May 12, 2017

How to Get Student Loans Forgiven: A Step-By-Step 2017 Guide


Waiting to hear how much your student loan payments are until they become due is a mistake.

Many college students often have little idea of how high their student loan debt is until the bills arrive. The totals can be frightening. Then there are the impending payments.

Once you add up the balances, ramen noodles and macaroni and cheese will seem like your meal for a long time coming.

Seriously, though, student loans are not all that bad. They did take a weight off your shoulders. They allowed you to get your degree. No one blames you for taking the money a bank offered. Tuition, books, and room/board are expensive.

Looking back, you might regret your choices. You can't change the past. But you can change the future. There are ways to get your student loans forgiven. We'll tell you how.

Figure Out the Best Repayment Plan

Waiting for the bills to come in the mail is the worst thing you can do. Who wants the unpleasant surprise of hundreds of dollars due every month?

Instead, check out how much you owe using the National Student Loan Data System. This gives you a listing of all federal loans you have outstanding. You need this number to proceed.

Still not worried about what you owe? Consider this: the average college grad left college with $37,172 in student debt. Worse yet, each year this number climbs. Unfortunately, starting incomes have not had the same increase.

Yes, student loans have a grace period. It's usually six months after graduation. Then payments begin. It may take you at least that long to find a job. Chances are you won't be able to afford your payments right away.

What happens after six months?

If you don't apply for any type of aid, you are on the Standard Repayment Plan. You will pay principal and interest for the next 10 years. Here's what that looks like using the average college debt of $37,172:

  • Loan amount: $37,172
  • Interest rate: 5%
  • Monthly payment: $394.27
  • Interest paid over the life of the loan: $10,140.01

Interest accrues every month you have an outstanding balance. That $37,000 you borrowed suddenly turned into $47,000 - and that's if you make your payments on time.

Add this figure onto rent, car payments, and daily living expenses. You could easily find yourself struggling right out of college.

But, if you don't make your payments, you can kiss your good credit score goodbye.

Tip: If you are still in college, know this. It is not necessary to take out the full amount offered to you. A great rule of thumb to use: don't borrow more than your anticipated starting salary.

What If You Can't Afford the Standard Repayment Plan?

It happens. Graduates find themselves in over their heads. They can't find a job that pays enough and now they have to pay back their debts.

There are options. First, you must figure your discretionary income:

Discretionary Income: Your adjusted gross income - 150% of the federal poverty level for your family size. For a family of 1, 150% of the poverty level is $18,090. This means $18,090 of your income goes untouched.

Note: Only borrowers with certain types of loans qualify for a repayment plan. Any Federal Direct loan is usually eligible. However, Stafford, Perkins, or FFEL loans must be consolidated into a Direct Loan. Private loans and Parent PLUS loans are ineligible.

  • Income Based Repayment: You must have Federal Direct Loans or Federal Family Education Loans to qualify.

    In addition, the date you got your loan determines this plan's payment. Loans taken out before July 1, 2014 pay 15% of their discretionary income. After 25 years of payments, any amount left over is forgiven.

    Loans taken out after July 1, 2014 pay 10% of their discretionary income. After 20 years of payments, any leftover amount is forgiven.

    However, this only applies if the IBR payment is lower than your standard repayment amount. As your income increases, so does your payment. The max payment is the amount of the standard repayment plan's payment.

    As a bonus, the government will pay your unpaid interest for 3 years from the start of the program. Chances are your payment doesn't cover the interest. The government has your back for 3 years.

    After that, the unpaid interest may get added to your principal balance. Luckily, this doesn't happen until your IBR payment equals the Standard Repayment payment. Then any unpaid principal gets added to your principal balance.

  • Pay as you Earn Repayment: Again, you must know your discretionary income. Fewer graduates will be eligible for this program because of date restrictions.

    You must be a "new" borrower after October 1, 2007. In other words, you don't have any student loans dating before this date. You must also have taken out an eligible loan after October 1, 2011. If you fall into that category, read on.

    You will only pay 10% of your discretionary income. Assuming, of course, this payment is lower than your standard payment. If you don't have an income right now, you don't have a payment. Plus, your outstanding balance is forgiven after 20 years of payments.

    This loan's max payment also equals the standard repayment plan payment. The interest payback also begins when your payment equals the 10-year repayment plan.

  • Revised Pay as you Earn Repayment: This program is for those who don't fall into one of the above categories. Most importantly, there are no date restrictions. Only Parent PLUS loans are excluded. Payments are 10% of your discretionary income, just like the other plans.

    However, there is no cap on the payments. As your income increases, so do your payments. This could make for some hefty payments if you become successful.

    After 20 years of payment, if any principal remains, it will be forgiven. Because there is no payment cap, you won't have any interest added to your principal balance.

  • Income Contingent Repayment: This is the only repayment plan available for borrowers with parent PLUS loans consolidated into a Direct Consolidation Loan.

    This plan bases your payment on 20% of your discretionary income. The ICR determines discretionary income differently. It is the amount of your adjusted gross income that exceeds 100% of the poverty level.

    It gets more complicated. Your payment is based on the lesser of a 12-year repayment plan or 20% of your discretionary income. This payment may also exceed the Standard Repayment Plan payment.

    The government does not subsidize any unpaid interest. 100% of the unpaid interest gets added to your loan balance annually. However, no more than 10% of the loan balance will be added.

Forgiveness Plans

There's more good news. If you work in a specific industry, you may qualify for earlier loan forgiveness.

  • Public Service Loan Forgiveness: If you work for a government agency or non-profit, consider a repayment plan.

    After 10 years of payments in any of the above plans, your loan balance may be forgiven. You must work full-time and make consecutive payments.

    Completing this form will help you learn if you are on track for loan forgiveness.

  • Teacher Loan Forgiveness: Teachers working at a low-income school for five consecutive years may qualify for this program.

    You must have state certification and have a license to teach in your state. Your loan cannot be in default, either.

    Elementary school and middle school teachers may receive up to $5,000 in forgiveness. Teachers who specialize in math, science or special education may receive up to $17,500 in forgiveness.

  • Teacher Cancellation Forgiveness: Federal Perkins loans are usually exempt from any program unless you consolidate it into a Direct Loan. However, if you are a teacher, you may want to leave your Perkins loan alone.

    If you work at a low-income or non-profit school full-time for a full academic year, you may qualify for:

    • 15% forgiveness the 1st and 2nd year
    • 20% forgiveness the 3rd and 4th year
    • 30% forgiveness the 5th year

    After 5 years, you no longer have a loan balance. This far surpasses any other repayment plan.

  • Nurse Cancellation Forgiveness: It's not just teachers who benefit from cancellation of the Federal Perkins Loan. Nurses benefit too.

    Nurses need 5 years of consecutive service. After this time, they may receive up to 100% of their Perkins loans forgiven.

Watch Out: Of course, bad news always accompanies good news. Unfortunately, Uncle Sam will come knocking on your door with any forgiveness plan. The IRS requires you to include any forgiven loan amounts as income. This means a higher tax liability. This may still be the better option. Your tax liability is often much lower than the amount forgiven.

Bottom Line

You are not alone in your concern over your student loans. Should you take a repayment plan? Remember, extending your term means more interest. If that is all you can afford, then so be it. Just keep in mind the amount of interest you pay.

Paying off other debt so you can afford the 10-year payment makes the most sense. Until then, take advantage of the repayment plans. If you get to the point of forgiveness, take it. Just don't forget the tax consequences.

More from CreditDonkey:


How to Pay for College


Best Student Loans

Infographics: Life after College

Life After College

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