Interesting read…but of course does not affect me.
Student loan forgiveness program a blessing and a curse
Kathleen Pender
Sunday, September 16, 2007
Abroad swath of public service workers – including school, government, health care, nonprofit and military employees – can have their remaining student loan balances forgiven after 10 years in public service and 10 years of loan payments under a bill awaiting President Bush’s signature.
The program, however, will benefit future public servants more than existing ones because payments made before Oct. 1 will not count toward the 10 years of repayment. Only payments made after Oct. 1 will count.
That infuriates David Rapaport, a history teacher at Palo Alto High School who has been working in the public sector and paying off his student loans for 12 years. “It doesn’t reward the people who are in the trenches, doing the job, paying back their loans. It should reward the people who have already made the commitment to do the job. The people it’s going to help haven’t even committed to public service yet,” he says.
Rapaport says the cost of the program won’t start coming due for 10 years, by which time many of the people who voted for it will be out of office. “It’s a very blatant attempt to do a feel-good bill,” he says.
Rachel Racusen, a spokeswoman for Rep. George Miller, D-Martinez, one of the bill’s sponsors, says, “The bill provides loan forgiveness for public service workers after 10 years of service and loan repayment, which will rightfully reward millions of workers for their vital service to our country and will encourage students to enter critically important but typically lower-paying fields.”
The loan-forgiveness program is part of the sweeping College Cost Reduction and Access Act, which has passed the House and Senate. Bush is expected to sign it.
Like almost everything Congress cooks up, it is shamefully complex. Public-sector workers who are paying off student loans should do their best to understand it, however, because there are two things they should do now to get the most out of the program.
The lower your income and the higher your debts, the more benefit you will get from the program. People with higher incomes might not benefit at all. For a student with $100,000 in debt, “Once you hit about $55,000 in income, the benefits phase out pretty quickly,” says Philip Schrag, a law professor at Georgetown University and ardent supporter of the program.
The bill covers government workers plus employees of tax-exempt nonprofit organizations, which includes most hospitals and private schools. About 25 percent of workers are in occupations covered by the program, according to census data.
To qualify, employees must make 120 monthly loan payments while they are employed in one or more eligible jobs and they must be in an eligible job when the loan is forgiven.
The program covers only government guaranteed Stafford, graduate Plus and consolidation loans that were issued under the U.S. Department of Education’s direct lending program. A minority of colleges offer these direct loans.
Most students get their Stafford and Plus loans from banks and other private-sector lenders through the Federal Family Education Loan Program. Loans made through this program are not eligible for the forgiveness program. However, a student with what are called FFELP loans can consolidate or reconsolidate them into a direct loan, which would be eligible for forgiveness. Perkins loans are eligible only if they are consolidated into a direct loan.
Private student loans are not eligible for the new program. Neither are Plus loans taken out by parents. Normally, Stafford and Plus loans are paid off over a 10-year period that starts after the student has left school. A student who pays off loans over the normal repayment period will have nothing left to forgive after 10 years.
To take advantage of the program, borrowers would have to stretch their payments beyond 10 years. One way to do this is by entering an income-contingent repayment program. This program is open to anyone regardless of occupation, but it is restricted to federal direct student loans, so a borrower would have to have or consolidate or reconsolidate into direct loans to participate.
In this program, borrowers can have their monthly payments capped. In most cases, the cap is 20 percent of the amount by which a borrower’s adjusted gross income exceeds the poverty line.
The poverty line today (in the 48 contiguous states) is about $10,210 for one person, plus $3,480 for each additional family member.
Suppose a borrower has $40,000 in income and a family of four. His poverty line is $20,650.
His annual income exceeds his poverty line by $19,350. Twenty percent of that number is about $3,870 annually or roughly $323 per month. His monthly payment would be capped at $323.
Any amount over $323 a month is deferred. After 25 years, any remaining loan balance is forgiven.
This program exists today. The bill on Bush’s desk creates a new, more generous program called income-based repayment, but it doesn’t start until July 1, 2009.
Under the new program, loan payments are capped at 15 percent of the amount by which your
income exceeds 150 percent of the poverty line.
Under this program, the borrower in the above example would have his payments capped at $113 per month.
This new program applies to both FFELP and direct student loans and also forgives remaining loan balances after 25 years. Those who go into public service can have their balances forgiven after 10 years.
What can borrowers do now?
If you are in or going into public service and anticipate having low income and high debt, “you should get into direct lending now and start off with income-contingent repayment. When income-based repayment becomes available July 1, 2009, switch to that,” says Mark Kantrowitz, publisher of FinAid.com.
He adds that there are two “flaws” in income-based repayment, which Congress might fix at a later date.
Today, any loan balance that is forgiven becomes taxable income. Also, “there is an implicit marriage penalty. If you are married, the income used in the formula includes your and your spouse’s income. “If you are in public service and you marry someone with high income, you get no benefit,” Kantrowitz says.
You can calculate your maximum monthly payments under the income-contingent program and the new income-based repayment programs at FinAid.com (see chart for links).
According to the Congressional Budget Office, the public-service loan-forgiveness program is expected to save the government $110 million over 10 years. That’s because more borrowers will switch out of FFELP loans into direct loans, which are cheaper for the government. The government subsidizes private-sector lenders under the Federal Family Education Loan Program.
After 10 years, when the government starts forgiving public-sector loans, the costs will start to mount, but the budget office hasn’t yet calculated the cost beyond 10 years.
Online resources
Text of bill:
links.sfgate.com/ZUY
Article by Georgetown Professor Philip Schrag:
links.sfgate.com/ZUZ
Income-contingent repayment calculator:
links.sfgate.com/ZVA
Income-based repayment calculator:
links.sfgate.com/ZVB
Public Service Loan Forgiveness
Under a bill expected to be signed by President Bush, public service workers can have their remaining student-loan balances forgiven after 10 years in a qualifying job and 10 years of payments.
Q: What jobs are eligible?
A: A full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education (including early childhood education), social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization), public child care, public service for individuals with disabilities or the elderly, public library sciences, school-based library sciences and other school-based services, or at a 501(c)(3) non-profit organization that is tax exempt. This includes most universities and private schools.
Q: What loan payments count toward 10 years of repayment?
A: Only payments made after Oct. 1, 2007
Q: What loans are eligible?
A: Federal direct Stafford (subsidized and unsubsidized) loans, federal direct grad Plus loans, federal direct consolidation loans.
Q: What loans are not eligible?
A: Private education loans and parent Plus loans are not eligible. Stafford or grad Plus loans granted through the Federal Family Education Loan Program are not eligible unless they are consolidated or reconsolidated into a federal direct loan, which would be eligible.
Q: How can I take advantage of the program?
A: If you don’t already have direct loans, consolidate or reconsolidate your FFELP loans into a direct one. Enter an income-contingent repayment plan. After July 1, 2009, switch to the new income-based repayment plan.
GI Jane Finances 