Student loan forgiveness

Mark KantrowitzBy Mark KantrowitzBy Savingforcollege.com

Student loan debt may be cancelled through one of several loan forgiveness, loan discharge and loan repayment assistance programs. While it’s better to use college savings than student loans to pay for college, getting someone else to repay your student loans is almost as good an option.

Although the terms “loan forgiveness” and “loan discharge” are often used interchangeably, there are important distinctions between the two types of loan cancellation.

  • Student loan forgiveness is usually based on the borrower working in a particular occupation for a period of time.
  • Student loan discharge is usually based on the borrower’s inability to repay the debt or the borrower not being responsible for the debt because of fraud.

Employer student loan repayment assistance programs, or LRAPs, are similar to student loan forgiveness. Employers use LRAPs to provide incentives for recruiting and retaining employees who have student loans.

Under current law, some forms of student loan cancellation receive tax-free treatment and some do not. Student loan forgiveness is generally tax-free and several types of student loan discharge are tax-free, while the cancellation of the remaining debt after 20 or 25 years in an income-driven repayment plan is taxable.

Of course, if you have money leftover in your 529 college savings plan, you can always use a non-qualified distribution to pay down your student loan debt. However, non-qualified distributions are subject to ordinary income taxes and a 10 percent tax penalty on the earnings portion of the distribution.

Student loan forgiveness programs

Examples of student loan forgiveness programs include loan forgiveness for borrowers who are teachers, nurses or doctors, borrowers who work in national need areas and borrowers who work in public service or for federal agencies.

Some loan forgiveness programs cancel all or part of the debt up front. For example, these loan forgiveness programs will cancel a specific percentage or dollar amount of the borrower’s debt for each year of service. Up-front forgiveness provides partial forgiveness even if the borrower doesn’t complete service requirements in full.

Other loan forgiveness programs cancel the borrower’s remaining debt after a specified number of monthly payments. These back-end loan forgiveness programs are all or nothing, since borrowers must satisfy all of the service requirements before receiving any loan forgiveness.

Examples of up-front loan forgiveness programs include:

Examples of back-end loan forgiveness programs include:

  • Public Service Loan Forgiveness. A borrower’s remaining federal student loan debt is forgiven after the borrower makes 120 payments (10 years) while working full-time in a qualifying public service job while repaying the student loans in the Direct Loan program under an income-driven repayment plan. Public service jobs include working for the government or a 501(c)(3) tax-exempt charitable organization. Borrowers may consolidate FFEL program loans into the Direct Loan program to qualify.Borrowers should find the employment certification form once a year and whenever they change employers. Very few borrowers have qualified for public service loan forgiveness.
  • Income-Driven Repayment. A borrower’s remaining debt is forgiven after 25 years of repayment in income-contingent repayment (ICR) and income-based repayment (IBR), 20 years of repayment in pay-as-you-earn repayment (PAYE) and 20 years (undergraduate) or 25 years (graduate) of repayment in revised pay-as-you-earn repayment (REPAYE).


Student loan discharge programs

Some borrower’s loans may be discharged because of the borrower’s inability to repay the debt.

Some borrower’s loans may be discharged because the borrower is not responsible for the debt because of fraud or because of school closure.

How to obtain loan discharge and forgiveness

To obtain student loan forgiveness or discharge, contact the loan servicer for the correct forms. You can also call 1-800-4-FED-AID (1-800-433-3243) or the FSA Ombudsman if you are unable to obtain the forms from the loan servicer.

Depending on the type of discharge, you may receive a refund of some or all of the payments made on the loan, in addition to cancellation of the remaining loan balance.

Do not pay a fee to obtain student loan discharge or forgiveness. If you are asked for a fee, it is probably an advance-fee loan scam.

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