Student Loan Consolidation

It’s no secret that rising college costs have forced many students to assume debt. One problem with the high cost of college and correspondingly high student debt has been a reluctance on the part of college graduates to consider careers in public service. Graduates may feel pressured to take private-sector jobs because they can earn a higher salary, and that will help them reduce the burden of student loans faster. In an effort to relieve the financial pressure and encourage people to take these types of jobs with nonprofits or the government, Congress passed a debt forgiveness program for public service employees in 2007. This is called the Public Service Loan Forgiveness Program, usually shortened to PSLF.

How to Qualify for Public Service Debt Forgiveness

According to the Federal Student Aid website, the following kinds of employers may make debtors eligible for this program:

• Local, state, and federal government organizations
• Tribal governments
• Nonprofit organizations with tax-exempt status
• Certain nonprofits that don’t qualify for tax-exempt status but provide qualifying services

Qualify services include early childhood education, public health, public safety, and more. As a note, employment with labor unions, for-profit companies, political parties, and even many nonprofits that aren’t tax exempt do not qualify for the program.

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How Does the PSLF Work?

If a debtor qualifies for this forgiveness program, they are given a monthly payment based upon their income. Typically, they make payments for a minimum of ten years, or 120 payments. Qualifying payments must be made within 15 days of the due date, while the loan isn’t in default, and while employed full time. Full time is usually defined as working at least 30 hours a week, but an employer’s definition could be different. It is also possible to take part-time jobs with two different eligible employers to qualify.

Some other kinds of forgiveness programs require the borrow to declare the amount forgiven as income in the year that the loan is dismissed. This program does not have that requirement, and that’s a big advantage. Borrowers do need to certify their eligibility for this program. Since the law requires at least 10 years of payments, and the first student loan debtors won’t qualify until 2017, nobody has actually had their loans forgiven under this program yet. However, it’s possible to apply for the program today and make payments that are based upon income.

Which Kinds of Student Loans Qualify for Forgiveness Under PSLF?

Only loans that were taken out under the federal William Ford Direct Loan program qualify. There are other kinds of student loans that may not qualify. However, it might be possible to qualify anyway if these loans get consolidated under the Direct Consolidation Program. However, the only payments that will qualify for the 120 payments will be those that were made after the ineligible loans have already been consolidated.

This program is so new that nobody has been in it for ten years, and the rules are fairly complex. Still, it promises to help encourage many college graduates to serve their communities in public service jobs. If you think you qualify, or if you would like to consider a career in public service, this is a good time to research this program to help reduce the burden of college debt.

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After graduating from college, you may end up paying a large percentage of your income to your school loans. Although most colleges try to secure loan funds through a minimal number of lenders, students often end up with loan funds owed to multiple entities. As each lender demands a minimum payment, your funds may not stretch far enough to pay down debts while reserving enough for living expenses.

Thankfully, you can roll your multiple federal student loans into a single account through the Direct Consolidation Loan program. The consolidated loan package may then qualify for inclusion in a repayment program to reduce your monthly debt obligations and even result in forgiveness of the remaining balance. Here’s what you need to know when participating in loan consolidation and repayment programs.

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Grace Periods Do Not Reset

You normally have a grace period of up to six months after graduation to begin paying your loans. During this time, your loans do not accrue interest nor go into default for non-payment. When applying for loan consolidation, most lenders want you to wait until the grace period has ended.

If you decide to enroll in graduate school during that six-month stretch, you will only receive the remaining time on your grace period after graduating a second time. Therefore, you must carefully time your school attendance periods and loan consolidation application to avoid missing payments and ending up in default status.

Multiple Repayment Plans Available

After completing the loan consolidation process, you have the ability to select from eight structured repayment plans. The repayment plans range from fixed and graduated amounts to several income-based programs. You will need to look over your career goals and finances with a professional to determine the best repayment plan for your situation.

With the income based repayment plans, your loans, interest included, are forgiven in 20 to 25 years. If you work in a public service career, loan forgiveness occurs in just 10 years. During these income-based repayment periods, you will pay between 10 to 15 percent of your discretionary income to your loan balance.

Yearly Program Renewals Mandatory

You must keep careful track of your repayment program application date, as yearly renewals are required. If you fail to reapply on a yearly basis, the loan forgiveness counter may start off at the beginning. The yearly application process involves submission of your tax forms to prove a qualifying income status for your family size. Depending on your lender’s processing procedures, you will need to submit your tax forms by mail or through an online system.

Taxes Owed On Forgiven Balance

Once you reach the loan forgiveness date for your consolidated loans, you will need to claim the forgiven total as income on your taxes. If you plan ahead, and have the income available, you can build up a savings account with enough funds to cover the income tax payments. Otherwise, you may need to set up a payment plan with the IRS to cover taxes on the forgiven loan debt amount.

Weighing Loan Consolidation and Repayment Options

With so many program requirements, restrictions and options to consider, it is wise to involve a professional in the consolidation and repayment plan selection process. A professional can help you identify eligible loans and bundle them into the appropriate consolidation plan. Forgetting a single loan has the potential to reset your journey toward loan forgiveness, so you must ensure all debts are included the first time around.

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