Guest Article by Demetrios Sourmaidis
If you are struggling to pay off your federal student loans, there are several options that can help you either receive a discharge (forgiveness) of your student loans or reduce the monthly payment to reflect your difficult financial situation. These are the Teacher Loan Forgiveness, Public Service Loan Forgiveness and Income Based Repayment Programs.
Teacher Loan Forgiveness is a relatively simple program with some basic rules:
The teacher loan forgiveness program was created in an attempt to lure more people into the teaching profession by offering principal reduction on federal student loans in the amount of $17,500. Along with the principal reduction, many teachers may also qualify for public service loan forgiveness which will also be discussed in this article. The combination of these two forgiveness programs has made becoming a teacher very attractive. There are however some rules to qualify for the principal reduction on your federal student loans:
- You cannot be in default on a subsidized or unsubsidized loan at the time you apply.
- You cannot have an outstanding balance on Direct Loans or Federal Family Education Loans as of 1 Oct 1998 or on the date you took out one of these loans if it was after 1 Oct 1998.
- You must have completed five academic years of qualified, consecutive teaching service and at least one of those years must be after the 1997-98 academic year.
- The loans you are applying for must have been taken out before five academic years of qualified teaching service.
- The time you received benefits teaching in an AmeriCorps Program does not count toward your five academic years.
- You must have been employed in an elementary or secondary school that qualifies under Title I of the Elementary and Secondary Education Act of 1965 or was selected by the Department of Education as a school with over 30% of its students that qualify for Title I services.
The Public Service Loan Forgiveness Program is and even simpler program with fewer requirements:
Much like the teacher loan forgiveness program, the public service loan forgiveness program was implemented to try and attract educated folks into working for local, state, or the federal government. If you have federal student loans and work in the public sector, you may qualify for loan forgiveness after 120 qualifying payments. This means any balance remaining on your federal loans would be forgiveness by the government as soon as ten years after graduation if thats when you being working in the public sector. Of course, there are some rules to qualify for the public service loan forgiveness program:
- You must be working in a Public Service position when you apply for loan forgiveness and when you make each payment.
- You must make 120, on-time and in full monthly payments under a qualified repayment plan on your Direct Loans before any remaining amount can be forgiven.
- Only payments made after 1 Oct 2007 qualify
- Only Income Based, Income Contingent, or a Standard 10 year repayment count as qualifying payments.
Income Based Repayment
If it turns out you do not qualify for either Teacher Loan or Public Service Loan Forgiveness, there is still the option of an Income Based Repayment Plan. The income based repayment program bases your monthly student loan payments on your income rather than your loan amount and interest rates. Depending on your family size and income, you may qualify for a payment of zero on your federal student loans. This zero payment is not a deferment or a pause of the loan, that monthly payment would count to your forgiveness.
Take for example a mother who stays at home with her children and is not currently working, and does not plan to work for the next ten years. This mother would not be responsible to make a payment for ten years, and when she does reenter the workforce, she would only be responsible for 15 years of payments rather than 25. Also, interest during the first three years in the income based repayment program is forgiven and not capitalized if your income based payment is less than what you would normally pay in interest per month in a standard repayment. Here are some main benefits of the income based repayment plan:
- What You Pay Is Based On What You Earn – Your new monthly payment is based on fifteen percent of your discretionary income (after monthly bills and food) and the size of your family.
- Forgiveness After Twenty-Five Years – If you meet all of the Income Based Repayment requirements; your remaining loan amount, after 25 years of qualified payments, will be forgiven.
- Help With Interest – If your new Income Based Repayment amount doesn’t fully cover the monthly interest that accumulates on your loan, the government will pay the unpaid amount for up to three consecutive years. This is on Direct Subsidized Loans and Subsidized Federal Stafford Loans as well as the subsidized portion of FEEL Consolidation Loans. The three year period begins with your first payment under the new Income Based Repayment Plan.
There are some aspects of the income based repayment that some borrowers may not like. First, your lender will request updated income information and recalculate your payment depending on your most up to date financial situation. This means your payment will increase if your income increases. Even if there are no changes to your income or household size, this paperwork still has to be submitted to the loan servicer. Failure on your part to do so will result in your monthly payment being returned to the original amount you paid under the Standard Repayment Plan. Also, if you do not provide the necessary paperwork on your income, then the unpaid interest will begin to capitalize.
Smaller Payments Mean More Interest – Since an Income Based Repayment amount is lower than the original Standard Repayment amount, you’ll be making payments over a longer period. This means you may end up pay more interest on your loan. Keep in mind also that the interest you pay for the first three years under an Income Based Repayment Plan is not capitalized. This means that you do not pay a single cent against your loan amount for 36 months; only interest.
Taxes May Apply Even With Forgiveness – If you have not repaid the full student loan after the maximum twenty-five year period, the remaining will be forgiven. However, that ‘leftover’ amount is still considered taxable income and the Internal Revenue Service will require you to pay.
Getting your loans forgiven or repaid can be difficult. Be careful in your research and choose the best option available to you. Good luck!
Demetrios Sourmaidis is currently a writer for www.StudentDebtRelief.us whose primary objective is to educate and assist student loan borrowers on the many federal programs available to them, including loan forgiveness.Wishing you well,
Daniel R. Murphy
Educating people for building wealth, adapting to a changing future and personal development.