Students who believe that the right postgraduate job will make their education loans disappear may have another thing coming. If they expect that tenure at a public service job will eradicate all or a portion of their student debt — as is customary with loan forgiveness programs — they could well be disappointed.
With state budgets slashed, endowments taking a hit and businesses crumbling, loan cancellation and public service loan forgiveness programs are also in jeopardy. While certain organizations have cut funding for those already enrolled, others are imposing harsher income restrictions, stricter caps on the amount of forgiveness available or suspending new enrollment.
Here’s how to sidestep a canceled program or deal with it if it happens.
- Understand the risk.
- Read the fine print.
- Find a new backer.
- Assume the debt.
Understand the risk
Joni Finney, a professor in the University of Pennsylvania’s Graduate School of Education, says that those eyeing loan forgiveness should know that not all programs are made equal.
“Programs at the state level are vulnerable since budgets are under such duress right now,” she says. “Big programs like the National Institutes of Health and the National Science Foundation are a high national priority and are safer than smaller programs.”
While risk levels vary wildly among privately funded forgiveness plans, Finney says that federally funded programs through such organizations as AmeriCorps, Teach for America and the U.S. military are likely the safest bets. Students who choose state, school or privately funded programs may want to research back-up forgiveness plans just in case and all students eyeing forgiveness programs should consider the possibility that they could wind up footing the bill.
“Any time you take out a loan, you should assume that you will have to pay it back,” says Finney. “If it’s forgiven, that’s wonderful, but you have to understand the risk.”
Read the fine print
When the student loan guarantor, the Pennsylvania Higher Education Assistance Agency, ended their Armed Forces Loan Forgiveness Program last year, those who assumed they would receive forgiveness funds the following year were disappointed.
“We provided up to $2,500 in loan forgiveness, but we never promised students that it would continue year after year,” says communications director Keith New. “We only promised students that we could guarantee funds one academic year at a time.”
While certain plans like Georgetown Law Center’s Loan Repayment Assistance Program are guaranteed by the school, the majority are not, meaning students could wind up with a boatload of debt they hadn’t anticipated paying. Before signing onto a forgiveness program, students need to read the specifics and be prepared if the program isn’t guaranteed, says New.
Paul Mahoney, dean of the University of Virginia School of Law in Charlottesville, Va., one of the only organizations in the country that will expand its loan forgiveness program next year, urges students to also research the source of the forgiveness funding.
“Students should ask about the school’s level of commitment to the (forgiveness) program and whether there is a specific endowment set aside for it and that’s it or whether the school is committed to finding additional sources of funding to meet its commitments (should funding drop),” he says.
Find a new backer
Victims of canceled loan cancellation have two choices — pay the debt or find someone who will. The good news is that plenty of agencies across the country are willing to do just that.
“Certain states are also offering new programs,” says Tori Berube, college outreach manager for the New Hampshire Higher Education Loan Corp., a student lender and guarantor agency that recently suspended its loan forgiveness program for teachers.
“In New Hampshire we just started a Stay Work Play incentive program where students can have up to $8,000 in (in-state educational) loans forgiven if they work for certain New Hampshire employers for one to four years.”
New Hampshire isn’t the only one rolling out new forgiveness funding. According to Studentaid.ed.gov, this past July the U.S. government introduced a forgiveness plan aimed at public service workers who land national or local government positions, jobs with nonprofit agencies or full-time positions with Peace Corps or AmeriCorps. Public Service Loan Forgiveness only applies to federal Stafford, Grad PLUS or Direct consolidation loans. To qualify, students must hold a public service job and make payments on their loans for a minimum of 10 years starting after Oct. 1, 2007, after which the government will forgive any remaining debt.
Beginning July 2009, low-wage public service employees receive an additional boost through the government’s new income-based repayment plan, which caps monthly loan payments at 15 percent of a borrower’s discretionary income, defined as any earnings above 150 percent of the poverty line. Borrowers who earn less than 150 percent of the poverty line — approximately $16,000 a year — won’t make any loan payments, while those who earn just over the line will have significantly reduced bills that will disappear entirely after 10 years on the job.
“Students need to know that even though some loan forgiveness programs are shutting down, there are still lots of options out there,” says Berube.
Students looking for a new forgiveness program to pick up their loan tab can start the search by contacting their lender, professional organizations in their field or by checking out mappingyourfuture.org and finaid.org.
Assume the debt
“If students are stuck with a loan forgiveness bill, their only option is to pay that debt,” says Certified Financial Planner Mickey Cargile of WNB Private Client Services in Midland, Texas. “It’s unfortunate, but being mad about it doesn’t fix the issue. We have to step up and take the proper action.”
Cargile advises students who are dropped from their forgiveness program to immediately contact their lender and let them know the situation. While lenders can’t eliminate debt, they can work with borrowers to negotiate reasonable payment plans. Those that simply can’t pay their surprise debt may be able to lower or postpone payments until they’ve created a backup plan, says Keith New of the Pennsylvania Higher Education Assistance Agency.
“There are deferment options, forbearance options and students can consolidate their loans and lock them in at a lower interest rate,” says New. “If students encounter any problems paying back their loans, come to us. We can help.”
In addition to the income-based repayment plan, the Department of Education reports that the U.S. government also offers extended repayment options that spread the debt over a longer period of time (up to 30 years) as well as graduated repayment plans that allow students to pay interest only for a few years, then slowly work their way up to full payments. Students who need extra time to come up with a financial plan B can also defer federal loan payments for up to three years or place private loans in forbearance for up to one year. Before taking the latter option, borrowers should know that when in forbearance, interest capitalizes and is added back into the balance of the loan.
Bankrate’s story, “What to do when you can’t pay student loans,” explains the options in more detail.
Whatever plan you choose, New reminds students to tackle the situation head-on and to always stay in contact with the lender.
“Some people have a tendency to run away from trouble, and when you’re talking about financial management, we ask them to run to us,” he says. “We’ll work with them to help them stay on a good financial track.”