New Government Program Pays Off Student Loans

[Luke_Wilbur]

Student loan borrowers who commit to a decade of public service may see the remaining balance on their federal student loans forgiven under the government's new public-service loan forgiveness program.

 

Borrowers who enter public-service fields such as law enforcement, public education, or certain nonprofit work could have their remaining federal student loan debt forgiven, provided they work full-time for 10 years in an eligible public-service field and make 120 monthly payments on their college loans during that time.

 

To be eligible for the loan forgiveness program, borrowers must have taken out student loans, parent PLUS loans, or a federal consolidation loan through the Department of Education's federal Direct Loan Program. Borrowers who took out their federal student loans from a private lender through the Federal Family Education Loan Program (rather than directly from the government through the Direct Loan Program) will have to consolidate their FFELP student loans into the Direct Loan Program in order to qualify for the loan forgiveness benefit.

 

The public-service loan forgiveness program is a provision of the College Cost Reduction and Access Act of 2007, which also increased federal grant aid to needy students and was intended to provide student loan borrowers with the incentive to consider and continue working in often low-paying public-service fields.

 

Borrowers will only be able to count payments made on their federal Direct student loans after October 1, 2007, toward the 120-payment requirement. FFELP borrowers who consolidate their FFELP college loans into a federal Direct Consolidation Loan will only be able to count the payments they make on their Direct Consolidation Loan toward their payment requirement. Any payments made prior to October 1, 2007, or to any lender other than the federal government won't count.

 

The first batch of loan forgiveness payments, to be issued in 2017, will cover any federal student loan balance, including principal and interest, that remains after a borrower has made 10 years of payments, while working full-time in a public-service field, under one of three possible student loan repayment plans: the standard 10-year repayment plan, the income-contingent repayment plan, or the income-based repayment plan, which becomes available July 1, 2009, as another provision of the College Cost Reduction and Access Act.

 

Both the income-contingent and income-based repayment options allow borrowers to make smaller monthly payments than what is typically required under the standard repayment plan. For borrowers in other Direct Loan repayment plans, only those payments they make that are at least equal to the monthly payment amount that would be required under the standard repayment plan will count toward the 120-payment requirement.

 

Because the standard repayment plan positions borrowers to pay off their student loan balance in 10 years -- the same period of public service required before any student loan balance can be forgiven -- financial aid experts are encouraging borrowers in low-paying public-service jobs who are interested in the loan forgiveness program to look into their eligibility for the income-contingent or income-based repayment plans. Borrowers enrolled in the standard repayment plan throughout their required 10-year service period may not have any student loan debt left to be forgiven after 10 years.

 

The fact that borrowers may have already paid off their student loans before the loan forgiveness program can even go into effect is a flaw of the program that could prove misleading to students, say government opponents.

 

Diane Auer Jones, assistant secretary for postsecondary education for the U.S. Department of Education, says students taking the program's benefits into consideration as they plan their college financing strategy may end up being disappointed.

 

"Some students will see the program and take on more debt than they would have otherwise," Auer Jones explains, "not realizing it is unlikely that most of it will be forgiven."

 

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