The Low Down on Student Loan Forgiveness
You’ve just graduated and are looking forward to a long career of wealth and prosperity but then you realize that you have a ton of student loan debt and the thought of repaying them is a little daunting. There may be options for you to have some of the federal student loans forgiven, depending on what type of loan you have and the payment plan that you sign up for.
Perkins Loans are a special type of federal student loan, they are low interest loans given to you by your school based on financial need (If you are a student you should discuss with the financial aid office about getting the most that you can in Perkins Loans). Perkins loans have different qualifications for loan forgiveness compared to other federal student loans. If you’re an educator most likely you will qualify for loan forgiveness up to 100%. For PAs, we fall under the “full-time nurse or medical technician”category. The way this program works is that a percentage of your loans is cancelled over 5 years; the first two years 15% is cancelled, the third and fourth year 20% is cancelled and the 5th year 30% is cancelled. You’ll have to submit annual paperwork showing that you’re employed full-time as a PA, since these loans are disbursed by your school you should contact your schools financial aid office or your loan servicer about the paperwork. For myself it is a one sheet form that I fill out and have my clinic manager sign, then I send it off to the loan servicer.
If your monthly payment is more than what you can afford for any of your loans under the Direct loan program, the first step to student loan forgiveness is to sign up for an income driven repayment plan. This will lower your monthly payments and extend the years in which you will be paying on these loans. After you make qualifying payments for 20-25 years the remaining balance on your loans will be forgiven, depending on what plan you sign up.
Unless you have a really low income or a really high amount of student loans, most people you will not make it the 20-25 years to have your loans forgiven and if you do the amount you pay in interest over that time will probably not make it worth paying off your loans over the extended time. If you truly cannot afford to pay the higher amount of the standard plan you at least have an option to have your monthly payments lowered.
Depending on your employer you may qualify for Public Service Loan Forgiveness, and if that is the case you can have your loans forgiven after 10 years of full time employment instead of the 20-25 years for the other options. You will want to continue to pay the minimum amount based on what repayment plan you might qualify. Your employer would qualify if it is a government agency or if it is a not-for-profit organization, such as a not-for-profit hospital that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code. If you work in private practice you most likely will not qualify for the program.
Similar to the Perkins Loan Cancellation you must submit paperwork showing you have been working for a qualifying employer. You can wait to the end of your 10 years or 120 payments to submit the paperwork if you want, but I suggest doing it annually to help keep track of your qualifying payments. Once you’ve completed the 120 qualifying monthly payments you must submit an application for forgiveness.
One thing to keep in mind is the tax burden if you do have your loans forgiven. Under the Public Service Loan Forgiveness program any amount that is forgiven is not considered income by the IRS so you do not have to pay taxes on it. With the forgiveness after 20-25 years under the income driven repayment plans, any amount that is forgiven is considered taxable income and will be considered a part of your income for that year. For more information on this it is best to speak to a tax expert.
Loan forgiveness is a great option for some people, however there are a lot of hurdles to get there such as applications, annual documentation, qualifications etc. It is important to know the possible tax implications as this can change your decision on if you want to pursue forgiveness. Everyone has their own unique financial situation and it is important that you weigh all the options using a student loan calculator and choose what is best for you; if you are able to get passed the hurdles a large portion of your student loans may be forgiven.
