Forgiveness is the term when you do something that qualifies you to have your loan eliminated. Here's a summary of the different student loan forgiveness programs.
Written by Attorney John Coble.
Updated March 1, 2021
Are you overwhelmed by your student loan debt? Are you having trouble affording your student loan payments? The good news is you have many options to reduce or eliminate your federal student loans. This article is a digest of the many student loan forgiveness programs available with suggestions for further reading. The article will end with guidance on the types of student loan discharges available.
It's important to understand the difference between forgiveness, cancellation, and discharge. Each of these debt relief options ends your loan repayments and eliminates the remaining balance on the loan.
Forgiveness is the term when you do something that qualifies you to have your loan eliminated. Usually, this involves working in a particular vocation for a set term of years. An example of a forgiveness program is the Teacher Loan Forgiveness program for teachers.
Generally, discharges are policies that set aside your student loans because of something that happened to you. An example of a "discharge" is your student loan balance being eliminated due to your becoming disabled.
It’s important to understand that these forgiveness and discharge programs only apply to federal loans. An exception to this rule is the bankruptcy discharge that can work against private student loans. It should be noted that bankruptcy discharges for student loans are difficult - though not impossible - to obtain.
Forgiveness and Cancellations Based on Work Requirements
Loan cancellation and loan forgiveness are the same thing. The largest work-related forgiveness programs are the Public Service Loan Forgiveness (PSLF) Program, the Teacher Loan Forgiveness Program, and the Perkins Loan Cancellation Program.
Public Service Loan Forgiveness Program
Only loans through the William D. Ford Foundation Direct Loans Program qualify for the PSLF Program. All federal Direct Loans, including Direct PLUS Loans and Direct Consolidation Loans, are eligible for PSLF. Loans through the Federal Family Education Loan (FFEL) Program and Federal Perkins Loans aren't eligible for the PSLF Program. Still, FFEL Loans and Perkins Loans can qualify for PSLF if they're consolidated through a Direct Loan Consolidation.
The PSLF Program forgives your Direct Loans "after you have made 120 qualifying payments on a qualifying repayment plan while working for a qualified employer." Those are the exact words used on the U.S. Department of Education's PSLF page. That's a lot of "qualifying" and thus, deserves some explanation.
"Qualifying payments" are payments made:
after Oct. 1, 2007;
under a qualifying repayment plan;
for the full amount due as shown on your bill;
no later than 15 days after your due date; and
while you are employed full-time by a qualifying employer.
Qualifying Repayment Options
Qualifying Repayment Plans are the income-driven repayment plans (IDR) and the standard repayment plan. Since the standard repayment plan is over a term of 10 years, it wouldn't make sense to use the standard plan with PSLF. This is because the standard plan would fully repay the loan thereby getting loan forgiveness of $0.00. The qualifying IDR plans are the:
Revised Pay As You Earn Repayment Plan (REPAYE Plan)
Pay As You Earn Repayment Plan (PAYE Plan)
Income-Based Repayment Plan (IBR Plan)
Income-Contingent Repayment Plan (ICR Plan)
Each of these IDR plans will be discussed in more depth later in this article.
For purposes of the PSLF Program, a qualifying employer is:
A federal, state, local, or tribal government
501(c)(3) not-for-profit organizations
AmeriCorps and the Peace Corps
Labor unions and partisan political organizations, even if they're tax-exempt nonprofits don't qualify for the PSLF Program. For-profit government contractors don’t qualify for the PSLF Program.
Teacher Loan Forgiveness Program
Only Direct Loans under the Direct Loans Program and Stafford Loans under the FFEL Program qualify for Teacher Loan Forgiveness. PLUS Loans don't qualify for Teacher Loan Forgiveness. Consolidated Loans under either Direct Loans or FFEL are eligible for Teacher Loan Forgiveness but only for the portion of the consolidated loan that's attributable to Direct Loans or Stafford Loans.
The Teacher Loan Forgiveness provides up to $17,500 of loan forgiveness for your Stafford or Direct Loans if you're employed full-time as a highly qualified teacher for five complete and consecutive years at a low-income school or educational service agency. To be a "highly qualified teacher" you must have attained at least a bachelors' degree from your college and your state must certify you as a teacher.
To be eligible for the full $17,500 of forgiveness, you must be a full-time math or science teacher teaching at the secondary school level. Or, you could qualify by being a special education teacher at the elementary or secondary level. You're a special education teacher if your primary responsibility is teaching children with disabilities.
Perkins Loan Cancellation
As the name implies, only Perkins Loans qualify for this program. Perkins Loans were made only to students with exceptional financial need. No new Perkins Loans have been made since September 30, 2017. There will still be Perkins Loans outstanding for years to come.
Perkins Loans can be 100% canceled in as little as five years. There are Perkins Loans Cancellation programs for teachers, early childhood education providers, firefighters, police officers, some librarians, nurses, public defenders, and volunteers at AmeriCorps and the Peace Corps. For more information see this article from the Department of Education.
To qualify for Perkins Loans cancellation for teachers, you must be a
teacher in a school serving low-income students, or
a special education teacher, or
a math teacher, science teacher, foreign language teacher, bilingual education teacher, or teacher in a designated shortage field for the particular state.
If you meet these eligibility requirements for Perkins Loan Cancellation for a teacher, you'll have 15% of your Perkins Loan canceled for each of your first two years of service; 20% will be canceled for each of your third and fourth year of service, and 30% will be canceled for your fifth year of service for a total of 100% canceled. Most of the vocations outside of teaching have this same cancellation schedule. Some vocations and volunteer work have different schedules. Peace Corps and AmeriCorps work only provide 70% loan cancellation. Loans for some vocations are canceled over seven years of service.
Other Work-Driven Forgiveness Plans
There are several lesser-known loan forgiveness opportunities based on employment in particular vocations. These programs include the following for healthcare workers:
There are also several student loan forgiveness programs for attorneys. Some of these forgiveness programs are:
There are many more programs for student loan relief provided by the military and by the states.
Forgiveness Through Income-Driven Repayment Plans
Income-Driven Repayments (IDR) programs are another way to have part of your federal student loans forgiven. The four programs available are the Income-Based Repayment (IBR), Pay As You Earn (PAYE) Repayment, Revised Pay As You Earn (REPAYE) Repayment, and Income-Contingent Repayment (ICR). With each of these programs, you pay a percentage of your discretionary income for a period of time, then the loan servicer forgives your student loan.
The IDR programs are often used with other forgiveness programs. The table below uses general rules. These programs are complex. You can get a more accurate idea of what each program will do for you by using the Department of Education's Loan Simulator or from this article.
|Term||20 or 25 years||20 years||20 or 25 years||25 years|
|Discretionary Income Calc.||Anything above AGI of 150% of the Poverty Line||Anything above AGI of 150% of the Poverty Line||Anything above AGI of 150% of the Poverty Line||Anything above AGI of 100% of the Poverty Line|
|%age of discretionary income||10 - 15%||10%||10%||20%|
|Ceiling on payments||10 year Standard Repayment Monthly Payment Amount||10 year Standard Repayment Monthly Payment Amount||No Cap||12 year Fixed Monthly Payment Amount|
Tax Consequences of IDR Plans
When lenders forgive debts, the IRS treats the amount of the debt forgiven as income. There are exclusions to prevent forgiven debt from being treated as taxable income for the work-driven forgiveness plans. Examples of these work-driven forgiveness plans include the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness Programs.
At this time, there is no such exception for forgiveness income with these income-driven repayment plans. So, the amount of forgiven debt at the end of your IDR program could be taxable income for you. The first thing to realize is that the one absolute certainty in life is "change." This holds especially true when it comes to tax law. These taxes are a concern for the future.
By the time your debts are forgiven, the law may well have changed so it's not included in income. Yet, you should plan as if this student loan forgiveness will be included in income. Good planning would include saving for this potential tax debt and structuring your repayment plan in the most advantageous way. In the worst case, you may have to enter into an installment agreement or offer-in-compromise agreement with the IRS.
Regardless of the tax consequences, the IDR repayment plans are a good deal for you. It’s essential to understand there'll be no tax consequences if an IDR plan is used in conjunction with one of the work-based forgiveness programs.
There are several situations that can lead to the discharge of your federal student loan debt. Most of these discharges are self-explainable due to their name. These include the Closed School Discharge, Total and Permanent Disability Discharge, Death Discharge, and the Bankruptcy Discharge.
A few of the discharges need further explanation. These include False Certification, Borrower Defense to Repayment, and the Unpaid Refund Discharge. You may be eligible for the False Certification Discharge if your school falsely certified your eligibility for federal student aid.
You could be eligible for the Borrower Defense to Repayment Discharge if your school made misleading statements that you relied upon to your detriment when taking out your federal student loan. The Unpaid Refund Discharge is useful when the school was supposed to refund your lender for a part of the academic period that you failed to attend the school.
The federal government has provided you with several opportunities to reduce your student loan burden. Some require student loan borrowers to work in a particular job, such as a public service job, for a certain period of time. Others provide a payment based on your income and require no particular job.
When the government gives you something, take it. To ignore these opportunities is the same as paying extra on your taxes out of the goodness of your heart. You have other financial challenges to be concerned about, i.e., rent or mortgages. It's a good idea to make your student loan burden as light as possible.