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The Short Answer

Want Student Loan Relief? Consider Public Service

Borrowers who enter careers in the public sector may be able to get part of their college loans canceled. Here's how.

Question: I've heard that people who take out college loans can have part of the loans forgiven if they work in certain types of jobs. Can you explain how this works?

Answer: There are two programs through which borrowers with federal student loan debt can have a portion of that debt forgiven, or canceled. The first of these is geared toward borrowers who work in public-service jobs while the second is geared specifically toward teachers. In each case eligibility depends largely on the borrower's type of employment and level of income.

For Those in Public Service
The first of these programs, called the Public Service Loan Forgiveness Program, requires that the borrower make 120 regular, on-time monthly payments on their federal loans while also working in a public-service job. Forgiveness covers the remaining balance on the loan and only loans made through the Federal Direct Loan program, including Stafford loans, are eligible. Perkins loans, loans made through private lenders (even if guaranteed by the federal government), and other college loan types are not. However, if you consolidate any of these loans into a Direct Consolidation Loan, any payments made on this new loan count toward the 120-payment rule. (You can read about the pros and cons of consolidating college loans in this Short Answer article.)

What kinds of jobs qualify for the program? According to the program website, they include "any employment with a federal, state, or local government agency, entity, or organization or a not-for-profit organization that has been designated as tax-exempt by the Internal Revenue Service." The type of job and type of organization doesn't matter, meaning the program is open to pretty much anyone with a qualifying loan who works full-time in government or a not-for-profit organization with 501(c)(3) tax-exempt status. Included in this are borrowers serving in the military or who work in public safety, law enforcement, emergency management, public health, public education, or public libraries.

To take advantage of the Public Service Loan Forgiveness Program, the borrower must choose a qualified loan-repayment plan, such as the Income-Based Repayment Plan, which limits monthly payments to 15% of the borrower's discretionary income. Although the standard 10-year repayment plan technically qualifies, the fact that it is designed to pay off loans before forgiveness eligibility kicks in (as noted above, the borrower must make 120 on-time payments to qualify) effectively makes it irrelevant here. Income-based repayment plans, on the other hand, extend the repayment period to as long as 25 years while offering lower monthly payments. Therefore, students considering public-service careers while borrowing for school are encouraged to use one of these income-based repayment plans as this may qualify them for loan forgiveness after 10 years. Also, parents who take out Parent PLUS loans on behalf of their children may be eligible for loan forgiveness if they--the parents--work in one of the aforementioned public-service fields.

More information on the Public Service Loan Forgiveness Program, including how to apply, may be found here.

For Teachers at Low-Income Schools
The federal government also offers a loan-forgiveness program for borrowers who teach in underprivileged schools. Under the Teacher Loan Forgiveness Program borrowers who teach for at least five consecutive years in schools designated as low-income may have up to $5,000 in loans forgiven. For teachers in specialty areas such as math, science, or special education, up to $17,500 in total loans may be forgiven. Borrowers must have a bachelor's degree, a teaching license, and meet other qualifications.

The program is available to teachers who have taken Federal Direct loans, which are offered directly through the U.S. Department of Education, as well as to those with Perkins loans, a type of need-based federal loan that colleges offer. You cannot take advantage of both the Teacher Loan Forgiveness and Public Service Loan Forgiveness programs. Generally, for borrowers with higher loan debt and who qualify for both, the Public Service Loan Forgiveness is more beneficial.

For more information on the Teacher Loan Forgiveness Program, visit the Federal Student Aid website here

Other Repayment Plans
In addition to the federal programs described above, some schools offer what's known as a Loan Repayment Assistance Program, or LRAP. Typically these are available to graduates who pursue a specific career path--such as law school grads who go into public service--and/or who meet certain income guidelines.

Additional repayment assistance is offered by programs such as AmeriCorps, which grants qualified volunteers who complete one full year of service an award of $5,645 (the current maximum Pell Grant amount) that may be used to pay off college loans, and the Peace Corps, through which volunteers who serve for two years can receive a 15% cancelation of their Perkins loans.

Student loan debt forgiven through the federal programs mentioned above is not subject to federal income tax. But loan forgiveness provided by other institutions, such as colleges, may be. Consult a tax professional if you're not sure whether having some or all of your loan forgiven would add to your tax bill.

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