Thursday, August 13, 2015

Student Loan Forgiveness...Do You Know The Dangers?

Cathy A. Robinson, CPA
Senior Manager

What many people ask themselves, especially millennial’s, is how they can take advantage of student loan forgiveness. Here’s what you need to know:  

Public Service Loan Forgiveness

 This program was created in 2007 and was intended to help to remove the student loan debt from those low-salaried employees of the public service industry. There are also some for profit employers who qualify your employment as a public service.  This list includes:  police officers, teachers, public defenders, and those in the public health sector.  Borrowers of federal loans may qualify for forgiveness on the remaining balance of their student loans if they have made 120 payments on their loans while working in the aforementioned list.

Income-Based Repayment

More people qualify for this type of plan. This plan allows borrowers to pay ten percent to twenty percent of their income towards their loans. These loans will then be forgiven in 20 to 25 years. But a word of caution, with this plan, you will pay more in interest over the life of the loan. 

Pay as you Earn

This plan caps out your payments to being ten percent of your income. Like the Income-Based Repayment plan, it lasts for 20 years, and any balance remaining after this time period will be forgiven. In order to qualify for this program, you need to have taken a loan after October 2007 and have borrowed a Direct Loan or a Direct Consolidated Loan.

In all three of these plans, your payment amount will never exceed the amount you would have to pay under the standard ten-year payment schedule. Unfortunately, like private loans, there are some dangers associated with these repayment plans.

  • For income-based repayment plan, the amount of debt forgiven at the end of the plan becomes taxable income for the borrower. The borrower who received student loan forgiveness then faces large tax bills they typically cannot afford.

  • You MUST remember to continue to qualify each year, meaning you must remember to send in the application and updated paperwork each year. Failing to do this will get you removed from the program.  

  • For participating in Public Service Loan Forgiveness, you must be working full-time at a qualifying public service organization at the time you enter the program as well as at the time the remaining balance is forgiven.

This update is published periodically by HW&Co. as an information service to our clients, business associates and friends. It is general information and professional advice should be obtained before acting on any comments contained in this document.