Student Debt Resource

15: Frequently Asked Questions on Education Debt Relief

/ Student Debt E-book

We receive many questions about educational debt relief programs. Those we receive most frequently are about Public Service Loan Forgiveness and income-driven repayment (IDR) plans.

Here are some answers to help you get started. For more information on Income-based repayment (IBR) plans, and other income-driven repayment plans (including the new Pay As You Earn (PAYE) plan and Public Service Loan Forgiveness (PSLF), go to Chapter 3: Income-Driven Repayment Plans and/or Chapter 4: Public Service Loan Forgiveness.

Please note: the below FAQs do not take into consideration the Temporary Waiver Opportunity for Public Service Loan Forgiveness which expires on October 31, 2022. Check out the PSLF Coalition FAQs for more information here.  

Will Public Service Loan Forgiveness and IDR plans be around for the foreseeable future, or will they be eliminated by Congress? 

Unlike many government programs, these are not subject to appropriations or the budgetary process. It would take an act of Congress to take Public Service Loan Forgiveness and/or the IDR plans away from borrowers. However, the PAYE, REPAYE, and ICR plans are administrative rule-making creations, and are a bit easier to remove or alter. Higher Education Reauthorization is due in Congress.  

Will the loan cancellation provisions under the IDR plans mean that I will be left paying a high tax bill? 

The Consolidated Appropriations Act of 2021 excludes student loan forgiveness from taxation as income through 2025.  Unless this tax exemption is further extended. The amount of unpaid loan principal and interest cancelled may again result in the Department of Education submitting a Form 1099-C: Cancellation of Debt to the IRS during the tax year of the cancelled loan balance. While this amount is technically taxable as gross income, there does exist a number of special rules for cancelled debt amounts that do not exist for typical gross income.  

The most notable special rule is the insolvency exclusion. This rule lowers the amount of cancelled loan debt for which you owe taxes, by the amount your debts exceeds the market value of your assets, immediately prior to having the outstanding loan balance cancelled. Liabilities can include outstanding student loan balances (including the loan balance amount eligible for cancellation), mortgages, car loans, medical bills, credit card debt, and back taxes. Assets can include bank account balances, cars, computers, tools, stocks, real property and bonds. See Publication 4681 (2016) for more information.  

For example, Jane is eligible to have $100,000 in outstanding student loans cancelled under the REPAYE plan. Jane has an additional $50,000 in liabilities from her mortgage. Jane has assets of $45,000. The difference between Jane’s total liabilities ($150,000) and her assets ($45,000) is $105,000. Because $105,000 is larger than $100,000, Jane will pay no taxes on her cancelled student loan debt.  

Outside of exceptions for taxes paid on cancelled debts, the IRS, upon request, offers generous repayment terms for taxes that cannot be paid in the year they are due. An individual automatically qualifies for an interest free 72-month installment agreement. For those who cannot accommodate repayment of their tax burden in 72 months, they may qualify for an Offer in Compromise (OIC). An OIC allows individuals, particularly those with low amounts of assets or low levels of income, to have a portion of their tax liability forgiven (up to 80-90 percent). For further information on OICs, contact a tax professional and see Form 656 Booklet 

Note: For those concerned about the potential tax consequences of their cancelled student debt, and are unable to pay a tax professional, free help is available. The Taxpayer Advocate Service is an independent organization of tax experts that can help you resolve present or future financial problems caused by tax liability. You can find local members of the Taxpayer Advocate Service by going to taxpayeradvocate.irs.gov or calling 1-877-777-4778. Additionally, free (or reduced fee) help may available via a Low Income Tax Clinic. These clinics provide professional representation on tax collection disputes, appeals, hearings etc. You can find a local clinic by going to taxpayeradvocate.irs.gov/about/litc, or checking Publication 4134, Low Income Tax Payer Clinic List.  

Do I have to choose between my Loan Repayment Assistance Program and the federal programs? 

No. We do not know of a LRAP that prohibits participation in Income-Driven Repayment (IDR) plans and/or Public Service Loan Forgiveness (PSLF) plans. In fact, most LRAPs work in conjunction with IDR and PSLF plans. However, some LRAPs may require you to enroll in an IDR plan or limit the amount it gives you to the amount you would be required to pay in an IDR plan. 

Can I participate in PSLF with defaulted loans? 

No. Monthly payments made on defaulted Federal Direct loans do not count toward the 120 payments necessary to earn PSLF. However, you can get your loans out of default by consolidating defaulted loans into a Direct Consolidation loan or participating in loan rehabilitation. 

Can I receive loan cancellation on Parent PLUS loans? 

Yes. Parent PLUS loans can be consolidated into a Direct Consolidation loan and then repaid under the ICR plan. This would allow for loan cancellation after 25 years, per the ICR plan’s loan cancellation provisions.  

Which student loans are eligible for PSLF? 

Only Federal Direct Loans are eligible for PSLF. This includes Federal Direct Subsidized and Unsubsidized Stafford Loans, as well as Federal Direct Grad PLUS Loans and Federal Direct Consolidation Loans are eligible for Public Service Loan Forgiveness. 

Parent PLUS Loans are eligible for PSLF but there are additional factors to consider. The first factor is eligibility for PSLF, which is dependent on the parent’s employment, not on that of the dependent student for whom the loans were borrowed. Second, a Parent PLUS loan must first be consolidated into a Direct Consolidation loan and repaid under the ICR plan in order for payments to qualify toward PSLF.  

Which student loans are NOT eligible for PSLF? 

Federal Family Education Loans (FFELs) are not eligible for Public Service Loan Forgiveness. Borrowers may consolidate their FFEL Loans into a Direct Consolidation Loan if they intend to work toward PSLF. 

Federal Perkins Loans are only eligible as part of a Federal Direct Consolidation Loan. You should always consult with the school from which you obtained a Perkins Loan before consolidating it, because Perkins Loans include their own cancellation provisions. These provisions will be lost if you consolidate your Perkins Loan. 

Loans made by a state or private lender that are not guaranteed by the federal government are never eligible. 

When can I initially enroll in the IBR, ICR, PAYE, or REPAYE plans? 

Prior to entering repayment, you may enroll in the IBR, ICR, PAYE, or REPAYE plans by selecting them on the Income-Driven Repayment (IDR) Plan Request form and selecting “I want to enter an income driven plan” option as the reason you are submitting the form. You will be required to verify your income by providing your loan servicer with your most recent tax return or alternative documentation (pay stubs or letter from an employer).  

If you are already in repayment, you can switch from a balance based plan to an IDR plan at any time by submitting an Income-Driven Repayment (IDR) Plan Request form and selecting “I want to enter an income-driven plan” option as the reason you are submitting the form. You will be required to verify your income by providing your loan servicer with your most recent tax return or alternative documentation (pay stubs or letter from an employer).  

If you are already in an IDR plan, you can switch to another one if your income changes, if your household size changes, or whenever you are required to re-certify your income. You may do this by submitting a new Income-Driven Repayment (IDR) Plan Request form and selecting the “I want to change to a different income-driven plan” option as the reason you are submitting the form. You will be required to verify your income by providing your loan servicer with your most recent tax return or alternative documentation (pay stubs or letter from an employer).  

When can I apply for PSLF? 

You may only apply for final forgiveness after you have made all 120 qualifying payments on your eligible Federal Direct Loan(s), while working in qualifying employment. In the meantime, keep track of your qualifying employment by submitting the Department of Education’s Employment Certification Form annually, and retaining pay stubs, W-2s and any other supporting documentation. 

Reminder: The first class of borrowers became eligible for PSLF in October of 2017. An application is now available. For more information, including upcoming deadlines and changes to the application process, sign up for our email list.   

How can I benefit from combining IDR plans, LRAPs, and PSLF? 

To utilize an IDR plan in conjunction with PSLF and an LRAP:

  • Enroll in the IBR, PAYE, REPAYE, or ICR plan as soon as you enter repayment (or two months prior, if possible) on your eligible Federal Direct Loans.
  • Apply for LRAP funding, as soon as it is feasible.
  • Use LRAP funds to contribute to monthly payments that are due under the IDR plan you have chosen.
  • Once you have made 120 qualifying payments on Federal Direct Loans while working in qualifying employment, apply for forgiveness from the Department of Education.
  • Earn debt forgiveness!

Example: Peter graduates with $50,000 in eligible federal loans. His loans have a 6.8 percent interest rate, and he is single. Peter begins qualifying employment with an adjusted gross income of $35,000. Since he is single, his household size is 1. Peter would pay the following under the various IDR plans: 

  • REPAYE: $143 with the eventual rise to $271 
  • PAYE: $143 with the eventual rise to $271 
  • ICR: $385 to start with the eventual rise to $456 
  • IBR (at 15 percent): $215 to start with the eventual rise $406 

Note: The above example assume that Peter will receive a five percent pay increase annually, and never increases his household size. However an increase in Peter’s salary will likely increase discretionary income, and thus increase monthly payment amounts, while an increase in household size would move Peter into a different federal poverty guideline amount, and thus likely lower Peter’s discretionary income and monthly payment amounts. 

Peter chooses to enroll in the REPAYE plan. Peter then applies for and receives LRAP funds from his law school that covers the full amount of his payment due under the REPAYE plan. Peter continues in the LRAP, while making 120 payments required for PSLF. Peter then applies for forgiveness via PSLF, having paid no money on his federal loans, yet earning $60,000 in a forgiven loan balance.  

In this example, combining IDR plans, PSLF, and LRAPs can prove to be a very beneficial financial decision.  

I am married and repaying loans under an IDR plan. Should I file taxes as married-separately or married-jointly? 

This answer varies for each situation. It is best to explore the pros and cons based on their individual financial situation. filing married-jointly is the only way a married couple can take advantage of tax breaks like student loan interest deductions, dependent care tax credits, and education tax credits, such as the American Opportunity Credit. Failure to receive these tax breaks can significantly increase a married couple’s tax liability.  

Filing married-separately means that under the IBR, PAYE and ICR plans, only the borrower’s annual gross income (AGI) and federal student loan debt is used to calculate monthly payments and will determine whether the borrower has the partial financial hardship required by the IBR and PAYE plans.  

If you file married-jointly, your spouse’s AGI and federal student debt is added to your AGI, and debt to get the total AGI, and debt used for determining IDR plan payments amounts and whether you have the partial financial hardship required by the PAYE and IBR plans. Thus, if you file married-jointly with a high earning and low eligible debt spouse, you may not possess a partial financial hardship necessary to repay your loans under the IBR and PAYE plans and/or you may have much higher monthly payments. 

Also, remember that the REPAYE plan does not require a partial financial hardship, but it will always use your spouses’ AGI, regardless of how you file, when determining your monthly payment amounts.  

What is a “qualifying loan payment” for Public Service Loan Forgiveness? 

A qualifying loan payment is the full monthly amount due on a Federal Direct Loan (including a Federal Direct Consolidation Loan) while enrolled in the ICR, REPAYE, PAYE, IBR or standard repayment plans. This payment must be made by the due date or within fifteen days thereafter. 

Also, the months during the period of payment suspension due to the COVID-19 emergency may count as qualifying payments if the other PSLF requirements are met. 

If my monthly payment under an income-driven repayment (IDR) plan is zero, does each month during which my calculated payment is zero, count toward the required 120 payments for PSLF? 

Yes. Any month when your calculated payment on your Federal Direct Loans under an income-driven repayment plan is zero will count toward your required 120 monthly payments. However, you are working in qualifying employment at the time these zero-dollar payments are due. 

When can I begin counting my time in public service toward forgiveness? 

You may count your public service employment (and payments) beginning Oct. 1, 2007. But remember, only qualifying payments made on Federal Direct Loans count toward your required 120 monthly payments, and only those Federal Direct Loans are eligible for forgiveness. 

Will the Department of Education track my qualifying employment and payments while I am working toward meeting the 120 required payments for Public Service Loan Forgiveness (PSLF)? 

The Department of Education’s loan servicer will track your employment only if you submit the Public Service Loan Forgiveness (PSLF): Certification & Application. The submission of this form for every employer allows you to receive an initial determination on how many payments have been made so far toward PSLF and how many more payments must be made. 

What if I submit the Public Service Loan Forgiveness (PSLF): Certification & Application but the written determination of payments and/or eligible employment from the Department of Education is wrong? 

Currently, there is not an official appeals process for the written determinations, so you may request that the errors in the determinations be corrected by going through the Federal Ombudsman. The Department of Education will assign an arbiter to your case, who will look at the evidence you provide regarding why the written determination is wrong and, in many cases, correct the errors. It is your responsibility to provide the evidence necessary to show why the errors you claim in the written determination(s) are valid, and thus warrant correction.  

Do the 120 payments have to be consecutive to qualify for Public Service Loan Forgiveness? 

No. You must make 120 separate, on-time, full monthly payments while you are employed full-time by a qualifying public service organization, but the payments do not have to be consecutive. 

If I have been making payments on my Federal Direct Loans since before October 2007, will these payments count toward the 120 payments for Public Service Loan Forgiveness? 

No. Under the law, only payments made after Oct. 1, 2007, count toward the required 120 payments for PSLF. 

If I’m volunteering at a qualifying employer but I receive my income from another source (a non-qualifying employer) will my payments count toward PSLF? 

No. Unfortunately, while you may be providing important services to a qualifying employer, unless they pay you income, the payments made during that time will not count toward PSLF. 

Does my work for an international organization count for PSLF? 

Unfortunately, no. If you are working full-time for a U.S.-based non-profit and working abroad, this will be qualifying employment. However, if you are working for a foreign nonprofit or an international organization, this is not qualifying employment for purposes of PSLF. 

Can a FFEL Spousal Consolidation Loan ever qualify for Public Service Loan Forgiveness?  

Unfortunately, no. While individual FFEL Consolidation Loans can be converted into a Direct Consolidation Loan, and thus qualify for Public Service Loan Forgiveness, Congress carved out an exception to this option for FFEL Spousal Consolidation Loans. However, as those with FFEL Spousal Consolidation Loans qualify for repayment under the IBR plan, an option for loan forgiveness can still be received via the cancellation provisions under this repayment plan. See Chapter 3 for more information.  

Does switching between IDR plans restart the clock for the amount of qualifying payments you have made toward PSLF? 

No. You can add qualifying payments made under the PAYE, REPAYE, ICR, IBR or standard 10-year repayment plans together to get to the 120 required for PSLF. In other words, if Jane made 40 qualifying payments under the PAYE plan and then switched to the REPAYE plan, and made 34 more payments under this plan, Jane would have made 74 payments toward PSLF.  

Is there an application to receive loan cancellation under the IDR plans? 

Unlike Public Service Loan Forgiveness, there is no formal application required in order to receive loan cancellation under the IDR plans. The laws simply state that once all the eligible payments are made under the chosen IDR plan, “the Secretary [of Education] cancels any outstanding balance of principal and accrued interest….”  

I am currently enrolled in a loan rehabilitation program to cure the default status on my federal loans. Do payments made while in a loan rehabilitation program count toward PSLF? 

No. These payments do not count toward the 120 required for PSLF. However, all future qualifying payments made after the completion of the loan rehabilitation program will count toward PSLF. 

I am unemployed and my current payment under my IDR plan is $0 per month. How does this affect my progression toward PSLF? 

Unfortunately, as you are not working with a qualifying employer, you will miss out on qualifying payments until securing a position with a qualifying employer.  

Reminder: A qualifying payment for PSLF is (1) a payment made after October 1, 2007, (2) on Federal Direct Loans, (3) for the full monthly amount due, (4) under an IDR plan, Standard 10-year payment plan, or other repayment plan with an amount equivalent to the amount under the Standard 10-year payment plan, (5) made while employed full time, (6) for a qualifying public service employer, (7) no more than 15 days after the due date.  

Once I fill out my FAFSA and receive acknowledgement of the financial aid I am eligible for, how do I access my aid? 

The aid will be provided directly to you by your law school. Usually, the school will apply financial aid to the cost of your law school tuition and fees, and you will receive a refund for the remainder.  

What is a “borrower’s defense to repayment” and how might it affect my federal loans? 

A borrower’s defense to repayment is a legal defense that allows the borrower to (1) avoid repaying their federal loans and (2) receive a refund for all monies previously paid on federal loans. A borrower has a defense if the borrower received federal loans from a university that made a substantial misrepresentation that caused the student to take out the federal loan(s) in order to attend the university. Only federal loans used to actually pay for the university can be forgiven via the defense.  

A substantial misrepresentation is “any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person’s detriment.” A substantial misrepresentation can include misleading statements about (1) the likelihood of employment after graduation, (2) graduation rates, (3) average income after graduation, (4) the availability of career services assistance, (5) availability of externships, (6) qualifications of teachers, (7) instructional methods and (8) program costs. This list is not exhaustive. The borrower who believes they can prove a defense to repayment can file an application with the Secretary of Education. This application can be found here.  

Upon receipt of the application, the Department of Education places the loans at issue in a forbearance status and/or stops any and all collection activity. A decision on the application is made within thirty days. If the application is successful, all or part of the federal loans at issue are forgiven and/or any payments made on those loans are returned. If the application is denied, the forbearance status is lifted, collection activity can resume, accrued interest is capitalized, and the borrower must assume payments on the loans immediately.  

The law school I previously attended has now closed. Do I still have to repay the federal loans used to pay for that program at the closed school?  

Yes, unless you withdrew from the program and then the school closed within 120 days. If you did withdraw from the program within 120 days of the school’s closing, you can receive a discharge of all federal loans used to pay for the program. Otherwise, you are required to keep making your payments.  

Note: You can also receive a discharge of your federal loans if the school closes while you are enrolled or on a leave of absence.  

You have mentioned special cancellation provisions for Perkins Loans. Can you tell me about some of those provisions?  

Perkins Loans have very generous cancellation provisions. For individuals who qualify, loan cancellation can occur within five years. Typically, the loan cancellation occurs in the following stages:  

  • First and second year of meeting eligibility requirements: 15%% of loan amount forgiven each year.  
  • Third and fourth years of meeting eligibility requirements: 20% of loan amount forgiven each year.  
  • Fifth year of meeting eligibility requirements: 30% of loan amount forgiven.  

Eligible individuals include: 

(1) Teachers working in low-income areas;  

(2) Special education teachers;  

(3) Math, science, and foreign language teachers;  

(4) Police officers;  

(5) Federal public defenders; 

(7) Active military.  

More information about Perkins Loan cancellation can be found here.