In 2007, the United States signed into law the Federal Public Service Loan Forgiveness program. Here’s the deal: If you meet the following 3 requirements, you were (are) supposed to be eligible to participate:
- Your loans must be federal direct loans.
- Your employer must be a government organization at any level, a 501(c)(3) not-for-profit organization or some other type of not-for-profit organization that provides public service.
- By the end, you need to have made 120 qualifying, on-time payments in an income-driven repayment plan or the standard repayment plan.
In other words, by working for 10 years without missing a payment, whatever is left will be wiped clean. If you think this sounds like a great program, you’re not alone. This program is often cited as one of the “reasons” to justify attending an expensive college program or taking out student loans despite plans to work in a lower-paying industry like public service.
Over the past 10 years, these kinds of programs have been so popular, that CNBC reported that 70% of the public service employees they spoke to believed that they were accruing years toward full forgiveness (10 years) and would receive full forgiveness in the future.
“Just 96 people across the country have been released from their debt, thanks to public service loan forgiveness. Last year was the first year of eligiblity, since the program was signed into law in 2007 and it requires at least 10 years of payments to qualify. Nearly 30,000 borrowers have applied for the forgiveness, according to the Education Department’s data.” – CNBC @ANNIEREPORTER
In a nightmare of red tape, “gotcha” rules and restrictions, out of the 30,000 who had already worked a FULL 10 YEARS and made payments for all 10 years, only 96 have been granted loan forgiveness.
That’s not a typo, 96 out of 30,000 who did their 10 years of service actually had their loans forgiven. I’ve only found a small bit of media attention around this issue, but I can’t figure out why it’s not making headlines!? That’s not even 1%, that’s not even half a percentage! That’s no one. That’s a big, fat, goose-egg.
As bad as I feel for those hoping to qualify for this program, what we have to do for our teens is in front of us- not behind us. Let’s talk about moving forward and talk about wisdom.
LIE #1) Everyone graduates. Truth: only 1/2 will. That’s a hard pill to swallow, and naturally, everyone thinks they’re in the half that will graduate. Together we could build a list of 50 reasons people don’t graduate college – and most of them are legitimate, valid or unexpected. (as opposed to a person just randomly flunking out, which isn’t usually the reason, though as long as we believe that’s the reason, we avoid considering that it could happen to our teens). The only way to proceed with wisdom is to proceed under the “worst-case scenario” assumption. I know 3 people in real life who left college with only a few classes left to take. These are smart people, but life happened. The truth is that predicting the future 4 years in advance is impossible. Unfinished degrees do not qualify for loan forgiveness.
- wisdom: bring the goal post of a degree closer if you can. Reduce the number of classes/ credits your teen needs for their degree by starting in high school. You can homeschool for college credit, use AP classes, use dual enrollment, and even summer sessions. A typical bachelor’s degree requires 40 courses total. At least 10 of those can be done in high school. Bring the goal post closer to leverage the odds of finishing.
LIE #2) Loan forgiveness will erase my debt. Truth: to even be eligible for loan forgiveness, you must first make payments perfectly for 10 years. Literally, perfectly. That means not a single late payment, no deferment, no gaps at all. Want to cut your hours from full to part-time? Can’t do it – disqualified. Want to stay home and raise your children? Can’t do it – disqualified. A moment ago we considered how hard it would be to predict the future 4 years in advance when we’re talking about a full decade, it’s not even a conversation. While there are plenty of allowances and exceptions, tens of thousands who applied (after 10 years of work) were denied for not meeting the exact allowance or exception.
- wisdom: assume all debt must be repaid. If you must borrow for your degree, wisdom is to borrow only for the LAST year of college, when your odds of completion are significantly higher. If you do borrow, make repayments immediately – don’t even wait for the “6 month grace period” that starts after graduation. Begin immediately and with intensity.
LIE #3) Loan forgiveness makes good financial sense. EVEN if you’re one of the 96 who was meticulous and received forgiveness, let’s look at the math. The Federal student loan’s official repayment calculator allows us to enter in the amount of our loan, and determine the monthly payments. I’m trying to avoid being too mathy here, but let’s assume you borrow $50,000 for your 4-year degree (or $12,500 per year). Only a maximum of about $20,000 can be “subsidized” which means you don’t get billed interest while you’re in school (about $5,000 per year borrowed this way) and the remaining $30,000 starts charging you interest from the day you borrow (about $7,500 per year borrowed this way).
Since people seeking loan forgiveness must deliberately HAVE A BALANCE at the end of the typical 10-year term, the Federal Student Loan Repayment program doesn’t put you on a “regular” repayment schedule. The schedule for students who want this method are typically placed on a 25-year repayment schedule.
Under the standard 120-month repayment, a student will pay $550 per month for 120 months. The total they’ll repay with interest is about $67,000.
A student who enters repayment with the intention of using forgiveness will enter a 300-month repayment program. They’ll pay only $270 per month. As such, at the 10-year mark, this student has only repaid $14,000 of their whole loan! (even though they’ve made payments totaling over $32,000) If forgiveness is granted, the remaining $36,000 will disappear (hooray if you’re one of the lucky 96) but the other tens of thousands locked into this repayment program will actually repay $87,000. A significantly larger amount to repay – not to mention being more than 40 years old by the time you get out from under the loan.
- wisdom: use your college’s transfer policy and CLEP/AP policy to the maximum. Start in high school and take advantage of transfer agreements. Whittle the “rack rate” tuition down by resourcefully planning the degree as carefully as possible. Apply for scholarships every week that you’re enrolled in college, and if you have college savings, use them as late in the game as possible. Borrowing the absolute minimum to pay the tuition bill (pay cash for living expenses) and tighten the budget. Once you’ve decided to borrow, repay immediately and with gusto. Repaying your loans as quickly as possible assures that you’re not wasting 10 years of your life working at a job that may not even forgive your loans. By taking control of the college process, you remain in control of your finances and power over your future.