More than 44 million Americans owe $1.44 trillion in student loan debt. For many of these borrowers, they pay several hundred or even thousand dollars per month. Student loans can make it difficult to afford a mortgage, start a business or pay down other debts. However, borrowers with federal student loans may have several options to forgive or discharge their remaining balances. The Department of Education has several options for student loan forgiveness.
If you are struggling to pay back your student loans, or if you want to explore options for loan forgiveness, then we encourage you to continue reading.
How Does Public Service Loan Forgiveness Work?
In 2007, the Public Service Loan Forgiveness (PSLF) program was passed by Congress and signed into law by President George W. Bush as a way to entice graduates with federal student loan debt to enter jobs in the nonprofit and public sectors. The PSLF program allows borrowers with Direct Loans who work full-time in qualifying jobs to have their remaining balances forgiven after making 120 consecutive payments. Qualifying jobs may include state, local and federal organizations. Some nonprofit organizations are also eligible for this program.
If you want to enroll in PSLF, then you should ensure that your employer qualifies as a public service entity and that you are a W2 employee, and not an independent contractor. It is also important to keep track of your eligibility while you are enrolled in the program. Each year, you should complete the Employment Certification for Public Service Loan Forgiveness form and submit it to FedLoan Servicing, the loan servicer that oversees the PSLF program. Always keep digital and paper copies of correspondence with FedLoan Servicing. In addition, you should make backup copies. It is very important to ensure these records are not lost.
PSLF is most effective when paired with income-driven repayment programs, which cap your monthly payments to a percentage of your discretionary income. You may also consolidate FFEL loans (which are not eligible for PSLF) into Direct Loans to qualify.
If you do not qualify for PSLF, you may also check and see if your career option qualifies for other types of loan forgiveness. One of our prior newsletters covered this topic in much more detail. However, in most cases, PSLF eligibility will overlap with other programs.
How Does Student Loan Forgiveness Work with Income-Driven Repayment Plans?
Another option for loan forgiveness is to enroll for an income-driven plan. These include the IBR, ICR, REPAYE and PAYE programs. Depending on the program, your loans are forgiven after making 20 to 25 years of consecutive and timely payments. However, there is a catch to seeking loan forgiveness through these programs. Any forgiven amount is considered taxable income by the IRS. This means you could be hit with a large tax bill in 20 to 25 years from now.
Congress has signaled it would like to remove income tax liability for these programs. In 2015, Senator Jeff Merkley (D-Oregon) introduced the Income-Based Repayment Debt Forgiveness Act, which would have removed this tax liability. In 2016, a group of Senators introduced the Student Loan Tax Relief Act, which had similar goals. Although these bills have not got anywhere, they may gain traction in the future if more people speak out in their favor. Public policy is most often incremental, and it is likely other lawmakers will build upon these prior bills.
While it is important to consider the tax implications of using an income-driven plan for loan forgiveness, it should not deter you from enrolling.
Can I Receive an Administrative Discharge on My Student Loans?
There are also several options for receiving an administrative discharge on your student loans. These options include:
- Permanent and total disability discharge: If you can show the Education Department that you have a permanent and total disability, you may have your loans discharged. However, you will have to pay income taxes on the amount forgiven. Fortunately, lawmakers have signaled they would like to eliminate this tax liability.
- Closed-school Discharge: If your school closes while you are enrolled or you withdraw within 120 days of the closure, you may have your loans forgiven. The forgiven amount is not considered taxable income by the IRS.
- Borrower defense to repayment discharge: In some cases, your loans may be discharged if you are defrauded by your school. The borrower defense to repayment rule is complex and may require lots of paperwork and other forms of evidence.
Unfortunately, some of these options suffer from the same drawback as the income-driven programs. Depending on the type of administrative discharge, you may have to pay taxes on discharged loans. In all cases, administrative discharges may be more likely to succeed with the help of an attorney.
Struggling with Student Loan Payments? Contact Our Kansas City Bankruptcy Attorneys for Help
If you are struggling with student loans, you may have options to reduce your monthly payments. Depending on the circumstances, you may also be able to seek an administrative discharge or have your loans forgiven.
The Kansas City bankruptcy attorneys at The Sader Law firm can help you learn if you have options for lower payments or loan forgiveness.