Relief From Student Loan Debt for Public Service Workers

By ANN CARRNS

Published: September 10, 2013 in The New York Times

Raha Wala, a 30-year-old lawyer for an international human rights organization, is facing $200,000 in student loan debt. But if all goes according to plan, most of that burden will be forgiven after 2020 under a federal program aimed at helping those who enter public service jobs.

“It’s enabling me to do the work that I love,” said Mr. Wala, who graduated in 2010. “It wouldn’t be possible, otherwise.”

The federal government is trying to encourage more participation in the Public Service Loan Forgiveness program, which was created in 2007. The program and other debt assistance options have been underused because of complex rules and sometimes conflicting benefits.

Last month, the Consumer Financial Protection Bureau created a tool kit for employers — like nonprofits, school systems and police and fire departments — to help make their workers aware that they may be eligible. The public service program allows those with high student loan balances relative to their income to have the balance of their loans canceled if they work in government or nonprofit jobs for 10 years.

Mr. Wala hasn’t calculated exactly how much the forgiveness program will save him, but he expects it could be many thousands of dollars. “I definitely am looking at it as something that will have to happen, if I want to maintain a stable lifestyle,” he said.

The program works best with income-driven student loan repayment programs — options that let you make lower loan payments based on your pay. (That’s because if you stayed on the standard 10-year loan repayment plan and made all your payments on time, you wouldn’t have any loan balance to forgive.)

The savings can be substantial, as this example from the Institute for College Access and Success shows: A student graduated this year with $26,600 in loans and landed a public service job with a $25,000 salary. She continues to work in public service for 10 years, and her income increases 4 percent a year to $35,600.

Under the income-based repayment plan, which sets monthly payments at 15 percent of discretionary income, she would pay $16,700 over 10 years and have $28,000 in debt forgiven.

In contrast, if she didn’t work in public service (but still qualified for income-based repayment) she would pay $61,500 over the income program’s 25-year repayment period, with no loan forgiveness. (She’d save even more combining public service with the Pay as You Earn program, which sets monthly payments at 10 percent of discretionary income.)

There are some restrictions. Only federal direct loans — those originated by the federal government — are eligible for the public service forgiveness program. But older loans that were made by private lenders and guaranteed by the federal government — like those made under the Federal Family Educational Loan program, which ended in 2010 — may be refinanced into a new direct loan, to become eligible.

You must make your loan payments on time every month for 10 years — 120 payments — to qualify. The payments don’t have to be consecutive, however. You could, for example, work at a public service job for five years, leave for two years and return for another five years.

Betsy Mayotte, director of regulatory compliance at American Student Assistance, cautions that you can’t always predict your career path 10 years in advance, so you should still borrow the absolute minimum you need — in case you move away from public service and aren’t eligible for its debt-erasing benefits.

Here are some questions to ask as you consider your options:

■ I just started working in public service. Do I have to apply for the loan-forgiveness program now?

No. But to help you keep track it’s a good idea to submit an employment certification form to the United States Department of Education each year. You fill out the form jointly with your employer. More information on the form and how to submit it can be found on the Consumer Financial Protection Bureau’s Web site.

■ Do I have to pay income taxes on the debt canceled under the public service program?

No. The amount forgiven after 10 years of public service isn’t treated as taxable income. Debt forgiven for borrowers using income-based repayment program alone, however, is considered taxable under current law.

■ Are there other options beside the public service program to help reduce my loan debt?

Yes. In addition to federal programs, some states and some private employers, offer their own programs. SALT, a program of American Student Assistance that aims to help students manage their debt, has just published a guide that you can download free.