Student Loan Forgiveness
These are the highlights of a very good article written by Adam Minsky for the February 2018 edition of the Journal of Financial Planning.
The first step is to identify which type of student loan has been obtained. This determination is critical because only Federal Direct Student Loans can be forgiven. The types of Federal Direct Student Loans are, Family Federal Education Loan (FFEL), Stafford (Subsidized and Unsubsidized), PLUS, and Perkins. All others are Private loans.
There are two federal student loan forgiveness programs, the first is repayment based and the second is public-service forgiveness.
Once it is determined that there is a federal direct student loan, there are several types of repayment forgiveness plans available.
The first is Balanced Based Repayment. This is the typical debt repayment plan. The payments are for the length of the term (10, 25, or 30yrs) and can be either level or graduated (smaller at the beginning).
The next is Income Based Repayment (IBR). This payment plan uses a formula to determine the payment. The formula is based on 15% of discretionary income which is the amount the Adjusted Gross Income (AGI) is above the poverty exemption. For 2018 the poverty level for a family of 3 is $20,780. IBR has a higher level of income excluded than other income-driven payment plans, usually around $15,000 to $20,000. It is based on 150% of the poverty level. However, it depends on the family size. IBR must be renewed annually and joint income is considered if married. The amount of the loan that is left after 25yrs is forgiven as long as the borrower is making payments. However, the amount forgiven is considered taxable income, with a few possible exemptions. IBR can work in conjunction with the Public-Service Loan Forgiveness program.
Income-Contingent Repayment (ICR) is the next payment plan. ICR applies to only federal loans, and is based on 20% of discretionary income. ICR includes joint income if married however, a couple can file married separately. ICR has a 25yr term and any amount remaining is forgiven. However, as with IBR, the amount forgiven may be taxable.
The final payment plan is Pay as you Earn (PAYE). PAYE is the fastest track to loan forgiveness and is based on 10% of discretionary income with a 20yr term. Joint income is considered but couples may file separately.
The Public-Service loan forgiveness program is also for federal direct student loans only. In order to qualify there must be 10yrs/120 consecutive payments made and the remaining balance is forgiven. The forgiven balance is not considered taxable income as it is in the repayment program. The Public-Service forgiveness requires a minimum of 30 work hours per week at one of the following employers, Public Schools, Government entity at any level (Federal, State, Local, County, or Tribal), Public Libraries, Public Hospitals, a 501C(3), or Non-profit organization.
The Public-Service and Repayment programs can be used together.
Minsky, A. (2018). Managing Student Loans in a Changing Landscape. Journal of Financial Planning, 31(2), 22-26.