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Here’s What You Need To Know About Student Loan Forgiveness And Income Based Repayment

income based forgiveness student loansIncome-based repayment for federal student loans is a powerful tool. Forgiveness of the balance at the end of the road makes it even better. We know income based repayment for your federal student loans is awesome. How it can lower your payments and make your life a whole lot better. But it gets even better when you realize you can get your balance forgiven, too. Related:

Here’s how.

The Basics Of IBR Forgiveness

The government will forgive any remaining loan balances after you repay your federal student loan through an income based repayment plan for a period not to exceed twenty-five years. To qualify, you must satisfy at least one of the following conditions each year:

  1. Made reduced monthly payments under a partial financial hardship (even if your IBR payment is $0);
  2. Made reduced monthly payments after you no longer had a partial financial hardship or stopped making IBR payments;
  3. Made monthly payments under any repayment plan that were not less than the amount required under a standard federal student loan repayment plan;
  4. Made monthly payments under the standard ten-year repayment plan for the amount of your loans that was outstanding at the time you first selected IBR;
  5. Made IBR payments if in Direct Loan Program; or
  6. Received an economic hardship deferment.

In other words, your forgiveness may be based on a combination of factors.  You may have made monthly payments for part of the time, deferred for economic reasons during a different period, and been in an income based repayment plan for your federal student loans at other times. So long as you participated in an IBR program for the time period, you’re eligible to look into forgiveness.  Even if the 25 years isn’t consecutive – in other words, you fell off the wagon for a year here and there, but got back on eventually – you may qualify for forgiveness.

When The 25 Year Clock Starts Ticking

If you made payments under an income-contingent repayment plan, the clock begins to tick on the date you made a payment on the loan under that plan at any time after July I, 1994. If, however, you did not make payments under an income-contingent repayment plan, the calculation of the beginning date is a bit more complex. If you’ve got a federal consolidation loan, the starting date is when you made a payment or received an economic hardship deferment on that loan, before the date you qualified for IBR.  If that date is before July 1, 2009 then we use July 1, 2009 as the start date. If you’ve got more than one eligible loan, the government will use the date you made a payment or received an economic hardship deferment on that loan.  Here, too, if that date is before July 1, 2009 then we use July 1, 2009 as the start date. If you didn’t make payments or receive an economic hardship deferment, the date used will be the date on which you made a payment under the IBR plan. If you consolidate your eligible federal student loans, the government will use the date you made a payment on the Direct consolidation loan after qualifying for IBR.

Tax Consequences Of IBR Forgiveness

As with anything else, the government giveth … and the government taketh away. When you get your student loans forgiven after going through income based repayment, the amount that gets wiped out is considered taxable income.  So if you end up walking away from $25,000 in federal student loans then you’re going to need to consider those tax effects. One thing to know is that there is no tax on cancelled debt if you’re insolvent at the time the cancellation occurs.  Talk with your tax professional when you get the tax forms to figure out if you’re considered insolvent.

Not As Long As It Seems

You’re probably reading this and thinking that 25 years is a mighty long time – and it is.  But not as long as you think. Lots of people end up paying their student loans until they’re old and grey.  It used to be possible to pay off your loans in 10 years or less, but for most people that’s just not in the cards anymore.  Loans are bigger than ever before, and the cost of living is through the roof. The key is in the planning, as with anything else.  Get onto an IBR repayment plan as quickly as possible, monitor your payment stream, and be ready to jump when the time comes.  It could save you a lot of money and headache in the future. Image credit: hollyhennypenny

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By |January 16th, 2013|

About the Author:

I’ve been a consumer protection lawyer since 1995, working to help people end their bill problems. I’m a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.

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