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 Student loan forgiveness and service payback programs are available to provide aid to students and to attract individuals to serve in certain jobs or work in regions of the country that are experiencing a shortage.
Student Loan Forgiveness Programs
The first federal student loan forgiveness program dates back to the National Defense Student Loan Program of 1958. This was a forgiveness program aimed at increasing the enrollment of students willing to be public school teachers. Today, loan forgiveness programs have expanded to new categories of borrowers and ideas for new programs continue to be introduced into Congress.
As previously mentioned, student loan forgiveness programs and service payback programs are really just a variation of a work-contingent student financial aid program. For example, service payback programs cover all or a portion of a student's costs if they agree to work for a specific period of time in a certain field or job after completing their education. These programs pay for a student's expense while they are attending school.
Forgiveness versus Service Payback
A loan forgiveness program will repay a percentage of a former student's educational debt in exchange for work in a designated job. Unlike service payback programs that pay for educational expenses while the student attends college, forgiveness programs pay off a student's loan after they start working.
DOE Student Load Forgiveness Programs
As part of the Higher Education Act (HEA) of 1965 and its amendments of 1998, both teachers and childcare providers were now eligible for student loan forgiveness via the Department of Education. These provisions applied to outstanding interest and principal for holders of unsubsidized Stafford loans obtained through the Federal Family Education Loan (FFEL) Program as well as the William D. Ford Federal Direct Loan Program (Direct Loan).
Student Loan Forgiveness for Teachers
The teacher loan forgiveness programs are offered through FFEL and Direct Loans. They provide teachers up to $5,000 in loan forgiveness after five consecutive years of full time teaching. The teaching position must be in a low income public or private non-profit school which is district eligible for Elementary and Secondary Education Act (ESEA) funding.
Loan Forgiveness Rules for Teachers
A low income community is defined as one in which 70% of the population earns less than 85% of the state median household income. Only new student loan borrowers as of October 1, 1998, with no outstanding loan balances, are eligible for this loan forgiveness program. Teachers must also have accrued at least five years of consecutive teaching before they are entitled to receive this money / award.
Student Loan Forgiveness for Childcare Providers
Eligible childcare providers must have a degree in early childhood education and work in a child care facility that meets state or local requirements, provides for children five or younger and serves a low income community. After the second consecutive year of employment loan forgiveness is 20% of the outstanding loan balance is forgiven annually. After each of the forth and fifth years, 30% of the loan balance is forgiven.
Loan Forgiveness Rules for Childcare Providers
As was the case with teachers, only ex-student borrowers as of October 7, 1998 are eligible for this loan forgiveness program. If funding is not sufficient to forgive all of the eligible applicants, then student loan forgiveness will proceed on a first-come, first-served basis. Priority will be give to borrowers receiving funding under this program in prior years.
Campus Based Student Load Forgiveness Programs
The following student loan forgiveness programs are campus based - meaning that these student loans originated with colleges and universities and were made to students based on demonstrated financial need.
Perkins Student Loan Forgiveness Programs
In addition to the federal loan forgiveness programs mentioned earlier, there are Perkins Loan forgiveness programs for ex-student borrowers who work in specific public service jobs.
These student loans have another set of forgiveness programs which include up to 100% of the loan amounts forgiven for:
- Full-time teachers serving full time elementary or secondary schools in low income areas
- Head Start staff persons
- Full-time special education teachers or qualified providers of early intervention services for the disabled
- Members of the Armed Forces serving hostile areas
- Peace Corps volunteers
- Full-time law enforcement or corrections officers
- Full-time teachers in shortage areas
- Full-time nurse or medical technicians
- Full-time employees of providers to high risk children and families in low income communities
If you're planning on entering these or similar fields, you might want to check these programs out. It's a win-win situation since your education is being paid for by the federal government and these areas in need get the attention they deserve.
Federal Student Loan Forgiveness Programs
In addition to Department of Education and campus-based student loan forgiveness programs, there are some fairly large federally funded programs. These programs apply to specific groups of federal employees or ex-students that are involved in specific occupations.
Loan Forgiveness for Military Employees
The military has several loan forgiveness programs that can help students pay for college in exchange for military service. This includes ROTC scholarships as well as:
- Army's College Loan Program - that will forgive one-third of approved student loans for each year of full-time duty served, up to a maximum of $65,000.
- Navy's Loan Repayment Program - that offers a student loan forgiveness program for up to $65,000 for full-time duty soldiers who have no prior military service, a high school diploma and a qualified loan.
- Air Force College Loan Repayment Program - that offers up to $10,000 in loan forgiveness to eligible recruits.
Civilian Employees
Federal agencies may even use loan forgiveness in an attempt to recruit new employees. Agencies can use incentives up to $10,000 per year for up to $60,000 in payments towards student debt. In return, the employee must usually agree to work for the agency for at least three years.
Loan Forgiveness for Health Care Workers
Medical and Health Researchers and Professionals can apply for student loan forgiveness via the National Institutes of Health - which runs several programs. The purpose of which is to attract research persons to the NIH. In exchange for repayment of up to $70,000 of education debt the student commits to working at least 20 hours a week for two years.
The National Health Service Corps (NHSC) has both a student loan forgiveness program and a service payback program. The purpose of these programs is to encourage health professionals to work as primary health providers in certain areas of the country where health professional are in short supply.
The NHSC will pay up to $50,000 in outstanding student loans in exchange for two years of service. Specifically, recipients of this loan forgiveness program need to sign a contract agreeing to provide two years of clinical service in one of the identified shortage areas.
The Nurse Reinvestment Act, which was signed into law on August 1, 2002, established a service payback program which provides a scholarship to nursing students in addition to a loan forgiveness program. Under this program, nurses must agree to work in a nursing facility for a pre-determined period of time.
Loan Forgiveness for Volunteers
In addition to the Peace Corps volunteer program mentioned earlier, members of AmeriCorps, the National Civilian Corps, and Volunteers in Service to America (VISTA) are eligible for education awards that can be used to repay student loans.
One term of service is required to qualify for this award. The award is $4,725 for a year of full-time service - smaller awards are available for volunteers of part-time service. Members of VISTA can choose between an education award and a lump sum stipend that accrues at the rate of $100 for each month of service.
State Funded Student Loan Forgiveness Programs
Recent studies indicate a greater number of state run and funded student loan forgiveness programs. That research, conducted in 2001, indicated that nearly 90% of states (43) offered either service payback programs or loan forgiveness.
As is the case with the federal programs, teaching and health care professionals are benefiting most from these initiatives.
Tax Implications of Loan Forgiveness
Under the current tax law, the amount forgiven represents taxable income for federal income tax purposes. Taxable income should be recognized in the year the student loan was written off.
There are some exceptions to this rule, for example if a student loans was forgiven by a tax-exempt educational institution, the forgiveness is excluded from gross income if the student is not employed by the educational institution or if the loan forgiveness was based on an agreement by the former student to work for a specific number of years in certain professions. Chapter 5 of IRS Publication 970 contains more information on the tax implications of loan forgiveness.
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