Ah… to be a new college graduate again. With your freshly minted diploma in hand, you’re ready to start anew, pursue your passions, take the world by the horns and find your first job. And once you find a job, you finally have that wonderful… opportunity to start paying off those thousands of dollars of student loan debt.
Is there any way to avoid paying student loans? Have you considered a student loan forgiveness program? If you’re years away from paying off student loans, having debt forgiven might seem too good to be true. While the process can take some time, it can be simpler than you might think.
In my work for SALT, a site created by nonprofit organization American Student Assistance, I counsel consumers on managing their student loans. When I bring up student loan forgiveness, many have the same reaction: “I wish I’d known this option existed before.”
As you look further into this option to decide if it might be right for you, consider these other little-known facts about student loan forgiveness:
1. You may be eligible for Public Service Loan Forgiveness and not even know it
PSLF is both a great and a terrible name for this forgiveness program. It’s a great name because of the promise it portrays: by participating in public service opportunities rather than working in the private sector, some of your student loan debt is forgiven.
But Public Service Loan Forgiveness is also a terrible name because you’d never realize how many people outside of public service are potentially eligible for this benefit.
Federal Direct Student Loan borrowers who work for federal, state or local government agencies or 501(c)(3) organizations while making 120 payments under an income-based, income-contingent or standard repayment plan may qualify to have their remaining balance forgiven. Think about it. Almost any state, federal (except members of Congress) or nonprofit organization counts.
According to a report by the Center for Civil Society Studies at Johns Hopkins University, more than 10 percent of the US population works in the nonprofit sector. That means more than 10 million workers are potentially eligible for public service loan forgiveness in that area alone. The Consumer Financial Protection Bureau estimates that potentially 33 million people are eligible.
2. More student loan forgiveness programs exist than you might think
So if PSLF is the most well-known student loan forgiveness option there is — and hardly anybody knows about this program — what else is out there?
Do you work in health care? Move to an underserved area in California and receive up to $160,000 in student loan forgiveness. Love to ski? Colorado will pay health professionals up to $105,000 for three years of service. Dentists can sign up for an additional two years for another $50,000.
Like cows? (And who doesn’t like cows?) The state of Kentucky will pay $6,000 a year towards your student loans if you come to work as a vet and spend at least half your time working with large animals or those used for food.
And it never hurts to do your own legwork, because these aren’t the only programs out there. Many employers now offer student loan repayment as a benefit. The SALT resource only covers programs found through Internet research — and, believe it or not, not everything is on the Internet. So try doing your own digging to find other programs. A little work could save you a lot of money, to the tune of thousands of dollars.
3. You still have to pay income taxes on your student loans
No good deed goes unpunished. But in the world of student loan forgiveness, it sort of does. You should always consult with a tax professional (or visit www.irs.gov), but in general, if you receive the forgiveness benefit for doing something good, it’s probably not taxable. Examples include PSLF and the Teacher Loan Forgiveness Programs.
But beware that in some student loan forgiveness programs, the forgiven amount will be taxed as income. If you received loan forgiveness as a result of paying for 25 years under the income-based repayment plan, because you became disabled or because you’re a parent borrower and the student passed away or became disabled, the amount forgiven will still likely be taxed.
4. Sometimes you’re better off just paying your loans
Loan forgiveness is great — unless it costs you more in the long run. It’s important to do the math before making any drastic life changes to qualify for these programs. Ensure the risks and sacrifices are worth the reward. You may be better off knocking out your student debt on your own.
Let’s say you’re eligible for a lower payment under the income-based repayment plan. After 25 years under this plan, you determine that about $10,000 will be forgiven. Sounds good, right? But the total amount you pay back in that 25 years could be more than you would pay under a different repayment plan with no forgiveness benefit. After all, the longer you take to repay a loan, the more you pay in interest.
Overall, just as with any other financial decision, it’s important to understand all the terms of a loan forgiveness program. Be sure to weigh both the long-term and short-term benefits to determine the right decision for you.
Betsy Mayotte is the director of regulatory compliance for American Student Assistance, a nonprofit organization with 50+ years’ experience helping people make better decisions about financing their education and repaying student loans.