How to Avoid a $100k Mistake with Loan Forgiveness

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A recent CNBC article shared that less than 1% of borrowers had their loans forgiven. What happened?

Unfortunately, many borrowers were not educated on what the rules are for loan forgiveness. Most assumed that by working at a not-for-profit, they could get it, but there is more to loan forgiveness than that.

3 Rules for Loan Forgiveness:

  1. Federal Direct Loans with
  2. 120 Payments on an Income-Driven Repayment plan while at a
  3. Qualifying Employer

On top of those, here are a few other technical rules you’ll need to follow to get loan forgiveness:

  • You can’t be in deferment or forbearance while applying.
  • If you consolidate your loans, you’ll lose credit for all previous qualifying payments.
  • Once you refinance your loans to private loans, there’s no going back, and you’ll lose access to federal loan forgiveness programs.

Loan Types Matter

A common issue borrowers run into when trying to get loan forgiveness is that they have the wrong type of loans for loan forgiveness. They must be federal direct loans to qualify.

These loan types automatically don’t qualify:

  • Federal Perkins Loans
  • The Federal Family Education Loan Program (FFELP / FFEL)
  • Health Education Assistance Loan (HEAL) Program
  • Private Loans

If you took out loans for your child under the Direct PLUS Loans for Parents Program, you have to meet the requirements for forgiveness - not your child.

Qualifying Employer

Once you confirm that you have the right type of loans, you have to prove that you worked for a qualifying employer and made 120 qualifying payments while working there. Luckily, your payments didn’t have to be consecutive.  

A qualifying employer is a government organization, a 501(c) (3) not-for-profit organization or another type of not-for-profit organization that provides a public service.

Qualifying Payments

Qualifying payments include on-time payments made while on an Income-Driven Repayment Plan (IBR, PAYE, REPAYE, ICR). Sometimes your income increases to a point when an Income-Driven Repayment plan would be higher than the 10-year standard payment. When that happens your loan servicer will switch you to the 10-year standard payment, this still counts as a qualified payment.

Hopefully, we’ll see the percent of applicants that receive loan forgiveness increase over time. The government has already realized that many borrowers were not aware that they needed to be on an Income-Driven Repayment plan to qualify for loan forgiveness and issued a Temporary Expanded Public Service Loan Forgiveness program. However, the program won’t help a borrower with the wrong type of loans.

What to Keep

Keeping a paper trail is important. Here's what we suggest keeping if you're nervous:

  • Document all phone calls with your loan servicer -- just open up a spreadsheet and put the date, the name of the person you spoke to, her/his ID number, and what was discussed.
  • Save a PDF copy of all forms and documents you submit to your servicer(s) (Remember: you may have more than one!); once you send something off and you’ve saved your documents, be sure to record the activity in the spreadsheet mentioned above.
  • Save PDF copies of your NSLDS file after each annual update -- this will show what repayment plan you are on and how many qualifying payments you have made.
  • Save your paycheck stubs (sometimes called pay statements) for all 120 qualifying payments. To save space, you can scan these to your computer.

I know this may seem like a lot, but you don’t want to get into a situation where you don’t have any evidence of your progress toward PSLF.

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