Thinking of a law or medical degree? Have enough resources? Our savings are not generally sufficient to cover the high cost of college education. What then acts as a breather is a Student Loan. A student loan is specifically designed for students to pay for their education expenses and carry substantially lower interest rates and suitable repayment schedules to help students pay them back when they are capable of. Student loans are different from scholarships and grants and are supposed to be paid off. In the US economy , government started offering student loans in 1950s under the National Defence Education Act. The Higher Education Act of 1965 further helped to broaden the scope of student loans.
Types of Student loans
In the United States of America, there are mainly two types of student loans, namely, Federal student Loans and private student loans.
Federal student loans: These are funded by the federal government. Interest rates on a federal loan are fixed and in some cases, tax deductible. Federal student loans can take two forms- Direct Subsidized loans and Direct Unsubsidized loans with the former offering certain advantages over the latter
Private student loans: Other than government agencies; banks and finance companies also offer student loans. Interest rates on private student loans are generally variable and higher than federal student loans. Unlike federal loans, private student loans are never subsidized and might even require smooth credit history.
One major difference between federal and private student loans is that an individual with federal student loan is eligible for student loan forgiveness programmes whereas, an individual with private student loans is generally not eligible for the same. A student loan forgiveness programme is designed to help students pay full or a part of their student loan in exchange of pursuing a particular occupation or volunteering service. In the US, student loan forgiveness programs are also aimed at directing individuals towards sectors of national importance where there is lack of qualified personnel. The US Department of Education offers forgiveness on federal student loans and once forgiven, the student is not liable to pay his remaining loan balance. There are two types of student loan forgiveness programmes; upfront forgiveness that eliminates a part of student debt with each passing year of service and back-end forgiveness that cancels whole of the student loan after a certain number of years of service. Back-end forgiveness programs come with all-or-nothing condition and therefore, might be risky for individuals who are not sure whether they would be able to complete their committed tenure of service or not.
Forms of Loan Forgiveness programmes
- Public Service Loan Forgiveness Programme : The Public Service Loan Forgiveness Programme offered by The US Department of Education is intended to encourage individuals to join and continue full-time work in public service sector. This programme requires an individual to make 120 qualifying payments on one’s direct loans. Payment made after October 1, 2007 are considered qualifying. There are three modes of repayment plans under the Public service loan forgiveness programme- Income Based Repayment Plan (IBRP), Income-Contingent Repayment Plan (ICRP) and the 10-year standard repayment plan.
- Teacher Loan Forgiveness Programme : The Teacher Loan Forgiveness Programme offered by The US Department of Education is intended to encourage individuals to enter into teaching profession.
- Total and Permanent Disability Discharge: An individual might qualify for Total and permanent disability discharge programme if they are incapable of arranging in any gainful activity because of physical or mental impairment. However, they are certain conditions for such impairment, such as the impairment has lasted or can be expected to last for 60 consecutive or is expected to end up in death. For an individual’s federal student loans to be discharged, he/she needs to provide information to the US Department of Education to prove one’s permanent disability.
- Death Discharge: Federal student loans are also discharged if the borrower dies. In case of parent PLUS loan, the loan may be discharged if the student himself dies or the student on whose behalf the loan was taken, dies. The loan is discharged on providing a copy of the death certificate to the school or the loan servicer.
- Perkins Loan Cancellation and Discharge: The Federal Perkins Loan Cancellation applies to individuals who perform certain types of public services or certain types of occupations such as Volunteer in the Peace Corps or ACTION program (including VISTA), Teacher, Member of the U.S. armed forces (serving in area of hostilities), Nurse or medical technician, Law enforcement or corrections officer, Head Start worker, Child or family services worker and Professional provider of early intervention services.
- Discharge in bankruptcy: Federal Student Loans can be discharged if one succeeds to prove in the bankruptcy court that paying off the loan would mean undue hardships for the individual.
- Unpaid refund discharge: An individual might be eligible for a discharge of Direct Loan or Federal Family Education Loan programme loan if he/she withdrew from school but the school did not pay a refund that it owed to the U.S. Department of Education or to the lender.
Eligibility Requirement for Forgiveness or Discharge of Student Loan
- Only loans availed under the William D. Ford Federal Direct Loan are eligible for Public Service Loan Forgiveness Program. In case of Federal Family Education Loan (FFFL) and the Perkins Loan Program, the loan needs to be consolidated into a Direct Consolidation loan in order to be eligible for the Public service loan forgiveness programme. Employment with a federal, state or local government agency, entity or organisation or a not-for-profit organisation that has been designated as tax exempt by the internal revenue service (IRS) under section 501(c)(3) of the Internal Revenue Code (IRC) qualify for the Public service loan forgiveness programme.
- An individual is required to teach full-time for five complete and consecutive years in certain elementary school or secondary school or an educational service agency that serves low-income groups in order to qualify for Teacher Loan Forgiveness Program. Also, such forgiveness is applicable for Direct Unsubsidized and Subsidized loan and Unsubsidized and Subsidized Stafford Federal Loans.
- An individual with William D. Ford Federal Direct Loan programme loan, Federal Family Education Loan programme loan or Federal Perkins Loan might qualify for Total and permanent disability discharge program. The borrower needs to provide information to the US Department of Education to prove one’s permanent disability which is further evaluated before providing discharge of student loan.
- To be eligible for Obama’s Student Loan Forgiveness Program, students must have taken out their loans after October 1, 2007 and meet salary-to-debt ratio conditions as determined by IBR calculator qualify for this forgiveness program. Also, the loans must not be in default or already in repayment to be eligible for this program.
- Private student loans are completely left out from the range of Federal Student Loan Forgiveness Program.
How to avail Student Loan Forgiveness
- Under the Public Service Loan Forgiveness (PSLF) Program, the borrower can submit the PSLF application after having made 120 qualifying payment towards his/ her debt. The borrower must be working at a qualified Public service agency when this application is made and when the loan is forgiven.
- To apply for Total and Permanent Disability Discharge Program, one needs to reach the Nelnet Total and Permanent Disability Servicer via a call, email or online application. Nelnet will provide further information on how to apply for a TPD discharge of loan. Nelnet will also direct the loan holder to suspend the receipt of payment for a period of up to 120 days. The Education Department will then decide for discharge of loan on the basis of the honesty of the borrower’s claims.
- Under the Teacher Loan Forgiveness Program, the borrower needs to get the Teacher Loan Forgiveness Application printed and filled after having completed five years of full- time and consecutive teaching. The certification section of the form has to be completed by the Chief Administrative Officer of the school where he/ she provided teaching services. For teacher cancellation of student loan, the borrower needs to provide produce the required documentation before the school which then takes the final decision on discharge of loan.
Student loan forgiveness programs were originated with the soul objective to alleviate debt burden among the student class of the society and contain a series of benefits for the borrowers. With a number of student loan forgiveness programs present, it is important for the borrowers to prudently analyse all available options and go for the best suited one. However, one problem that remains unaddressed is the high expenditure incurred in achieving a college degree and there are no focussed measures to solve that issue in support of the forgiveness programs. There is some amount of criticism that these programs attract due to high subsidies involved. Policies focussing on making college fee low or at least fixed and competitive would serve dual benefit for the economy as a whole.