Student loan borrowers dream of the day they’re debt-free the way others fantasize about winning the lottery. That day could come sooner than you think if you qualify for federal student loan forgiveness, but there may be changes ahead for some of these programs that you should consider before applying.
There are four primary programs that will cancel or reduce your federal loan balance, and qualification is based on your job or on the repayment plan you choose.
Public Service Loan Forgiveness
How it works: Your remaining federal loan balance will be forgiven if you work full time for a nonprofit or the government for at least 10 years. Qualifying workers include firefighters, teachers, military personnel and nurses, among others.
You’ll save the most money on Public Service Loan Forgiveness if you repay your loans on an income-driven plan for those 10 years. The program started in 2007, so the first Public Service Loan Forgiveness recipients will have their loans discharged in 2017.
Which loans are eligible: Only federal direct loans are eligible for the program, but you can consolidate other student loan types in order to repay them on Public Service Loan Forgiveness. Consider keeping your Perkins loans separate if you qualify for Perkins loan cancellation, which we’ll explore further below.
Best for you if: You plan to work in public service for at least 10 years and you’re already on, or are willing to switch to, an income-driven repayment plan.
Here’s why: Since you must still be working in the public interest when you apply for forgiveness — after your 120th loan payment — Public Service Loan Forgiveness is a big commitment. It’s worthwhile only for grads who plan to pursue a career in public service anyway, says Kristin Bhaumik, assistant director for special programs in the University of Michigan’s office of financial aid.
“Ten years is a very long time for most people to plan out their future just for loan forgiveness,” she says.
How to apply: Call your student loan servicer, the company that manages your federal loans, to let it know you’re interested in the program and to confirm that you qualify. The company will tell you if you must consolidate your loans to make them eligible and what initial paperwork you need to fill out.
You and your employer should fill out the employment certification form annually, or whenever you change jobs, to make sure you’re on track for forgiveness. Send the form to FedLoan Servicing, which oversees the program. You’re not required to submit the form every year (though it’s a good idea to do so); you can also apply for forgiveness once you’re eligible and certify your employment retroactively.
The program began on Oct. 1, 2007, so you’re eligible once you’ve made 120 on-time loan payments since that date. The application will be available by October 2017.
Potential changes to consider: Public Service Loan Forgiveness is slated for elimination in the 2018 White House budget, currently awaiting approval by Congress. If included in the final approved budget, the proposal would impact only loans originating on or after July 1, 2018. It would not affect those who are already on track for loan forgiveness.
Teacher Loan Forgiveness
How it works: Teachers who work full time for five consecutive years can have up to $17,500 in direct or Stafford loans forgiven. The program is available only to teachers who work in low-income public elementary or secondary schools and who took out their first loans after Oct. 1, 1998.
Which loans are eligible: Direct loans and Stafford loans.
Best for you if: You plan to teach full time in a low-income public school for at least five years and have a loan balance of $17,500 or less. If you have a larger loan balance and plan to teach for 15 years or more, consider enrolling in Public Service Loan Forgiveness after five years.
Here’s why: Participants will also qualify for Public Service Loan Forgiveness, which is more generous, but Teacher Loan Forgiveness will reduce or eliminate your loans in half the time: five years instead of 10. Although the two programs can’t overlap, you can take advantage of both if you plan to teach for 15 years or more.
How to apply: Fill out the application after you complete the five-year teaching requirement and send it to your student loan servicer.
Perkins loan cancellation
How it works: Borrowers with federal Perkins loans can have up to 100% of their loans canceled if they work in public service jobs, generally after five years. Teachers, firefighters, nurses, police officers, school librarians and public defenders all qualify, among others. Check this chart to see if your job makes you eligible.
The Perkins loan teacher benefit has some specific guidelines. Teachers must work full time in a low-income public school or teach qualifying subjects like special education, math, science or a foreign language.
Which loans are eligible: Perkins loans only. The total amount of Perkins loans you can borrow as an undergrad is $27,500; as a grad student, you can borrow an additional $32,500.
Best for you if: You have Perkins loans and you plan to work in an eligible public service job for at least one year.
How to apply: Perkins loans are disbursed to you directly by your college. Call the financial aid office and ask for a loan cancellation application. In many cases, your loans will be discharged incrementally each year you serve; for example, you’ll get 15% of your loans canceled your first and second years as a teacher, 20% canceled your third and fourth years and 30% canceled your fifth year. You must show proof that you work in a qualifying public service job during the period you apply for forgiveness.
How it works: The federal government offers four main income-driven repayment plans, which allow you to pay a percentage of your monthly income toward your loans:
All of these programs automatically forgive your remaining loan balance after 20 or 25 years, depending on the plan. Most were designed for borrowers who have a large loan balance relative to their incomes. Revised Pay As You Earn (known as REPAYE), however, is open to any federal student loan borrower, no matter how much you earn.
Which loans are eligible: Loan requirements vary among plans. In general, if a loan type isn’t eligible for income-driven repayment at first, it will be once it’s consolidated into a Direct Consolidation Loan.
Best for you if: You have substantial student loan debt or can afford your payments only on an income-driven plan, and you’re willing to save money for your potential tax bill in the future.
Here’s why: Forgiveness is certainly a benefit of the income-driven plans, but it’s not a reason to sign up for one of them. You’ll accrue more interest on these plans than you would on a standard or graduated repayment schedule, and as tax law is currently written, you’ll be required to pay income taxes on the amount forgiven.
“Borrowers need to plan for that,” says the University of Michigan’s Bhaumik. A tax professional can estimate what you’ll owe upon forgiveness so you can start saving now. But it’s worth the tax bill if repaying your loans on an income-driven plan is the only way you can afford your payments.
“I would rather a borrower take a reduced monthly payment and make that payment on time, every time, than go into delinquency or default,” Bhaumik says.
How to apply: First fill out an Income-Driven Repayment Plan request and return it to your servicer. You must recertify your income every year to stay on the plan you choose. There’s no separate forgiveness application; your loans will be forgiven automatically after 20 or 25 years, depending on the plan.
Financial aid is dependent on the federal budget and higher education law, so changes to the terms of forgiveness programs could take place at any time.
“You’ve got to listen to political conversations surrounding these programs, because so much of it involves the political and public policy climate in the U.S.,” Bhaumik says.
Stay organized and informed, and once you receive forgiveness, you’ll know that lottery-like feeling of being rid of your loans at last.
To qualify for forgiveness, your loans can’t be in default, meaning they’ve gone unpaid for more than nine months. Also, private student loans don’t offer forgiveness, though some lenders will let you make interest-only payments or take a temporary interest rate reduction if you’re having trouble affording your bill. If you have private loans, call your lender to see what options are available to you.
Potential changes to consider: The 2018 White House budget calls for the creation of one income-driven repayment plan to replace the current four plans. Under this proposal, the monthly amount would be 12.5% of a borrower’s discretionary income, and undergraduate borrowers would receive loan forgiveness after 15 years of payments, lowered from the current 20 years. Graduate borrowers would receive forgiveness after 30 years of payments, up from the current 25. To be enacted, this condition would need to be included in the final budget approved by Congress.
Other repayment options
If you want to save on the total cost of your loan and you have strong credit as well as a steady income, consider student loan refinancing. When you refinance with a private lender, your current loan is replaced with a new loan at a lower interest rate and a new term; the shorter the term, the more you’ll save.
Refinancing is a good choice for borrowers with private loans or those with federal student loans who don’t plan to use an income-driven repayment plan, federal loan forgiveness programs or other protections. Consider all options and compare offers before refinancing.
This article was updated. It was originally published Nov. 10, 2015.