College Cost Reduction Act and Loan Forgiveness for Public Service Employees
Public service employment is a topic I haven’t covered much of. This weekend I spent some time attempting to sort out my financial situation in light of my soon-to-be-in-repayment student loans. I graduate from Law School on Friday!
As a quick aside here is a great resource that I wish a financial fairy godmother could have whispered in my ear before I spent the better part of Sunday getting my information organized. The National Student Loan Data System compiles your loan and other finaicial aid information in once place. Even if you have multiple degrees from multiple institutions the NSLDS is a good place to get started.
As part of my research I learned about a new loan forgiveness program Congress recently authorized in the College Cost Reduction Act. Aspects of this program are sure to offer hope and encouragement to graduates seeking lower paying careers or careers in the public service.
The program significantly eases the burden associated with those who are so-called “high-debt, lower-income graduates” by creating an “income based” repayment plan which is more generous than the best option previously available called the “income contingent” or “income sensitive” repayment plans.
Here is an example from Georgetown University’s professor Schrag:
Suppose that a single borrower owes $ 100,000;… Suppose further that the borrower has adjusted gross income of $ 40,000 in the first year after graduation. On a standard ten-year repayment schedule, such a borrower would have to pay $ 1173 per month (35% of adjusted gross income and a much higher percentage of after-tax income). But under ß 203, such a borrower would pay each month ($ 40,000 – $ 15,315)X(15%)/12 = $ 309, or only 9% of adjusted gross income. That is the monthly repayment in the first year; as the borrower’s income rises, the repayment amount will gradually rise, but that increase will be moderated by parallel increases in the federal poverty level. 36 Hofstra L. Rev. 27.
The most generous aspect of the program is that borrowers/graduates who spend ten years in the program or make 120 payments while full-time employees in designated public service positions will be eligible to have their remaining principle and interest forgiven.
Previous programs operating with the “income contingent” options required a waiting period of 25 years before any loan amounts would be forgiven. Borrowers not engaging in public service will be eligible for the new “income based” repayment plans and remain eligible for loan forgiveness after 25 years.
There is one major problem associated with the new program’s law. Any amounts forgiven in will count as taxable income generating an unusually high tax burden in that year. The net savings should exceed any additional tax liability, however. Either Congress or the IRS could act to change that but it will not be a significant factor until the first group of borrowers exit the program in 2017.
Any Queercents readers plan on accessing the benefits associated with the College Cost Reduction Act? Any thoughts on how the new program will affect the economy? Anybody out there who thinks this option might weigh in their decision to return to school?
Congratulations on your impending graduation!
Sadly, I probably don’t qualify for any of these programs. I doubt that massage therapy meets the government standard for public service. I imagine you have to be a teacher or something similar?
Adam: Yes, congrats on finishing law school!
Jan: Or something similar? Social work happens to be high up on the list of approved public service professions.
Congratulations on your upcoming graduation. I am graduating from law school next year, and to say that the College Cost Reduction Act is a godsend would be like saying taking the MPRE was fun. I am troubled by the balloon taxable income burden at the 10 year forgiveness period. I can’t find much written about this anywhere, so if you have further information that would be helpful. I don’t understand how a lawyer earning a modest income, even at the end of the 10 year period, would be able to saddle the immense tax burden. I, myself, will have close to $185K in law school debt and intend on working in government. I cannot see how I will be able to afford what might be a $75-$100K windfall in “income” at the ten-year mark. It seems antithetical to the purpose of the program. The whole reason lawyer/borrowers will take advantage of the public service forgiveness provision is a result of not being able to service the loan debt at the standard rates. Tell me how the IRS expects a lawyer earning, hypothetically $85K after 10 years, to endure an approximate 33% tax burden for that year’s return? Hello! $28,050 tax bill. Good luck collecting. Something is wrong with this picture.
I’ve worked in Stanford and Northwestern financial aid offices. Everything boils down to two words–Choices and Consequences. Nobody forced students persue their careers–anyone who takes loans without thinking about repaying those loans are fools–just like buying homes without any down payment–and sub prime disaster we are seeing today. Although your “dream” job may be to be in public service–the reality may be that you probably are going to have to work in the private sector to pay off a good portion of your debt.
Signed–
Had a high interest loan in the 80’s and paid it off with making sacrifices!
I agree with Russell. Plus, there are so many contradictory pieces of information. One place says that the public service must be with a low income institution and others don’t, or at least there is some sort of difference in how the act acts.
Also: In terms of working in education the law I read from congress includes school counselors, etc, but in another place it says only teachers.
I just don’t know what to do.
I am about to leave law school, and credit this program with allowing me to stay in the public interest sphere. There is one additional problem, though, that I feel acutely as a woman and as a parent–there is no “partial credit” for part-time work. Anything less than full-time employment for a particular year simply doesn’t count…it’s as if, for the 10-year, 120-payment loan forgiveness purposes, you never worked that year. I’m not suggesting that part time work and full-time work should be treated the same, but why not a 20-year, 240-payment program, at least half-credit for half-time? I’m so glad that this program exists, but why punish young families by in effect taxing those of us who choose to spend at least some of our work week at home with our young children, while also contributing to the workforce?
1. Massage Therapy Qualify? Probably not for the public interest loan forgiveness unless you have a very unique job in the public or non-profit sector. HOWEVER, the act still applies to you if you qualify for the Income Based Repayment Plan. You can pay this lower payment, for 3 years the unpaid interest on your subsidized loans continue to be paid for by Uncle Sam and in 25 years the remainder of your loans are forgiven.
2. Low income? Not really. If you qualify for the IBR payments then you qualify for the act. Check this out: http://www.finaid.org/calculators/ibr.phtml
3. School Counselor qualify? Probably. I am interested in being a public defender or a district attorney and I am having the same problem. The act says these positions are governed (in low income areas). However, “public service job” has been defined broadly thus far. Any “government” job is included and any “school based job”. As a counselor you will probably qualify. Check this out: http://www.finaid.org/loans/publicservice.phtml
3. Tax implications. They are potentially huge and you MAY have to plan for them. The loan forgiveness in year 10 is quite possibly going to be taxable. I have found little information on this as well and have yet to read the act word for word. I would GUESS that congress will reduce or eliminate the tax of the forgiveness but this is a guess. (Despite your party affiliation you may want to vote in Republicans around 2018)
4. No part time credit. This is a bit of a downer and I think it does send the wrong message to young families. Don’t hold your breath… but it MAY change.
5. One other thing not mentioned is the fact that the IBR payment is based on both YOUR income and YOUR SPOUSES income– yet the payment calculation does not care if your spouse has qualifying school debt. This results in higher payments for both spouses. If the debt was equal but belonged only to one spouse it would result in a lower payment and more forgiveness. Seems silly and there are advocates who would like this changed.
Check out my blog and feel free to ask me questions. I’ll do my best to help!
JD
Editor, Political Pieces Blog