The loan will still continue to accrue interest, but no payment will be due until the student leaves school, graduates, or reduces class load to less than half the load that is considered full time for their particular field of study.

Repayment Strategy

There are many different strategies to payoff student loan debt.  These strategies include loan forgiveness programs such as those offered by the Peace Corps and certain occupations such as teaching as well as loan credits that are offered for working through numerous non profit agencies such as AmeriCorps.  If your strategy is to pay the loan yourself be certain to take advantage of loan consolidations and refinances that offer lower interest rates.  The key to refinancing to lower rates is that you want to make certain that you make a payment that does not extend the term of the loan.  Even if the loan refinances to a full term, you need to make a payment that will amortize that loan in a shorter period of time.

Can filing for bankruptcy dissolve my student loan debt?

As it stands today, you cannot have your student loan debt reduced or eliminated through bankruptcy proceedings.  This was the law of the land for publicly funded student loans prior to 2005, but in 2005 the law was extended to make it so that you could not extinguish any student loan debt by filing for bankruptcy.

Proposed Law Changes

Since 2005 there have been several attempts to modify this law to its pre 2005 wording.  As a result this would allow students that received private student loans to have the debt extinguished through a bankruptcy.   The student who had publicly funded student loans would still not be able to discharge their debt.

This has become an increasingly visible issue in recent years as so many graduates are not able to find work that will enable them to meet their financial obligations.  It was found in 2010 that over 50% of graduates were not able to find work and that many of those that did find work were significantly underemployed given their skills and education.

New Paradigm

All of this is a problem as the society at large adjusts into a new economy where formerly the cost of higher education was automatically rewarded with a high paying career where one could manage the debt.  What we find now is that many who incur their debt for undergraduate degrees find themselves fighting for entry level positions with those that do not have the same educational background nor the burdensome educational debt.  As a result the one with the debt is under much more financial stress and burdens than the one without the debt.  Now of course studies show that the one with the undergraduate degree will out earn the one without the degree over time, as the one with the degree surpasses the one without, but this does not normally occur until 3-7 years into a career, making the first 3-7 years very difficult for the one carrying the burden of significant student loan debt.

New Proposals

It is possible that instead of disallowing discharge of student loan debt through bankruptcy that those with undergraduate educations be allowed to defer the repayment until they are 5-10 years into their careers.  This would give them ample time to become established and give them time to realize the increased earning capacity that is common with those that have college degrees.  This is one alternative to forcing those that are under financial stress into bankruptcy and even into overly stressful situations when they should be working on their careers.  It is as if society wants to put extra burdens on the best and the brightest, making life even more difficult for them when they are just starting out.

No matter what solution comes along, one thing is for certain, the laws will be changed in favor of giving relief to those that are suffering under substantial student loan debt and yet find themselves looking for work in tough economic times.  Bankruptcy discharge may not given to everyone, but allowing for payment deferrals and other creative means to ensure repayment is certainly a step in the right direction.

With Federal student loans there is a counseling requirement that needs to be met by each borrower. We already talked a bit about student loan entrance counseling in our previous article. Similarly student loan exit counseling is a part, and meets part of the requirements for, this counseling component of any federal loan.  The counseling component can be completed off line or online as specified and required by your educational institution.  Each school handles the exit counseling component differently and it is the student/borrowers responsibility to meet this requirement as specified by their school.

Who Needs It

Exit counseling is a requirement for all student loan borrowers and is something that must be completed prior to the student withdrawing from, graduating from, or dropping below what is considered “half full time” attendance.  If the student is transferring to a different school they must complete exit counseling if any of the above apply.

What Loans Require It

Exit counseling is required for all borrowers that utilize the William Ford loans or the Federal Family Education Loans.  The William Ford loans are also known as direct loans, direct subsidized and unsubsidized loans, and as the direct PLUS loans which are normally for professional or graduate students.  The Federal Family Education Loans are also known as subsidized and unsubsidized federal Stafford loans and as federal PLUS loans which also are normally for graduate and professional students.

What To Expect

The counseling itself is broken into five separate sections.  The getting started section covers the types of federal student loans and the specific lexicon and terminology that is used when discussing student loans.  The counseling then moves into a discussion of the repayment of the loan.  In this section you learn and review the interest rate, the payment schedule, how to make payments, the incentive behind making payments, and the various plans that are available for repayment.  The third section covers what happens if you have difficulty in making your monthly student loan payments. In this section the counseling covers the issues of payment deferment, payment forbearance, loan default and loan consolidation.  The fourth section covers the possibility of loan discharge as well as loan forgiveness and the various ways in which a student may accomplish this.  The final section covers resources where the student can go for more information as well as going into details about the students rights and responsibilities with regard to the money that has been borrowed.

The counseling is filled with quizzes and questions in order to ensure that the student is comprehending the information given.  The student loan program is a critical element in ensuring that higher education is made available to those that have attained high levels of achievement regardless of their financial status.  But with the public assistance in helping those that have made these achievements comes a burden of responsibility to pay back this assistance.  The Student loan exit counseling is designed to help the student understand their commitments as well as what is expected of them.  It also helps the student understand what they can do should they fall short on being able to meet these commitments.

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