Public Service Loan Forgiveness and You

If you’re a public defender (or just about any other government or “public service” lawyer) with student loans, you’ve probably heard that there’s a way to get your federal loans forgiven after you make payments for a while. Well, it’s true! Just make 120 “qualifying” payments on “eligible” loans while working “full time” in a “public service” job and after those 120 payments (10 years), the full balance of all your federal loans (including interest) will be forgiven! Easy, right?

Well, yes and no, but after spending the last two days fighting the loan monsters, I think I might have this figured out. It’s not easy, but it’s not that hard, either.

Start at Equal Justice Works. They’ve done all the hard work for you. Download their Public Service Loan Forgiveness Checklist and follow it to the letter. The first step is to find out what kind of loans you have by checking the National Student Loan Data System. As EJW explains here, even if you’ve already consolidated your loans, you may need to do it again because you might have Federal Family Education Loan (FFEL) consolidations instead of Federal Direct consolidations. FFEL loans do not qualify for public service loan forgiveness, so you will need to reconsolidate those FFEL consolidations to make them Direct consolidations. Silly, but true. My understanding is if you do your consolidations through the Federal Direct Consolidation program, the resulting Direct consolidation loans will be eligible for forgiveness. Be sure to read all the rules and disclaimers about consolidation because it may raise your interest rates. That’s not a problem if you’re certain you’re going to keep that public service job for 10 years so all your federal student loan debt will be forgiven, but it could make a big difference over time if you’re not so sure.

Once all of your federal student loans are converted to qualifying Direct consolidation loans, you have to make sure you’re making qualifying payments. The College Cost Reduction and Access Act (CCRAA) says that qualifying payments are those made under the “standard,” income-based repayment (IBR), or income-contingent repayment (ICR) programs. That’s true, but it’s misleading. My loans were all in “standard” repayment, so I figured those payments would qualify toward my 120 needed for forgiveness. Wrong. My “standard” payment plan was for a 20-year term on some loans and a 30-year term on others. Payments made on the “standard” repayment plan only qualify if you’re paying on a 10-year term. And, of course, if you’re making standard payments on a 10-year term, you will pay off your loans in 10 years, so there will be no forgiveness. So the “standard,” 10-year repayment plan is technically eligible for forgiveness, but, well, whatever. Just forget about the standard repayment plan; you need the IBR or ICR.

ICR is basically interest-only; payments must at least equal the accrued interest each month and length of repayment is up to 15 years. If you want to maximize the amount that gets forgiven after 10 years, and if you qualify, the IBR is may be the better way to go.

I went for the IBR, which is explained pretty well here. You have to qualify for IBR by having some financial hardship which means that your “standard” repayment plan payment would be more than 15% of your “disposable” adjusted gross income (AGI). To figure out what that means, get your AGI from your most recent tax return — it’s your gross minus deductions, which means it’s probably a lot less than your gross. Then find the Annual Poverty Guideline for your household size. (Check here for updates.) Multiply your Poverty Guideline by 1.5, then subtract that number from your AGI. This number is your “disposable” AGI. If your annual payments under the standard repayment plan are more than 15% of your disposable AGI, you qualify for IBR.

Note: Your payment under IBR should be no more than 15% of your disposable AGI (so your monthly payment should be your disposable AGI divided by 12). It seems the Direct Loan people are not always calculating your IBR payment correctly; they are apparently basing your payment on gross income rather than AGI. See more at IBRinfo and in the IBR Forum at EJW for what you can do to correct this so you can get the lowest monthly payments — and greatest loan forgiveness — possible.

Once you’ve done all that, just call up your loan servicer and request to change your payment plan on your federal loans to the IBR plan. This should theoretically reduce your monthly payments on your federal loans, but more importantly if you make 120 of these payments, you can then ask the federal government to forgive the balance of your federal student loan debt. Yes!

Of course, no one has ever done this because the program just started in 2007 (and was actually sort of phased in over time), so the Department of Education hasn’t even developed the form that you’ll eventually use to apply for forgiveness. That means theoretically you could think you’ve done everything right and make your payments for 10 years only to find out, whoops! you missed something somewhere and all those payments didn’t qualify!

Needless to say, that would be a huge bummer. If there’s a way to avoid that, it’s making sure you have the best information. Don’t rely on anything you read here! Do your own research and make sure you’ve got all your ducks in a row. I’ll try to update this if I find out anything new. Also, there are more tips and tidbits in the EJW loan forgiveness podcast, so check that out, too.

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