In a recent JLBC article we discussed the benefits of the Income Based Repayment(IBR) and Pay as you Earn (PAYE) programs, which help you reduce monthly student loan payments to as little as zero per month. We hope you are now enjoying the hundreds of dollars per month that you were able to save through the program. However, as we did note previously, these payments are deferred, rather than abolished, and as such you are potentially adding to your principal which you will eventually have to pay back.
However, there is a solution and that is the focus of this article. To combat the growing debt, there are various programs available to help wipe out the leftover loan. Although this might sound radical, under these programs, if you make a certain number of payments, whatever debt remains is discharged. More specifically, there is something called the Public Service Loan Forgiveness (PSLF) program which lets you wipe out remaining debt after just 10 years or 120 ”qualifying payments.” (We will discuss what that is a little later.)
This will not work for everyone—but if you are a teacher, nurse, policeman, fireman or are employed in a field that meets the definition of Public Service, including the non-profit sector, take a look at what this has to offer because you might be able to walk away from your student debt. After 120 qualifying payments, all remaining debt will be forgiven with no tax liability and no damage to your credit score.
It sounds too good to be true. Here’s a quick review: IBR and PAYE programs reduce your monthly payments based on your income and household size, without consideration for the loan balance. Here are four examples: We are comparing the 10-year standard payment (after 10 years of this payment the entire balance is paid) versus the calculated payment under IBR. If you qualify under PAYE your payment would be even less.
• A teacher earning $50,000 with a household size of 4, debt of $50,000. $183 is the new payment versus the 10-year standard payment of $575.
• A nurse earning $65,000 with a household of 6, debt of $100,000. $220 is the new payment versus the 10-year standard payment of $1150.
• Charity worker earning $70,000 with a household of 4, debt of $75,000. $433 is the new payment versus the 10-year standard payment of $863
• Recent graduate earning $40,000 with a household of one, debt of $80,000. $285 is the new payment versus the 10-year standard payment of $920.
Assuming these payments are made for 10 years, total payments for each of the above is as follows:
Teacher—$69.000 for 10-year standard versus $21,960 under IBR
Nurse—$138,000 for 10-year standard versus $26,400 under IBR
Charity Worker—$103,560 for 10-year standard versus $51,960 under IBR
Recent Graduate— $110,400 for 10-year standard versus $34,200 under IBR
The charts above show the benefit of the reduced payments under the two programs. Obviously, if the monthly payments are less, the amount paid over 10 years will be less. The excitement of this program is that, if you are eligible for the Public Service Loan Forgiveness program, once you have made the 120 required payments, you can request and receive a discharge of any amounts still owed. There is no negative mark on your credit report and you do not have to report the discharged amount as income. (Normally any forgiven debt is reportable as income in the year it is forgiven and taxes will be due on these amounts. That is not the case in this program)
What are qualified payments? Essentially there are three requirements to be qualified payments.
• You must be eligible under the program guidelines;
• You must be enrolled in the program and,
• You must make payments each month they are due.
They do not have to be 120 consecutive months, in case you take time off or try a different profession for some time. As long as you have a TOTAL of 120 payments, you will eligible. There are forms you will need to file to verify your employment during the process. Don’t wait until the 10 years is finished. You will need to verify employment and you don’t want to have to find an employer who closed years ago. Make the payments, file the forms and after 120 payments, you will be able to wipe out all of the remaining debt you incurred while still a student.
If you are not a Public service employee, you will have to wait 25 years to discharge your debts. This is obviously not as attractive as the 10-year term and you may decide this is not for you since the total payment will increase as you are forced to make up these payments for 25 years. However, for the first three years of payments of subsidized loans, any payments not made under the program, are paid by the government and will not be added back to the principal. Even if you are not PSLF eligible and don’t plan to benefit from discharge, the first three years can provide an immediate benefit.
Pay as you Earn (PAYE) reduces the discharge period to 20 years for students who have recently graduated. This is also not as appealing as the 10-year Public Service Program, but it does provide flexibility in making current payments and relief if your earnings don’t match up with what you had expected. If you are PSLF eligible, you can still discharge your debt after 120 payments and because the monthly payment is less, you will actually end up paying less than under IBR.
So before you write next month’s check, do a little homework and see if the program can benefit you.
If you would like to get more information regarding these programs, call your loan servicer, or contact me at djs.siegel_gmail.com and I will forward a booklet detailing these programs along with a list of links to various Dept of Education sites.
David Siegel is a Home Lending Specialist with Citibank in its Englewood office. Siegel can be reached at david.siegel_citi.com or 201-419-1330. Join David, Marc Stein (Realtor) and Judah Fuld(Attorney) for a First Time Homebuyer seminar at Dougies, Tuesday, December 17th at 7:00 p.m.
By David Siegel