Many people have questions about options for student loan forgiveness and discharge. Here are the answers.
This article answers questions about student loan forgiveness and student loan discharge, including public service loan forgiveness, teacher loan forgiveness, death and disability discharges, employer-paid student loan repayment assistance, student loan settlements, statutes of limitation and the tax treatment of student loan debt cancellation.
Student loan forgiveness and discharge
How does the CARES Act affect student loan forgiveness?
Federal student loan payments that have been paused under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will count toward loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF) and the 20/25-year loan forgiveness at the end of an income-driven repayment plans.
As of March 29, 2020, the U.S. Department of Education and loan servicers have not yet updated their web sites to reflect the provisions enacted by the CARES Act.
What is the difference between student loan forgiveness and student loan discharge?
Student loan forgiveness and student loan discharge are both types of student loan cancellation, which ends the obligation to repay all or part of the student loan debt.
Student loan forgiveness and discharge differ in the reason for the cancellation of the student loan debt.
- Student loan forgiveness cancels your debt because of something you did, such as working in a particular occupation or providing service to the community.
- Student loan discharge cancels your debt because of something that happened to you that affects your ability to repay the debt or because you are not responsible for the debt.
Examples of student loan forgiveness include teacher loan forgiveness, public service loan forgiveness, loan forgiveness for service in AmeriCorps, the Peace Corps and Volunteers in Service to America (VISTA), loan forgiveness for military service, loan forgiveness for certain health professions, loan forgiveness for federal government employees and loan forgiveness after 20 or 25 years of payments in an income-driven repayment plan.
Examples of student loan discharge include the death discharge, total and permanent disability discharge, bankruptcy discharge, closed school discharge, unpaid refund discharge, false certification discharges (e.g., ability to benefit, disqualifying status, unauthorized signature and identity theft) and the defense to repayment.
What is a student loan repayment assistance program?
A student loan repayment assistance program, or LRAP, is a recruiting and retention tool used by employers to attract college graduates who are burdened by student loan debt. The employer agrees to make periodic payments towards the employee’s student loans as an employee benefit. The CARES Act made such employer payments tax-free from March 27, 2020 through December 31, 2020.
What is the defense to repayment?
If the borrower’s college misrepresented their educational services or engaged in wrongdoing concerning their educational services or federal student loans, in violation of state law, the borrower may qualify to have all or part of their federal student loan debt forgiven.
Where can I get more information and updates about loan forgiveness?
You can get a free student loan forgiveness tip sheet by signing up for a free student loan newsletter.
Student loan discharge forms can be obtained from the loan servicer and the StudentAid.gov web site.
Can private student loans be forgiven?
Most student loan forgiveness programs are limited to federal student loans.
Private student loans may be eligible for employer-paid student loan repayment assistance programs.
Is student loan forgiveness and discharge taxable?
Normally, the IRS considers cancellation of debt to be income to the borrower. It’s as though someone gave you money to repay your debt.
However, certain types of student loan forgiveness and discharge are excluded from income and therefore tax-free.
Student loan forgiveness that involves working in a particular occupation for a specified period of time is tax-free. This includes teacher loan forgiveness and public service loan forgiveness.
The Tax Cuts and Jobs Act of 2017 made death and disability discharges tax-free from 2018 to 2025.
The cancellation of the remaining debt in an income-driven repayment plan after 20 or 25 years of payments is taxable.
The CARES Act made employer-paid student loan repayment assistance programs tax-free from March 27, 2020 through December 31, 2020.
Are student loans subject to a statute of limitation?
Congress repealed the statute of limitations and defense of laches on federal student loans in 1991.
Private student loans are still subject to a statute of limitations, depending on the state. Six years is the most common statute of limitations, but the statute of limitations can be as long as 15 years.
Can I settle my student loan debt for less than what I owe?
The U.S. Department of Education allows three standard settlement options on defaulted federal student loans. These are always greater than the loan balance at the time of default, so strategic default will yield to benefit to the borrower.
The three standard settlement options are:
- Waive collection charges, so the payoff amount equals the current loan balance.
- Waive half of the interest that has accrued since the borrower defaulted on the loans.
- Reduce the loan balance by 10%.
Options for settling defaulted private student loans vary by lender.
What are the requirements for public service loan forgiveness?
To qualify for public service loan forgiveness (PSLF), the borrower must make 120 qualifying payments on eligible loans in an eligible repayment plan while working full-time in a qualifying public service job. After the borrower has made the required number of payments, the remaining debt will be forgiven. The qualifying employment must be at the same time as the qualifying payments. The qualifying payments do not need to be consecutive or with the same employer for all 10 years.
Which jobs qualify for public service loan forgiveness?
To qualify for public service loan forgiveness, the borrower must work full-time for a U.S. federal, state, county or city government agency or for a tax-exempt non-profit organization.
Working for a government contractor does not qualify, even if they are non-profit, since the law requires the borrower to be working directly for a government agency.
Labor unions and partisan political organizations are also not eligible for public service loan forgiveness.
Examples of eligible jobs include public health, emergency management, public safety (police, fire, EMT), military service, law enforcement, public interest law, early childhood education, public service for the disabled and elderly, public libraries, public K-12 schools, public colleges and 501(c)(3) tax exempt charitable organizations.
Part-time work for two or more qualifying employers is eligible, if the combined hours are at least 30 hours per week.
Does volunteer service qualify for public service loan forgiveness?
One must be a full-time employee in a qualifying public service job to qualify for loan forgiveness. Volunteer service for a non-profit organization does not count, except for limited volunteer service through the AmeriCorps, Peace Corps and VISTA programs.
How many borrowers have qualified for public service loan forgiveness?
As of February 2020, a total of 1,730 borrowers (1.2%) have had one or more student loans forgiven under the Public Service Loan Forgiveness (PSLF) program.
An additional 1,297 borrowers (0.9%) have had one or more student loans forgiven under the Temporary Expanded Public Service Loan Forgiveness (TEPSLF) program, which relaxes the repayment plan requirements for PSLF.
A total of $163 million in student loan debt has been forgiven.
Why have so few borrowers qualified for public service loan forgiveness?
The public service loan forgiveness program is complicated, with a lot of details that borrowers must get right to qualify for loan forgiveness. They must have the right type of student loans, the loans must be in the Direct Loan program, they must be in the right repayment plans, they must have been working in the right type of job for the right employer and they must have made the right number of payments.
The most common reason why borrowers have failed to qualify for public service loan forgiveness is the number of qualifying payments. For example, many borrowers have not been in repayment for 10 years, making it impossible for them to have made 120 qualifying payments.
The loan servicer also seems to have problems counting the number of qualifying payments made by borrowers. There have been several cases where the loan servicer did not count the number of qualifying payments correctly.
Why did Congress make public service loan forgiveness so complicated?
Many aspects of the design of public service loan forgiveness were intended to reduce the cost of the program.
How can I increase my chances of qualifying for public service loan forgiveness?
Attention to detail matters. Keep good records of your employment and loan payments. Make all of your payments on time. Submit the annual recertification of your income and family size by the deadline every year. File an Employment Certification Form (ECF) every year and whenever you change employers. Be careful about loan consolidation, since it resets the forgiveness clock. (Loan forgiveness is per loan and not per borrower.) Use a public service loan forgiveness checklist to make sure you are following all of the steps correctly.
Can I qualify for both teacher loan forgiveness and public service loan forgiveness?
Yes. Teacher loan forgiveness and public service loan forgiveness are stackable, but you cannot use the same years of teaching service to qualify for both. You must have five years of teaching service to qualify for teacher loan forgiveness and an additional 10 years of teaching service to qualify for public service loan forgiveness.
Obviously, if you pursue public service loan forgiveness first, there will be no federal student loan debt remaining afterwards to be forgiven by teacher loan forgiveness. So, teacher loan forgiveness must come first. This will reduce the amount of debt to be forgiven by public service loan forgiveness.
Stacking the two loan forgiveness programs might be preferred by borrowers who are unsure whether they will pursue teaching as a career for more than five years.
The teaching service required by the TEACH Grant can also count for the loan forgiveness programs.
Can parents qualify for public service loan forgiveness?
Yes. To obtain some forgiveness, parents will need their federal education loans to be in an income-driven repayment plan. Federal Parent PLUS loans are not directly eligible for income-driven repayment. However, if a Federal Parent PLUS Loan is included in a Federal Direct Consolidation Loan, the consolidation loan is eligible for income-contingent repayment (ICR). Parents must also follow all the other requirements for public service loan forgiveness.
If my calculated payment under an income-driven repayment plan is zero, does this count toward public service loan forgiveness?
Yes. If the required monthly payment under an income-driven repayment plan is zero, it still counts as one of the required 120 qualifying payments. A zero payment can occur when the borrower’s income is less than 150% of the poverty line.
Can I make a lump sum payment to qualify for public service loan forgiveness?
Most lump sum payments, also known as paid-ahead status, will count as a single loan payment.
There are a few exceptions, which include the Segal Education Award after service in AmeriCorps, transition payments after service in Peace Corps, and U.S. Department of Defense student loan repayment program payments.
The lump sum payments from AmeriCorps and Peace Corps can count as up to 12 qualifying monthly payments.
A lump sum payment from the U.S. Department of Defense on or after July 1, 2016 can count as up to 12 qualifying monthly payments.
Can I receive partial loan forgiveness under the public service loan forgiveness program?
No. Loan forgiveness under the public service loan forgiveness program is all or nothing.
Are federal student loans in default eligible for public service loan forgiveness?
No. However, if a defaulted federal student loan is rehabilitated, it can regain eligibility for public service loan forgiveness. Payments made during default do not count toward loan forgiveness.
If my application for public service loan forgiveness was denied, can I appeal?
Yes. If you think your application for public service loan forgiveness was denied incorrectly, contact the servicer at 1-855-265-4038.
If the sole reason why your application for public service loan forgiveness was denied was due to the use of an extended or graduated repayment plan, consider applying for Temporary Expanded Public Service Loan Forgiveness.
