Last Chance: How to Apply for Student Loan Forgiveness Before Trump Cancels It For Good?

a year ago

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Obama student loan forgiveness programs increase the chances of settling the loan arrears with minimal losses. As of 2018, this possibility is seriously threatened by Trump’s latest budget proposal. Namely, the proposal intends to limit the income-based loan repayment plans and cut funding for federal work study by 50%. Also, it will give a firm nudge to the government to go after the student borrowers who fail to pay their loans.

● The changes will take effect on July 1, 2019, excluding the loans given to borrowers to finalize their current education.

● In the 2016-2017 school year, ~5.7 million students had subsidized loans. The budget proposal would cancel loan forgiveness for students going into public service and revoke the subsidized Stafford loans.

● The new budget proposal is to establish a unified income-based repayment plan for student loans.

● While the currently paid amount is 10% (for 20 years) under the Obama proposal. The Trump’s proposal suggests capping students' monthly payments at 12.5% (for 15 years). The balance will be forgiven after 15 years (for undergraduate debt) or 30 years (for graduate school debt).

● In total, over 10 years the policy is expected to save $203 billion.

Repayment Plans Under the Obama Program

Under the Obama Student Loan Forgiveness Program students are given 5 repayment options:

● Standard Repayment – a fixed payment is made each month for the life of the loan. The payment amount depends on the overall borrowed amount, interest rate, and loan term.

● Graduated Repayment – initially, the payments are lower than the standard repayment plan, but gradually increase every two years.

● Income Contingent Repayment (ICR) –  payments are based on the borrower’s income, family size, loan balance, and interest rate. Under the ICR, borrowers can have a payment as low as $0.00/mo.

● Income-Based Repayment (IBR) – payments are based strictly on the borrower’s income and family size.The balance of the loan and interest rate are excluded from the monthly payment calculation. 15% of a borrower’s discretionary income is used for making payments. Under the IBR, borrowers can have a payment as low as $0.00/mo.

● Pay As You Earn (PAYE) – this income-based plan has the lowest monthly payment,  using 10% of your discretionary income. Qualifying for the PAYE repayment plan is more difficult than the others. Under the PAYE, the borrowers can have a payment as low as $0.00/mo

What is Student Loan Forgiveness?

Student loans must be repaid even if you didn’t complete your education, don’t have a job, or are dissatisfied with the education choice you made. However, federal student loans can be forgiven, discharged, or canceled under specific circumstances. The exception includes public service employment and service as a teacher. Loan forgiveness, cancellation, and discharge mean you are not required to repay your loan.

There are several types of forgiveness, cancellation, and discharge.

Type of Forgiveness/Cancellation/Discharge

Direct Loans

Federal Family Education Loan (FFEL) Program Loans

Perkins Loans

Closed School Discharge

X

X

X

Public Service Loan Forgiveness

X

   

Teacher Loan Forgiveness

X

X

 

Perkins Loan Cancellation and Discharge (includes Teacher Cancellation)

   

X

Total and Permanent Disability Discharge

X

X

X

Discharge Due to Death

X

X

X

Discharge in Bankruptcy (in rare cases)

X

X

X

False Certification of Student Eligibility or Unauthorized Payment Discharge

X

X

 

Unpaid Refund Discharge

X

X

 

Borrower Defense Discharge

X

X

 

 

Types of Loan Forgiveness Programs

Obama’s administration proposed capping the student loan forgiveness at $57,500. Under this proposal, the borrowers whose balances exceeded the indicated amount had to wait 25 years for loan forgiveness. However, the proposal never came into effect. The loan forgiveness program applies to debt holders in particular fields of work, to specific types of loans, and those making qualifying payments.

How to apply for student loan forgiveness?

If you don’t know where to start, view the list of student debt forgiveness programs:

● Public Service Loan Forgiveness

● Income-driven Loan Forgiveness Plans

● Federal Perkins Loan cancellation

● Teacher Loan Forgiveness

● Student loan forgiveness for nurses

● National Health Service Corps (NHSC) loan repayment assistance

● Department of Justice Attorney Student Loan Repayment Program

● Alfond Leaders Program (additional student loan repayment assistance programs - LRAPs)

● CSPI-Student Loan Repayment Program (CSPI-SLRP)

Student loan discharge for special circumstances

Review the requirements to enter a suitable program to see if you’re eligible for student loan forgiveness.

What Are the Public Service Loan Forgiveness (PSLF) Program Exceptions?

If you’re applying for public service loan forgiveness programs, there is a bunch of exceptions, including:

● Direct Loans/Private Loans

Please mind, direct Loans are partly eligible for PSLF, whereas private student loans are not.

● Federal Perkins and FFEL

In the event your Federal Perkins Loan and/or Federal Family Education Loan (FFEL) are consolidated, they would become eligible for the program. However, only 120 payments toward your Consolidated Loan count. Any payments made prior to consolidating your student loans would not count.

What Are the Tax Consequences of Student Loan Forgiveness?

In some cases, the Internal Revenue Service (IRS) sees the discharged amount of student loan as a taxable income. This is how you can get a tax bill of 25-30% of the forgiven loan amount. Suppose, you have $50,000 of student loan balance discharged, under the condition of making $40,000 the year of your discharge. Then, you can expect $12,500 taxation for the discharged amount.

Still, there are certain tax relief options. For instance, you can submit an application for an insolvency exclusion. If you can prove to the IRS that your debts exceeded the value of your assets at the time of loan discharge, you might be eligible for an exclusion. To apply for the insolvency exclusion, submit the IRS Form 982.

The loan discharge amount may not be completely subject to the insolvency exclusion. Use the worksheet in IRS Publication 4681 to evaluate how much of your student loan actually is.

In case a borrower is partially eligible or completely ineligible for an insolvency exclusion, they are responsible for paying the IRS bill.

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Any questions or propositions?