Everyone knows the alarming news about student loans: It’s grown to become the second-largest source of consumer debt in the U.S. behind only home mortgages, surpassing credit card debt since the financial crisis.
And there is little relief in sight. You must repay your loans even if you drop out of college or can’t find a job—or just think in hindsight the education was nowhere near worth the average $33,000 in loans that 2014’s graduating class take home with their diplomas, according to an analysis of government data by Mark Kantrowitz of Edvisors. The Wall Street Journal referred to the 2014 class as “the most indebted ever.”
Congrats, graduates! Now, what to do about that financial albatross?
There are income-based repayment plans—which President Obama has been pushing in an effort to lessen the debt load as wages continue to stagnate and job opportunities remain scarce—and deferment is an option if you lose your job or experience another kind of financial hardship. Refinancing student loans may also lower your payments. But most student-loan holders have to pay the piper eventually—except for those who may qualify for true student loan forgiveness.
Could that be you?
The Consumer Financial Protection Bureau revealed last year that many of the estimated 25 percent of the U.S. workforce employed by a public service employer “may be eligible for existing student loan repayment benefits.”
It pays to understand the circumstances that might lead to your loans being classified by the federal government as eligible for being forgiven, canceled or discharged.
The federal loan program families
The most important thing to know is this: Student loan forgiveness programs cover many types of federal student loans—including Direct Loans, Perkins Loans and Federal Family Education Loan (FFEL) Program loans, such as the Stafford loans—but there is no dedicated student loan forgiveness program for private student loans. In addition, the forgiveness programs vary depending on the type of federal loan—some apply only to Direct loans and others only to Perkins loans, for example.
The U.S. Department of Education provides a reference chart covering all of the conditions that may lead to cancellation of a loan and covering all the types of federal loans, as well as links to the applications that must be completed. Here are the basics:
For the Direct Loan, FFEL program and Perkins loans, the following conditions can result in 100 percent student loan forgiveness:
- Total or permanent disability or death (also referred to as discharge rather than forgiveness).
- Bankruptcy (though only in rare cases).
- School of attendance closing before graduation.
- False certification of loan by school.
The most certain way to qualify for student loan forgiveness is to work as a teacher, in the public service sector or for a nonprofit organization.
If you are a full-time teacher for five consecutive years in a designated elementary or secondary school or educational service agency serving students from low-income families, you can qualify for up to $5,000 (up to $17,500 for elementary/secondary special education teachers and secondary math and science teachers) of the total loan amount outstanding after completion of the fifth year of teaching.
Though note that graduate students and parents of students who hold PLUS Loans do not qualify. Loans with balances taken out prior to October 1998 are not eligible, and your five years of consecutive teaching must have commenced after October 1998.
The teacher loan-forgiveness application is available here.
For Perkins loans holders, cancellation of up to 100 percent of a loan may be granted if you have served full-time in a public or nonprofit elementary or secondary school system as a teacher in a school serving students from low-income families; or are a special education teacher, including teachers of infants, toddlers, children, or youth with disabilities; or a teacher in the fields of mathematics, science, foreign languages or bilingual education, or in any other field of expertise determined by a state education agency to have a shortage of qualified teachers in that state. The following formula applies to the cancellation scheduled:
- 15 percent canceled per year for the first and second years of service.
- 20 percent canceled for the third and fourth years.
- 30 percent canceled for the fifth year.
Public service employees
For public-service employees generally, the main loan program considered for forgiveness is the Direct Loans—Perkins or FFEL loan holders who work in the public sector and want to qualify would need to consolidate their loans in the Direct Loans program first. PLUS loans for parents and graduate students and/or professional students are part of the Direct Loans program.
Full-time employment with a federal, state or local government agency, entity or organization, or a not-for-profit organization that has been designated as tax-exempt by the Internal Revenue Service, may qualify you for this program. A private not-for-profit employer that is not a tax-exempt organization can also qualify if they serve the public interest and have no affiliate with labor unions or partisan politics.
The basic factors to qualify are:
- Making 120 on-time, full, scheduled, monthly payments on your Direct Loans. Only payments made after October 1, 2007, qualify. (Perkins or FFEL loan holders who consolidate into the Direct loan program must start the 120-payment cycle once the loans are consolidated.)
- Making those payments under a qualifying repayment plan.
- When you make each of those payments, you must be working full-time at a qualifying public-service organization.
You must complete the employer certification form and send it to the federal loan servicing agency. The first forgiveness-of-loan balances as of October 1, 2007, will not be granted until October 2017.
For Perkins loan holders, a chart of the specific public service sector positions that qualify for cancellation—and to what percentage of total loan balance—is available from the Department of Education.
The authoritative source for all information related to federal student loan forgiveness programs and the criteria considered in applications is the U.S. Department of Education’s web site section devoted to the details.
What to do if an application is rejected
Of course, applying for student loan forgiveness does not mean it will be granted, and it pays to be very careful in completing the necessary forms.
A negative decision on student loan forgiveness cannot be appealed, except for in the cases of false certification and forged signature discharges, for which the U.S. Department of Education may review the case.
If the basis for a request for loan forgiveness was a school closing before a student could compete their degree but the request for loan forgiveness is rejected, other options include:
- Contacting the state licensing agency to see if there is a tuition recovery fund or performance bond that will cover damages based on the school closure.
- Claiming a loss in a bankruptcy proceeding if the school filed bankruptcy.
Students can also consult the federal rating on higher-education institutions’ financial strength when deciding where to attend school. It is not a guarantee of financial stability or that a school will go bankrupt, either, but it is a resource to consult in analyzing an institution’s financial situation before taking out loans to attend it.