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Don’t Let Trump Turn You into a Chump: The 411 on Loan Forgiveness

The Public Service Loan Forgiveness (PSLF) program, first introduced in 2007 with the goal of encouraging students to work toward careers in teaching, social work, and other public service professions, could quickly become a defunct golden goose that fails to deliver on promises made to hundreds of thousands of graduates counting on loan forgiveness after years of faithful payments on student loans.  According to the office of Federal Student Aid, students that make “120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer” will gain the benefit of loan forgiveness for remaining debt, which means the earliest enrollees are just now becoming eligible to see the remainder of debt forgiven.  There are currently more than half a million grads on track to receive benefits, starting this October.

Unfortunately, the Trump administration seems intent on throwing a wrench in the works, as evidenced by the recent release of his proposed education budget, which seeks an end to PSLF.  With $10.6 billion in proposed cuts (with savings slated to go toward Education Secretary Betsy DeVos’s “school choice” initiative), the PSLF program isn’t the only one on the chopping block.  For borrowers that have jumped through numerous hoops and endured hardships to ensure compliance and eligibility, however, the news is a major blow.

What does this announcement mean for students awaiting loan forgiveness?  Until the final budget is approved, we won’t know for sure, but the mood is understandably bleak.  NPR reported that borrowers with the PSLF program have been feeling “frightened” and “anxious”, among other emotions, about the prospect of losing loan forgiveness.  However, you needn’t simply wait around for the other shoe to drop.

You can take control of your financial situation and take advantage of low interest rates when you choose to consolidate and refinance your student loans with a company like Education Loan Finance that puts you on track for speedy repayment.  If you’re hesitant to let go of the dream of loan forgiveness, there are a few things you should know before placing your trust in the current administration to honor the benefits promised years ago.

Winter is Coming…in Summer

When seasons change, you know summer will follow spring, and winter comes after fall.  There’s a natural progression you can rely on.  This is not the case with the PSLF program, it seems, where apparently promises made can be reneged at any time.  Just look at the recent case of four attorneys whose employers were approved as “qualified” initially.

These graduates did everything right, but on the eve of their forgiveness, they were informed that their eligibility had been revoked.  They launched a lawsuit, backed by the American Bar Association (ABA), to which the Department of Education responded that FedLoan Servicing, which acts on behalf of the Department of Education to process Employment Certification Forms, “does not reflect a final agency action on the borrower’s qualifications for PSLF”.  What does this mean?  The promise of loan forgiveness could be nothing more than a pipe dream if the Education Department can retroactively revoke qualifying status.

If you’re working toward loan forgiveness yourself, this should certainly worry you, as should the prospect of complete elimination of the plan.  You’d hope the government would honor their commitments to hard-working professionals that took out student loans and went into public service jobs based on the promise of loan forgiveness down the line, but there’s no guarantee this will happen, even if by some miracle the current administration doesn’t scuttle the entire program.

Forecast for Your Loans

So, you’ve been toiling away in job that, let’s face it, you might not have taken if not for the PSLF program and the promise of forgiveness at the 10-year mark.  How far along are you when it comes to paying your loans?  If you work in a low-paying public service job and you’ve been operating on an income-based payment system, you could actually owe more now than when you started, if your payments fail to keep up with accruing interest.  What the what?  While you’ve been awaiting forgiveness and making steady payments, it’s possible your debt has been growing, and if forgiveness is suddenly off the table, you could find yourself in a terrible financial situation.

Even if you receive loan forgiveness, you’re not out of the woods.  Did you know that some loan forgiveness is considered a tax liability?  Students that receive forgiveness under the PSLF program enjoy tax exempt status for this financial benefit, but the same cannot be said for those who are eligible for loan forgiveness through income-based repayment plans.  Under the Federal Direct Loan Program, also known as the Obama Student Loan Forgiveness Program, borrowers that pay 10% of their income toward student loans for 20-25 years are eligible for loan forgiveness.

Sweet deal, right?  Not if you get stuck with a gargantuan bill from the IRS once your loans are forgiven – loan forgiveness is treated like income.  You’re basically trading in one type of debt for another, and the IRS is a lot less forgiving, so to speak.  You could end up owing the taxman 25% of the amount forgiven for the year your loans are paid off.  If $50,000 is forgiven, you could get a subsequent bill from the IRS for $12,500, just for example.

Don’t Panic

Okay, take a deep breath, watch a cat video, and relax.  Maybe you owe more money now than when you graduated from college, or maybe student loan forgiveness will sink you in a mire of tax debt.  The whole system could get blown to smithereens when the federal budget is approved.  You might not have a lot of control over these circumstances and events, but neither are you impotent to act.

It’s time to look into refinancing your student loan debt with a reputable organization like Education Loan Finance.  It’s not too late to take advantage of low interest rates and other benefits that could save you thousands of dollars over your current student loan situation.  If you’re understandably nervous about the apparent unreliability and shaky future of the system you’ve placed your trust in, consolidation and refinancing could be just the ticket to regain control of your own financial future.

Misconceptions about Student Loan Forgiveness

When students start college, they are probably more concerned about how they’re going to cover the cost of tuition and classes than how they’re going to pay off student loans down the line. One problem at a time, right?

Of course, there are also students that carefully consider the loans they take out, the schools they attend, and their intended profession, all in an effort to reduce the costs of their education as much as possible.

For some students, a major part of their plans for eliminating education debt includes qualifying for student loan forgiveness. The premise behind these programs often assumes that college graduates make payments on their loans for a specified amount of time until certain qualifications are met to erase the remainder of the debt. While these programs can be rewarding for the borrowers who are eligible, there are, however, many misconceptions and potential pitfalls associated with banking on student loan forgiveness that could end up costing graduates in the long run. Here are a few common misconceptions cleared up.

Misconception #1: Everyone is Eligible for Loan Forgiveness

Although there are several instances in which students may become eligible for student loan forgiveness programs, you should not automatically assume that this is a possibility for you. For starters, loan forgiveness programs (as well as loan discharge or cancellation) generally apply to specific loans, specific professions, and/or specific sets of circumstances, according to the Office of Federal Student Aid.

Direct Loans, FFEL (Federal Family Education Loan) Program Loans, and Perkins Loans may all qualify for forgiveness, discharge, or cancellation, but only in certain circumstances, such as:

  • Public service loan forgiveness
  • Teacher loan forgiveness
  • Perkins Loan cancellation and discharge
  • Total and permanent disability discharge
  • Discharge due to death
  • Closed school discharge
  • Unpaid refund discharge
  • False certification of student eligibility or unauthorized payment discharge
  • Borrower defense discharge
  • Discharge in bankruptcy

It’s important to understand that these reasons may not apply to every type of loan, and some of them apply to very specific sets of circumstances. For example, the borrower defense discharge specifically relates to students seeking loan forgiveness because a school they attended misled them or engaged in other misconduct or violation of applicable state laws. This clearly doesn’t apply to every student, every school, or every loan.

Furthermore, you have to fill out an application for loan forgiveness, discharge, or cancellation and receive approval. Until then, you must continue to make payments in good faith, unless you are able to defer payments or you are granted forbearance in the meantime, according to the Office of Federal Student Aid.

If you want to find out if you qualify for student loan forgiveness, you need to do some research. It’s a good idea to check with lenders, with your school, and with the U.S. Department of Education, or more specifically, the Office of Federal Student Aid.

Misconception #2: Public Service Professions Are Automatically Eligible

According to the Office of Federal Student Aid, “The Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.” In addition, the Teacher Loan Forgiveness Program allows for forgiveness of Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, and Unsubsidized Federal Stafford Loans and cancellation of Federal Perkins Loans.

However, there are several criteria attached to these forms of forgiveness. Simply becoming a teacher, a government employee, an employee of a non-profit organization, or a member of the Peace Corps doesn’t mean you automatically qualify for student loan forgiveness.

For example, in order to qualify for loan forgiveness under the Teacher Loan Forgiveness Program, teachers must work for five “complete and consecutive” years at a qualifying institution that serves low-income families, as well as meeting other criteria. Even so, teachers may only be eligible to receive forgiveness for a portion of loans, and this doesn’t include PLUS or private student loans.

Misconception #3: Once I’m Approved for Loan Forgiveness, It Can’t be Rescinded

Unfortunately, it’s not entirely uncommon for professionals that thought they were eligible for student loan forgiveness to find out they were wrong. According to a report issued by The New York Times, a legal filing by the U.S. Department of Education in March suggests that approvals issued by FedLoan, the administrator of the PSLF Program, may be subject to rescindment. This particular case has led to at least one lawsuit so far, but it’s not the only reason why graduates may find that forgiveness they were counting on is beyond reach.

As noted above, qualifying students must not only have the correct loan type to be eligible for forgiveness under the PSLF Program, but they must also meet criteria for qualifying employment and qualifying payments (and payment plans). After all that, borrowers still have to apply and continue to meet qualifications until such time as they’re approved. In other words, there are a lot of hoops to jump through, and a lot of ways to make mistakes that could make you ineligible for loan forgiveness.

Misconception #4: If I’m Not Eligible for Forgiveness, I’m Stuck Paying My Loans

This is partially true. If it turns out you’re not eligible for any form of forgiveness for your student loans, for whatever reason, you’re still responsible to repay the money you borrowed. Even filing for bankruptcy won’t automatically discharge student loan debt. Of course, when you’re in good shape financially and perfectly capable of paying loans, you will be required to do so. Unfortunately by the time that borrowers learn that they are no longer eligible for student loan forgiveness, they have often already accrued higher interest costs resulting from making smaller payments in the early stages of repayment.

The good news is that you have options to reduce your debt if loan forgiveness is not on the table. Once you have established a reliable income and credit history, you can, for example, explore the possibility of refinancing your student loans. This course of action gives you the opportunity to consolidate loans, reduce interest rates, and potentially reduce monthly and overall payments in the process. Whether you refinance your education debt or not, you can also cut down on the overall interest costs and time spent in repayment on your loans by making more than the minimum payments each month.

Even if you do everything you can to secure a path to loan forgiveness after a set number of years of faithful payments, you may at some point discover that forgiveness isn’t an option for you. Naturally, the earlier you can confirm your situation, the better. If you aren’t eligible for loan forgiveness, it’s best to explore other options early on so that you can save as much as possible through refinancing.

How to Spot and Steer Clear of Student Loan Consolidation Scams

With around 44 million Americans owing $1.3 trillion in student loan debt, it’s not surprising that many are struggling with repaying their student loans. In fact, around 8 million borrowers went into student loan default in 2016 alone. With so many people feeling overwhelmed by their student loans and desperate to find ways to reduce their debt, it’s not surprising that scammers are taking advantage of the situation.

 

You’ve likely heard from student loan scammers – either through email, via an online advertisement, or by phone. They often advertise as Obama Student Loan Consolidation or Forgiveness Programs and offer to do things like get rid of your federal student loans, consolidate them for you, and reduce or eliminate your payments.

 

The government has started to crack down on the scammers – who often take lump sums or monthly fees from desperate borrowers. Many scammers promise things that they can’t deliver like a guaranteed 50% to 70% loan reduction with consolidation. Then they never actually do anything or they take your credit card information and your Social Security number and defraud you even more or steal your identity.

 

3 Things to Watch Out For

It’s important to know that you don’t need a company to help you consolidate your federal student loans via the Direct Consolidation program – it’s something you can easily do for free. While there are legitimate companies who help you evaluate whether or not student loan consolidation is right for you, and help you do the paperwork – the process is not that complicated and you’re likely better off doing it yourself.

 

If you do want to have a company help you with the process, there are a few red flags that will help you spot scammers. For example, if a company says that you should stop making payments on your loans and that you should send your student loan payment to them instead of to your student loan servicer, they are likely a scammer.

 

Companies who contact you via a robocall or who claim to be working with the Department of Education or to be offering services as part of the Obama Student Loan Program are also likely to be scammers. Legitimate companies cannot claim to be working with the Department of Education and do not use robocalls to contact you.

 

Finally, companies that ask for monthly fees or payment upfront are likely not legitimate. Legitimate companies that help you consolidate your federal student loans will not accept payment until they perform a service – though some will take the money and put it in a holding account until they’re able to help you consolidate your student loans successfully.

 

What is the Direct Consolidation Loan Program?

The Direct Consolidation program doesn’t wipe out your federal loans or reduce the amount you owe – as some scammers claim. Instead, it combines your loans into one loan which might make it easier to repay depending on your particular circumstances. It doesn’t lower your interest rate, but rather takes all of your federal student loans and puts them together into one loan with a new interest rate that is the weighted average of your previous loans with up to an additional 0.125% tacked on.

 

Federal Direct Consolidation makes sense for many borrowers as it allows them the ease of repaying just one loan, can allow them to extend the term length on their loans in order to reduce their monthly payments, and is necessary for borrowers to qualify for the Public Service Loan Forgiveness program.

 

Another benefit of the student loan consolidation is that it allows you to more easily rehabilitate any loans that you have that are in default.

 

Private Student Loan Consolidation

Consolidating student loans is essentially paying off multiple student loans with one loan. The problem with the Direct Consolidation program is it only allows you to consolidate your federal loans and not your private student loans. Private student loan refinancing allows you to consolidate both federal and private student loans – although if you consolidate federal student loans you lose some of the alternative repayment options and benefits that federal loans offer.

 

There are many companies currently offering private student loan consolidation and refinance. Many of these companies are start-ups, but there are some like Education Loan Finance which have over three decades of experience in the student loan industry. Education Loan Finance is affiliated with SouthEast Bank and offers student loan consolidation options for borrowers who would like to lower their monthly payments, pay a lower interest rate, and get more flexible terms on their federal and private loans.

 

All borrowers who are struggling should look into private student loan consolidation as it can save borrowers a significant amount of money as they can reduce their interest rate or greatly reduce their monthly payments by extending the term length of their loans.

 

By Andy Rombach, LendEDU

Student Loan Forgiveness 101

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.