Student loans have been in the news with the latest extension of the interest and payment holiday by President Biden until July 31 due to economic disruptions associated with COVID-19. This means borrowers have had more than two years without loan payments or owing interest on their student loan debt. Speculation is now rampant that Biden will extend the holiday again given the challenges of restarting the apparatus around servicing the loans and political pressures surrounding midterm elections.
While borrowers may be content to hope that the payment and interest holiday never ends, there are steps that some can take to help secure student loan forgiveness with a deadline later this year. This program does not apply to all student loan borrowers. Instead, it is limited to those who seek loan forgiveness through the Public Service Loan Forgiveness Program.
Under this program, borrowers may request forgiveness once they have made on-time student loan payments for ten years while working for a qualified employer. Even better, this loan discharge is not considered to be taxable income. So even though $ 100,000 of student debt may be wiped off the books, the borrower would not owe tax on this windfall. Those with public service employment can use the period between March 2020 until the end of the loan pause to help qualify for ten years of payments, as borrowers are considered current through that period.
A surprising number of employers are included in the definition of public service. Federal, state, and local government employees of course qualify. In addition, people who work for most nonprofit organizations, including many hospitals, will satisfy the requirement.
While the program has been in place for many years, applicants for loan forgiveness have historically had very little luck in making a successful application. Fewer than 3% of applications were accepted, partly due to the complexities involved in being in the correct loan repayment program and the documented roadblocks that student loan borrowers encountered.
In response to these difficulties, a new temporary program has been put in place that allows borrowers to receive retroactive credit for student loan payments even if they were not enrolled in one of the correct loan repayment plans. Until Oct. 31, borrowers can go to studentaid.gov/pslf and apply for credit for past payments made while working for a qualified public service employer. You can also receive credit for late and partial payments. If after making this application you have 120 on-time payments, you may qualify for loan forgiveness.
If you still have some payments left to qualify for forgiveness, you should ensure that you are enrolled in a qualifying student loan payment program so you will receive credit for future payments. It is important that you choose a qualifying “income-driven repayment program.” This is a student loan payment option that limits how much you pay per month based on your income and family situation.
There are also options for loan forgiveness for non-direct student loans, including Federal Family Education Loan Program loans, Federal Perkins Loans, or other types of federal student loans including Parent PLUS loans. In those cases, it can make sense to consolidate your student loans to qualify for loan forgiveness. It can also make sense to consolidate loans if you have more years of payment with one loan than another to qualify for the ten year forgiveness period on the entire loan balance.
This is a very complex topic, but I encourage you to educate yourself on your options. Your first stop should be studentaid.gov. In addition, student loan expert Mark Kantrowitz offers his expertise at savingforcollege.com.
David Gardner is a certified financial planner professional at Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change.