×

Student Loan Forgiveness 101

April 9, 2016

Student loan forgiveness (also known as cancellation and discharge of student loans) is the act of releasing a borrower from their obligation to repay all (or a portion) of their federal student loan(s), including the principal and interest. It is only provided under certain circumstances, to those with federal loans, and to borrowers who meet certain eligibility requirements. While it may seem hard to qualify for student loan forgiveness, there are a variety of options available, all of which intend to significantly reduce or eliminate student loan debt.

This introductory guide to student loan forgiveness aims to help readers familiarize themselves with the options and eligibility requirements surrounding federal student loan forgiveness and includes: student loan forgiveness categories, income-driven repayment plans, state, and city-sponsored forgiveness options, and what happens once a student loan forgiveness application is approved or denied.

Student Loan Forgiveness Categories

There are a variety of circumstances that may lead to federal student loan forgiveness. However, none are guaranteed and each circumstance may or may not apply to the borrower’s particular type of federal loan. Furthermore, certain categories of loan forgiveness mandate that applicants meet certain eligibility requirements, including items such as qualified monthly payments and qualifying employment. The following list highlights the different federal loan forgiveness categories, but borrowers should also review this chart, from the Federal Student Aid Office, to ensure their circumstance applies to their particular federal loan type (Direct Loans, FFEL Program Loans, and Perkins Loans):

  • Closed School Discharge
  • Total and Permanent Disability (TPD) Discharge
  • Death Discharge
  • Discharge in Bankruptcy (rare)
  • False Certification of Student Eligibility or Unauthorized Payment Discharge
  • Unpaid Refund Discharge
  • Teacher Loan Forgiveness
  • Public Service Loan Forgiveness
  • Perkins Loan Cancellation and Discharge
  • Borrower Defense Discharge

Borrowers who believe they may qualify for student loan forgiveness are encouraged to read more about the possibilities related to federal student loan forgiveness and cancellation. These borrowers should also contact their loan servicer (the company handling billing and services related to the student loan) to further discuss their options. Finally, if a student loan forgiveness application is placed under review, borrowers should continue to make payments on their loan to prevent it from going into default or accumulating additional interest until all final decisions are made.

Income-Driven Repayment Plans & Student Loan Forgiveness

The Federal Government’s four income-driven student loan repayment plans forgive a student’s remaining loan balance after either 20 or 25 years. These payment plans work by creating a set, monthly payment amounts that are based on what is affordable for the borrower’s income and family size. After making qualified payments for the entirety of the repayment period, the loan’s remaining balance is forgiven. Applying for an income-driven repayment plan is free with the Federal Government, and per Federal Student Aid (an office of the Department of Education), “most federal student loans are eligible for at least one income-driven repayment plan.” The repayment plans — and a few of their details —include:

  • Income-Based Repayment (IBR Plan):

The IBR Plan requires that a borrower meets certain eligibility requirements. Depending on when the loan was issued, monthly payments are generally 10 percent or 15 percent of the borrower’s discretionary income, and the repayment period is either 20 or 25 years.

  • Income-Contingent Repayment (ICR Plan):

The ICR Plan is open to all borrowers with eligible federal loans. Payment amounts are the lesser of the two options: either 20 percent of the borrower’s discretionary income or what the borrower would pay on a repayment plan with a fixed payment over the course of 12 years (adjusted according to income). The repayment period is 25 years.

  • Pay As You Earn (PAYE Plan):

The PAYE Plan requires that a borrower meets certain eligibility requirements. Payments are generally 10 percent of the borrower’s discretionary income, but it is never more than the 10-year Standard Repayment Plan amount. The repayment period is 20 years.

  • Revised Pay As You Earn (REPAYE Plan):

The REPAYE Plan is open to all borrowers with eligible federal loans, and payments are generally 10 percent of the borrower’s discretionary income. The repayment period is 20 years for loans solely dedicated to undergraduate study and 25 years when the loans have been used for graduate or professional study.

Borrowers using an income-based repayment plan may also be eligible for Public Service Loan Forgiveness. Qualifying for this plan means borrowers with a remaining Direct Loan balance will have loans forgiven after 10 years of qualifying payments, rather than 20 years. Learn more about the program and its qualifications here.

State and City-Sponsored Loan Forgiveness Programs

Student loan forgiveness programs may also be offered by particular states and cities. These local-level loan forgiveness programs are often directed at particular professions (for example physicians, health care providers, and teachers) when the city or state faces an employment shortage in a critical profession. Loan forgiveness for those with careers in science, technology, engineering, mathematics, and law are also frequently offered. To find state and city-based loan forgiveness programs, try searching one of the following databases:

  • Physicians looking to find states offering loan repayment and forgiveness, as well as scholarship opportunities, will find the Association of American Medical College’s (AAMC) searchable database most useful.

Approval or Denial of Student Loan Forgiveness

Approved: Borrowers who are approved for student loan forgiveness are no longer obligated to make student loan payments unless only a certain amount is forgiven. Additional benefits may also include a refund of past payments, the removal of any negative credit records related to default payments, and a renewed eligibility to apply for federal student aid (as long as there are no other defaulted loans). However, there are cases in which the borrower may be responsible for refunding a portion of the loan to the U.S. Department of Education, so it is important to understand and verify every detail throughout the process.

Denied: Borrowers who are denied student loan forgiveness remain responsible for repaying the remaining balance of the loan. It is unlikely that a final decision can be appealed (with the exception of false certification and forged signature discharges).

More Options

Borrowers who are ineligible for student loan forgiveness and income-driven repayment plans — as well as borrowers with private loans — will find that additional money-saving options still exist in the form of student loan refinancing and consolidation. No matter the situation, we recommend that borrowers talk to a student loan expert to find the plan and benefits that best suit their short and long-term financial goals. For questions about refinancing and consolidating student loans — both private and federal — contact the specialists at Education Loan Finance.

Leave a Reply

Your email address will not be published. Required fields are marked *

2019-04-22
Pay Down Student Loan Debt or Invest In a Traditional 401(k)?

Student loan debt in the United States has amounted to $1.5 trillion according to the Federal Reserve. This large student loan debt burden has affected many young people who are looking to start families and create a life for themselves. Despite this tough obstacle, many young people still have excess savings and need to determine what to do with these savings. Should they take their savings and invest in a traditional 401(k) or use that savings to pay down their student loan debt? We’re going to share different situations all spanning 10 years that involve paying down student loan debt and investing in a traditional 401(k) plan.     Let’s say you have a taxable income of $150,000 and file taxes jointly with a spouse. Under the new 2018 tax brackets, your effective federal tax rate is 16.59%.  Let’s also assume you have $70,000 of student loan debt with 10 years left at a 7% interest rate. Your monthly student loan payment would be about $812.76 assuming you’re making the same payment amount every month.  What should you do? Pay down the student loan or invest in a traditional 401(k) account?    

Income: $150,000

Effective Tax Rate: 16.59%

Student Loan Debt: $70,000

Monthly Payment: $812.76

Term: 10 years

Interest Rate: 7%

 

Scenario 1 - Paying Down Debt Student Loans Then Investing

Let’s start off by taking a look at how you can pay this debt down faster. Did you know that if you pay an extra $100 a month in addition to your regular student loan monthly payment, you’ll save $4,464.13 in interest paid? Not only will you save money by paying extra every month, but you’ll cut down the overall repayment period by a year and a half. Yes, you’ll be debt-free a year and a half earlier than you thought!   $812.76 + $100 = $912.76 Monthly Payment   After being debt free sooner than expected, you may decide to start investing in your 401(k). If you put all of the money you were paying from your student loan into your 401(k), you’d contribute $1,094.31 monthly.   You may be wondering how you can contribute more money towards your 401(k) than your student loan payment. The answer lies in taxes.   Student loan payments are made with post-tax income. 401(k) contributions are made with pre-tax income. Since a traditional 401(k) account uses pre-tax income, you are able to contribute more towards your 401(k) than you would have your student loan debt with the same income. Though you don’t pay taxes on 401(k) contributions, ordinary income tax will be applied on 401(k) distributions.   $912.76 / (1-16.59%) = $1.094.31 Monthly Contribution   After a year and half of contributing $1,094.31 per month, compounded monthly, at an assumed 7% rate of return, you would have $20,826.09. The investment amount of $20,826.09 combined with the student loan interest savings of $4,464.13 would give you a total 10-year net value of $25,290.23.  

Scenario 2 - Investing While Paying Down Student Loan Debt

  If you have a higher priority of saving for retirement than paying off your student loan debt, you may want a different option. Let’s see what would happen if you decided to put that extra $100 a month into a tax-deferred 401(k) account. The $100 would be contributed to your 401(k) account instead of your student loan debt balance, but you would continue to make monthly student loan debt payments. Due to the pre-tax nature of a 401(k), your contribution of $100 post-tax would become $119.89 pre-tax.   $100 / (1-16.59%) = $119.89 Monthly Contribution   With an assumed 7% rate of return, compounded monthly, on your 401(k), you will have approximately $20,872.19 in your 401(k) after 10 years.  

Scenario 3 - Employer Contributions 401(k)

  Some employers will match your 401(k) contributions up to a certain percentage of your income. This could be a real game-changer. Turning down your employer’s 401(k) match is like throwing away free money. If you have student loan debt, but your employer offers a match, consider contributing to receive the maximum employer match. If you contribute $119.89 a month with an employer match while making your normal student loan payments, your money can really grow.  If your employer matches the 401(k) contribution dollar for dollar, you will double your investment of $20,872.19 from Scenario 2 to $41,744.37 in your 401(k) account after 10 years.   Contributions to a traditional 401(k) are made prior to your income being taxed. The withdrawals on a traditional 401(k) are taxed. The tax rate that is applied to your withdrawals depends on your tax bracket in retirement.  As the average person’s career develops, they typically continue to increase their salary and move into a higher tax bracket. Upon retirement, they will see a decrease in income and move to a lower tax bracket. This means your 401(k) withdrawals could be taxed in a lower tax bracket if done while in retirement, instead of in your working years. Note that this will only be the case if your retirement income is less than your working income.    

Scenario 1 – Paying Down Then Investing

Scenario 2 – Investing While Paying Down Debt

Scenario 3 – Employer Contribution 401k

  As you can see from the chart above, investing while paying down student loan debt or paying down debt than investing produces almost the same total net value. One debt pays down and investment strategy might perform better than the other depending on the return in the 401(k) account. It’s important to keep in mind that the returns on a 401(k) account are never guaranteed   The real deciding factor on whether to invest or pay down your student loan debt will be if an employer offers a 401(k) match. Matching contributions from your employer will make investing significantly more attractive than paying down debt. If an employer match to your 401(k) is available, it’s wise to take advantage of it.   Your comfort level with your student loan debt can be a large factor in your decision to invest in a traditional 401(k) account or to pay down debt. Knowing whether you are more interested in being debt free or being prepared for retirement can help you make a decision. Let’s look at how student loan refinancing can help you amplify your student loan debt pay down and investment strategy.   In Scenarios 1, 2, and 3, the big question was whether you should use the additional $100 a month to pay down student loan debt or invest in a 401(k). What if you wanted to spend that $100 a month instead? Is it possible to find a way to save on student loan debt while spending that extra $100 a month? You’re in luck! This can be done with student loan refinancing.  

Scenario 4 - Refinancing Student Loan Debt

By refinancing your student loan debt, you should be able to decrease the high-interest rate of your student loan. In addition, you should be able to save money over the life of the loan and in some cases monthly.   The total interest you would have to pay on your student loans of $70,000 at 7% interest over 10 years is $27,531.12. If you qualify to refinance your student loan debt to a 5% interest rate, the total interest you would pay is $19,095.03. This would mean that refinancing your student loans would be saving you $8,436.09 in interest over the life of the loan or $70.30 a month.  When comparing your new 5% interest rate to your previous interest rate of 7%, not only would you be saving over the life of the loan, but reducing your monthly payment!   $8,436.09 / 120 = $70.30 Monthly Interest Savings  

Learn More About Student Loan Refinancing

   

Scenario 5 - Refinancing and Paying Down Debt Then Investing

  Now, what happens if you refinance your student loan debt, pay down the debt, and then start investing? Refinancing your student loan debt will cut your interest rate, saving you $70.30 a month, making your monthly student loan payment now $742.46 instead of $812.76 per month. By taking the additional $100 a month and the $70.30 in student loan savings from refinancing and applying them to your monthly student loan payment, you will be debt free two years and three months sooner than expected. Two years and three months are earlier compared to the one and a half years from Scenario 1. Just a reminder, in Scenario 1, there an additional $100 a month put towards your student loan debt. With refinancing and making the same monthly payment as Scenario 1, you will save $13,017.87 in interest over your original loan.   $742.46 + $70.30 + $100 = $912.76 Monthly Payment   Now that you’re debt free, you can use the money that would have been used for your student loan payment to contribute to your 401(k). Since 401(k) contributions are done with pre-tax income, you will be able to contribute a pre-tax amount of $912.76, which is $1094.31.   $912.76 / (1-16.59%) = $1.094.31 Monthly Contribution   After two years and three months of contributing $1,094.31 per month, compounded monthly, at an assumed 7% rate of return, you would have $32,085.89. The investment amount of $32,085.09 combined with the student loan interest savings of $13,017.87 would give you a total 10-year net value of $45,103.76.  

Scenario 6 - Refinancing and Investing While Paying Down Debt

  Now let’s try refinancing while you simultaneously pay down debt and invest. In this scenario, you will cut down the interest rate on your student loan debt from 7% to 5% by refinancing. You’ll be contributing the pre-tax amount of the extra $100 a month and $70.30 a month in interest savings towards your 401(k). You will end up contributing a total of $204.17 a month to your 401(k) account.   ($100 + $70.30) / (1-16.59%) = $204.17 Monthly Contribution   With an assumed 7% rate of return, compounded monthly, you will have approximately $35,544.87 in your 401(k) after 10 years. Combined with the interest savings of $8,436.09, you will have a total net value of $43,980.96.       Scenario 1 – Paying Down Then Investing Scenario 2 – Investing While Paying Down Debt Scenario 4 – Refinancing Student Loan Debt Scenario 5 – Refinancing and Paying Down Debt Then Investing Scenario 6 – Refinancing and Investing While Paying Down Debt   As you can see from the chart above, just from refinancing your student loan debt, you can save money and increase your total net value. If you take it one step further and supplement your debt pay down and investment strategy with student loan refinancing, you would approximately double your total net value! By taking advantage of student loan refinancing, you will be able to supercharge your debt pay down and investment strategy. For those who are just trying to save money on student loans or have more money to invest in their 401(k), student loan refinancing is the way to go.  

Check Out Our Guide to Student Loan Refinancing

  NOTICE: Education Loan Finance by SouthEast Bank is not authorized to provide tax advice or financial advice. If you need tax advice or financial advice contacts a professional. All statements regarding 401(k) contributions assume that you have a 401(k) plan and that you are able to contribute those amounts without contributing more than the current federal law limits. Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.  
2019-04-04
How To Find The Best College For You

Picking the right college for you is quite a task. There are so many to choose from! Plus, with the birth of digital experiences, vlogs, and just plain slick marketing materials, it can be a challenge to determine what matters when making such a big decision. It’s important throughout the college search process to remember the main goal which is getting an education. It can be easy to become distracted by the brand new apartments on campus and the conveniences that the college offers. Yes, it’s important to be comfortable while attending school, but it’s not worth losing out on education. How do you find the right college for you? Here are some things that you should take into consideration. Not every aspect will matter to you, but it’s nice to think about big-picture options.  

Major Malfunctions

The major that you’re interested in studying and how the college meets the major’s needs could be a huge deciding factor. For example, does the college have a good reputation, appropriate resources, and a notable department? Really take into consideration what the school’s reputation for the program.  Is your major available and are there classes that will challenge and engage you? Is the reputation of the college’s program going to further your career upon graduating?   Most people know their preferred major or industry before starting, but it’s common for college students to change majors. Does the school have a few appealing options for you? Get in touch with an advisor or the head of the department of your choice and see how you can find out more. You are attending college to further your education and get a career, so if that program isn’t available that could be deal-breaker.  

Location, Location, Location

Have you always wanted to live on the east coast, dreaming of the mountains, or would you prefer to stay closer to home? Being close by to your family and paying lower in-state tuition could be great options for you. A school in the city could be a better option since you’ll have the ability to take in everything that urban life has to offer. From expansive green grounds to bustling urban towers, there are so many different types of locations you could pick. Don’t rule anything out too soon. You might be surprised how friendly a university in the city can be, or how lively you’ll find a more rural campus.     When selecting a school it’s important that you consider the distance from your home. Many people often times will want to be available to go home on some weekends or for big events. What the cost is to go home? Can you take public transportation, can you have a car on campus your first year, can a friend or parent pick you up, if needed? A primary consideration for location is the cost. In-state-schools provide a much lower cost to attend than an out-of-state school. If you know you’ll need to borrow student loans for college it may be best to stay with an in-state-school. Paying to attend an out-of-state school will mean more money you’ll have to borrow and eventually pay back. Your decision on school location should be influenced by your comfortability level with being away from home and the cost associated with the location.  

Tally Total Cost

Cost is a huge factor in selecting a college.  Fees aren’t only limited to tuition but can be dependent on the school. One school may have lower tuition, but fees like room and board, off-campus housing, meal plans, or transportation. We touched on this previously but, if you opt for a school that’s farther from home, how much will you spend coming home to visit? If you really want to go far away from home you may need to factor in the cost of airfare to visit home. Plus, look into fees like a parking permit and departmental fees. It’s worth doing a little math to see what the total cost is before you get your heart set on one or another.  

Finding Financial Aid

If you can qualify for financial aid and are being provided with financial aid from a college that should heavily impact your decision. Can you get more aid at one school vs. another? Are there more scholarship options available through one college over another? Does staying in-state offer enough benefits that you don’t want to leave? There’s nothing wrong with picking a school because it will offer you the most aid. Aid is especially important if you are borrowing money to attend college. Even if the school doesn’t check all of your other boxes for wants, the cost savings could help make it a front-runner. Make sure you check into scholarships and applications for aid before you make your decision.  

What You Need to Know About Scholarships for College

 

Culture Shock

Schools usually have a discernible culture that students or faculty can feel and describe. For instance, a school with a robust exchange student program might be more inclusive and have a culture that appreciates diverse perspectives. Another school might be steeped in tradition and fit better for someone with traditional values. Schools with bigger arts programs or specialties in STEM could have a culture all their own. You really can’t get a good depiction of the culture from marketing materials. Understanding a school’s culture is the kind of thing you can ask while visiting or inquire about online in places like forums or Reddit.  

Sweet Student Life

You will be spending a lot of time on campus. Even if you are non-traditional or live off campus. You should take advantage of entertainment, attending special activities, and participating in one or more organizations. Maybe you want a certain Greek life experience—check into it! Ask around and see what the reputation of campus life is like. Look at upcoming events and see what types of organizations you can join. It can be difficult the first year to make friends and get connected into a social group. Well-supported campus life can make this big task a breeze and set you up for some awesome lifelong friendships and memorable experiences.  

All About Amenities

Relatively little things can make a big difference—especially if you’re between a few schools or have close contenders. Think about recreation and facilities on campus, what their sports, athletics programs or teams are like. Does the school have a special connection to a family member or your culture? Small things like cafes that better serve your dietary needs or campus dining options that stand above the rest can weigh into your decision. Your decision should not be based solely on these relatively small things, but if you’re on the fence of two universities it could be what gives you the push needed.   It’s important to understand how you’ll be financing college before you start looking at the school. If you plan on financing college by taking out student loans, they can impact your future. Once you understand your finances, you’ll be able to prioritize what is most important to you and start there. Remember too that schools usually have lots of opportunities for you to visit and learn more. There are entire departments of people whose job it is to acquaint you with the campus and community. Don’t be afraid to reach out and ask questions. Go in person and get a feel for the school if you can. Don’t forget to connect with potential faculty for your preferred major. You’ll probably learn a lot about what life would be like as a student, which will help make your decision much easier.   Happy school hunting!

Lower College Costs with These Jobs

   
2019-03-29
Silly Tax Stories and Strange Tax Deductions You Should Know

Tax time is here and hopefully, you’ve already filed. We also hope you don’t run into any of these wacky tax situations! Make sure you get expert help filing if you don’t know what you’re doing. No one wants to mess with the IRS, and you want to maximize the amount you can get back or keep for your financial goals.  

Clean eating isn’t deductible, no matter how healthy.

You can’t deduct money you spend on a healthy diet as a medical expense. John Kane, CPA,
reported at Credit.com that a client tried to deduct the cost of the family’s foods. Sure, the groceries were non-processed and healthy, but that doesn’t make them count as a medical expense. Sorry!  

Negative numbers don’t count.

Some people have tried to use negative numbers on their tax return, maybe innocently thinking that’s what you’re supposed to do. But according to the IRS, you’re supposed to use “0” in any instance where you have a negative amount.  

What is a “Good” Credit Score Anyway?

 

Go old school with pen and paper.

Many millennials live abroad or would like to in the near future. Did you know that you may not be able to file electronically if you are a US citizen and live outside of the country? Expats may find that they have to fill out the long forms because electronic forms require a US address.  

Buying a business? Hire a tax expert.

It’s super important to have the right experts and legal help on your side when you’re starting a business endeavor. One reason is successor liability. There are certain business debts or payments that you might not be responsible for, but back taxes don’t go away so easily. People can get burned by IRS liens if they don’t check to see what kind of taxes the business owes.  

What kind of employee are you? It matters—a lot!

Some businesses wrongly categorize their employees as independent contractors. In the case of a youth soccer association, they got in trouble with the IRS for requiring the referees to file as independent contractors. Businesses that aren’t following labor laws when it comes to tax filing could face big fines.  

Don’t try to hide from the IRS.

Just as a general tip, don’t try to dodge or outsmart the IRS. That’s a really bad idea. The IRS can go into your bank accounts with a levy if you owe taxes for long enough, so there’s no point in trying to hide. Working with them ASAP when you realize that you owe taxes is your best bet. You can probably set up payments, but only if you are on the ball.

Wondering about some of the wackier tax deductions? There are plenty!

 
  • Moving for work? Your expenses could be tax deductible, including moving Fido. Don’t forget to keep track of expenses for moving your pets. When it comes time to list dependents, stick to human dependents only. People have tried to deduct pets, but that’s a no-go!
  • If you’ve got a guard dog for your business, on the other hand, Cujo’s upkeep would be a tax-deductible business expense. If you are trying to deduct the miniature guard dog that protects your house, you’re out of luck.
  • Pools can increase your homeowner’s insurance and cost a pretty penny to maintain. Did you know that having a medical condition that’s helped by swimming or water therapy could mean your pool expenses are tax deductible?
  • You may not be able to deduct your grocery costs because you like clean eating. You may be in luck if you’re working with a doctor to do things like lower your cholesterol and BMI. If you’re making adjustments as part of a health plan, there might be ways to deduct some of those costs. Check with your tax pro!
  • Just FYI, you’re supposed to pay taxes on income even if it was attained as part of a crime or doing something illegal. Not that we’re making any accusations!
  • Trying to kick the habit? Supplies you use to quit smoking can be tax deductible, too. Just another reason to quit!
   

6 Ways to Use Your Federal Tax Return

  NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.