7 things to know before applying for student loan forgiveness

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7 things to know before applying for student loan forgiveness

By JULIE RAINS

A friend of mine borrowed money for dental school with no intention of making a loan payment. How? Before enrolling, she signed an agreement to practice dentistry in an underserved community for several years. In exchange, she received forgiveness of her student loans.

Choosing a career path and city to live in based on forgiveness options is one way you may be able to wipe out your student loans. But even if this approach wasn't part of your original debt reduction plan, you could consider investigating to see if you qualify for a forgiveness program.

Here are some things to know before applying for student loan forgiveness.

1. Your loan influences the types of forgiveness programs available to you.

Student loan forgiveness programs may stipulate the types of loans that can be forgiven through program participation.

For example, you must have a Direct Loan to get your loan forgiven through the federal Public Service Loan Forgiveness (PSLF) program. Similarly, to qualify for Perkins Loans forgiveness programs, you must have a Federal Perkins Loan.

Review your loan documents or log onto My Federal Student Aid to determine what type of loan you have. If you have private loans, it's unlikely you'll be eligible for a loan forgiveness program. However, consider checking with your lender to identify any options.

2. Consolidating loans may qualify you for certain programs and disqualify you for others.

Depending on the forgiveness program you're pursuing, you may need to consolidate your loans to be eligible. However, consolidation could prevent you from qualifying for other programs.

For example, only Direct Loans are eligible for forgiveness through the PSLF program. If you have Federal Perkins Loans, you'll need to consolidate these loans into a Direct Consolidation Loan to receive forgiveness with the PSLF method.

On the other hand, if you have a Perkins Loan, it will only qualify for its own specific forgiveness programs, so consolidation may prevent you from getting your loans forgiven via the Perkins Loan cancellation methods.

To learn more about your options, contact the school that issued your loan or the loan servicer to learn about forgiveness possibilities associated with your loans.

3. Certain types of jobs and/or employers may qualify for student loan forgiveness programs.

You may need to hold a specific type of job for which there's a high demand to qualify for forgiveness. In addition, your employer must qualify for program eligibility.

For example, if you're a teacher in a school with a high concentration of students from low-income families, you may qualify for loan forgiveness. Check this directory to determine if your school or educational service agency qualifies.

In addition, health care providers such as physicians and dentists who work in federally-designated underserved areas or areas where there's a shortage of professionals, may be able to receive student loan forgiveness. Firefighters, military personnel, attorneys and other professionals may also qualify.

Shade Ede, owner and publisher of Beating Broke in Jamestown, North Dakota, has received partial loan forgiveness under two state-sponsored programs.

He qualified for a technology occupations program -- known as the STEM (Science, Technology, Engineering and Mathematics) Occupations Student Loan Program -- by earning a computer science degree and working in a STEM-related field.

When Ede changed careers and began working as a teacher, he then became eligible for the Teacher Shortage Loan Forgiveness Program.

4. You may need to get written verification of your job from your employer.

Jason Reiman, Certified Financial Planner™ of Oro Valley, Arizona, says that one of the biggest problems for those seeking student loan forgiveness "is not having the correct paperwork trail to properly verify qualifying employment."

Getting forms completed may be particularly challenging for those wishing to qualify under the PSLF program, which requires employment verification for 10 years.

Consider submitting a completed Public Service Loan Forgiveness Employment Certification Form once per year or when you change jobs to make sure you're on track for loan forgiveness.

5. You may receive partial or full forgiveness.

Certain programs may allow you to wipe out 100 percent of your student loan debt. But others may have annual caps or combined maximums on the amount of debt that can be forgiven.

For example, many Perkins Loans forgiveness programs may allow borrowers to erase their loan balances over a span of five years. An example schedule of Perkins Loan forgiveness is 15 percent for the first and second years, 20 percent in years three and four, and 30 percent in the fifth year.

Other programs may reduce your loan balance by modest amounts of money. Ede received a combined $5,500 in loan forgiveness spread over five years. With student loans of about $32,000, he says "the forgiveness has only really made a small dent. But it's still money I didn't have to pay back."

6. You may be taxed on the forgiven amounts.

The amount of money you're forgiven may be added to your income for tax purposes. For example, if you receive $10,000 in loan forgiveness, you could owe taxes on your regular income and the additional $10,000 in the year your loan is forgiven.

Ede says that the money he received for loan forgiveness counted as income. However, PSLF program participants shouldn't owe taxes on the loan balances that are forgiven.

Different programs have different tax implications. To determine the impact of loan forgiveness on your taxes, consider consulting with the IRS or a tax professional.

7. There may be a limited pool of money for applicants.

Even if you're eligible for a program, you may not get your loans forgiven. Certain programs may have a limited amount of money available to qualified borrowers. In some cases, applying as early as possible may give you a better opportunity for loan forgiveness.

Bottom line

Student loan forgiveness programs may help you reduce or eliminate student loan debt but they typically only apply to very specific circumstances.

There are programs for a variety of professions, including health care providers, teachers and attorneys. Program details vary, so consider doing your research on requirements before submitting an application.

About the Author: Julie Rains is a mortgage-free, debt-free personal finance writer. She began investing in her 20s soon after landing her first real job. She writes about personal finance, mortgages, investing, and related topics at various online media outlets, including her own blog Investing To Thrive. Julie is a graduate of The University of North Carolina at Chapel Hill, where she earned a Bachelor of Science in Business Administration with a concentration in Finance. In her free time, she enjoys cycling, running, hiking, and hanging out with her husband and two sons.

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