Ins and Outs of Student Loan Forgiveness

Public Service Loan Forgiveness and other loan forgiveness programs are complicated, so there are many ways in which a borrower can lose eligibility for loan forgiveness.

Other problems can cause a delay in the receipt of loan forgiveness or a reduction in the amount. Watch out for these potential pitfalls if you want to qualify for student loan forgiveness.

Wrong Loans

Some federal loans are not eligible for public service loan forgiveness. Only federal loans in the Federal Direct Loan program are eligible for public service loan forgiveness. Federal loans in the Family Federal Education Loan (FFEL) program and Federal Perkins loans are not eligible. Borrowers can make FFEL program loans and Federal Perkins loans eligible by consolidating them into the Direct Loan program.

Loss of Federal Perkins loan forgiveness options. Borrowers who consolidate Federal Perkins loans will lose eligibility for the up-front loan forgiveness options and subsidized interest benefits that are provided by the Federal Perkins loan program.

Private student loans are not eligible for forgiveness. Only federal education loans, not private student loans, are eligible for federal loan forgiveness programs.

Federal Parent PLUS loans are not directly eligible. Federal Parent PLUS loans are not directly eligible for income-driven repayment plans, which limits their eligibility for public service loan forgiveness. However, if a Federal Parent PLUS loan entered repayment on or after July 1, 2006 and was included in a Federal Direct Consolidation loan, the consolidation loan is eligible for income-contingent repayment (ICR).

The consolidation loan might then be eligible for public service loan forgiveness, if the parent borrower makes 120 qualifying payments while working for a qualifying employer. (The Federal Grad PLUS loan, as opposed to the Federal Parent PLUS loan, is directly eligible for all of the income-driven repayment plans and public service loan forgiveness.)

Some Payments Don’t Count

Borrower did not make full payments. Payments that are less than the amount due do not count toward the 120-payment requirement.

Borrower made lump-sum payments. Borrowers must make separate monthly payments for those payments to count toward the 120-payment requirement. Lump-sum payments and early payments of future installments do not qualify, with a few exceptions.

The exceptions include AmeriCorps and Peace Corps volunteers who use their Segal Education Awards or Peace Corps transition payments to make a lump sum payment and members of the U.S. Armed Forces for whom the Department of Defense (DoD) makes a lump sum payment on their behalf.

Borrowers are given credit for the equivalent number of payments or 12 payments, whichever is less. AmeriCorps and Peace Corps volunteers can benefit from this special treatment of lump sum payments only one time. Members of the U.S. Armed Forces can benefit from the special treatment of lump sum payments as part of the student loan repayment program once a year.

Late payments do not count. Only payments made within 15 days of the due date count toward the 120-payment requirement.

Late recertification. Borrowers in an income-driven repayment plan must file recertification paperwork annually, since the monthly payment is based on their annual income. If they do not file the recertification paperwork in a timely manner, their loans may be placed in a forbearance. Forbearances do not count toward the 120-payment requirement.

Consolidation resets the clock on forgiveness. If a borrower consolidates federal loans into a Federal Direct Consolidation loan, any previous payments on the loans will not count toward the 120-payment requirement.

Retroactive payments do not count. Only payments made after October 1, 2007, count toward the 120-payment requirement.

Wrong repayment plan. Borrowers must make 120 on-time qualifying payments in an income-driven repayment plan or the standard 10-year repayment plan to qualify for public service loan forgiveness. Payments made under other repayment plans do not qualify.

Note that if a borrower makes 120 qualifying payments in a standard 10-year repayment plan, there will be no remaining loan balance to forgive. Only the income-driven repayment plans can yield a remaining loan balance to be forgiven after 120 qualifying payments.

Choice of repayment plan can affect amount of forgiveness. Income-driven repayment plans with a lower monthly payment tend to increase the amount of forgiveness. Of the income-driven repayment plans, the pay-as-you-earn repayment plan (PAYE) yields the maximum loan forgiveness, followed by either the income-based repayment plan (IBR) or the revised pay-as-you-earn repayment plan (REPAYE), and last by the income-contingent repayment plan (ICR).

Employment Might Not Count

Borrower was not employed full-time. Only payments made while the borrower is employed full-time for a qualifying employer will count toward public service loan forgiveness (Simultaneous part-time employment for two or more qualifying employers counts as full-time if the total hours are the equivalent of full-time employment.)

Borrower did not work for a qualifying employer. To qualify for public service loan forgiveness, the borrower must have worked full-time for a qualifying employer while the qualifying payments were made.

If the borrower works for a non-qualifying employer, the payments do not count toward public service loan forgiveness, even if the non-qualifying employer works under contract to a qualifying employer. For example, borrowers who work for government contractors will not qualify for public service loan forgiveness unless the contractor itself is a qualifying employer.

Borrower did not provide proof that payments were qualifying. A borrower must provide proof that they were employed full-time by a qualifying employer for all of the 120 payments. If a borrower worked for two or more qualifying employers, each employer must complete a copy of parts one and two of the application for public service loan forgiveness, specifying the employment start and end dates.

Timing of Forgiveness

Borrower is no longer employed by qualifying employer. To qualify for public service loan forgiveness, the borrower must not only be employed full-time by a public service organization when making each qualifying payment, but also at the time of application for loan forgiveness and at the time the remaining loan balance is forgiven.

Forgiveness is per-loan, not per-borrower. Each eligible federal loan must have 120 qualifying payments to receive public service loan forgiveness. Depending on when the loans entered repayment, the loans won’t necessarily all be forgiven at the same time, since the required 120 payments may still be pending on some loans. For example, loans borrowed as a graduate student might be forgiven later than loans borrowed as an undergraduate student.

Borrower in default on the loan(s). Borrowers must continue making payments on their eligible loans until they receive forgiveness. If a loan goes into default, it will not be eligible for forgiveness. Any amount paid after the final qualifying payment will be refunded.