Many times, when working with clients it’s the medical professionals who are faced with the challenge of how to tackle their student loan debt. The average student loan debt for a new doctor: $183,000. Big numbers like that tend to grab people’s attention!
What’s not typically discussed is the burden student loans can be for educators. Elissa Nadworny of the nprEd Team just released a great piece that followed several educators challenged by their large student loan balances. Check it out here: http://ow.ly/LEVp30dXgGr
As I was reading the stories she shared, it made me think about three options we evaluate when helping our educator clients figure out the best way to tackle their student loans. Some of which may be new to you.
Teacher Loan Forgiveness
This program was set up by the Federal government to encourage people to enter and stay in the teaching profession and will potentially forgive up to $17,500 of your Stafford Loans. The first thing to know about the program is that it will only forgive loans made through the Federal Direct Loans program. That means if you took out private student loans or consolidated your Direct Loans into a private loan after college, they’re not eligible for this program. Also, you must be current on your payments and have not defaulted on a loan to be eligible.
The second thing to know is that to qualify for any amount of forgiveness, you must have been employed as a full-time teacher for five consecutive years in a district with high enough need to be listed in the US Department of Education’s Annual Directory of Designated Low-Income Schools for Teacher Cancellation Benefits. The list is updated every year after May 1 and if your district or school is not listed, you won’t be eligible for any loan forgiveness from the program.
The third thing to know is how much you can have forgiven. There are two primary benefits based on what area you teach:
|Maximum Forgiveness Amount||Subject Area|
|$17,500||Special Education, Mathematics, and/or Science|
|$5,000||All other subject areas|
Once you’ve completed five years, submitting the application for forgiveness is actually a pretty easy process. All you need to do is fill out the Teacher Loan Forgiveness Application and have your district’s Chief Administrative Office attest to your time in the district and sign (You can find the form here). Once sent to the government and approved, you can kiss all or a portion of your remaining loans goodbye! Another key perk of this program, the amount of your loans that is forgiven is not taxable.
Public Service Loan Forgiveness (PSLF)
This program was set up by the Federal government to encourage people to enter and stay in public service positions that are vital to providing services to those in need, but historically pay low salaries compared to the level of education they require. The way PSLF works is that after 120 months (10 years) of payments under “a qualifying repayment plan” while working full-time for a “qualifying employer” the entire remaining balance of your Federal student loans will be forgiven.
The first thing to know and what I’m sure you’re wondering is what is considered “qualifying”? In terms of employment, qualifying means working in a position for the Federal, state, local, or tribal government, at a 501(c)(3) not-for-profit organization, or a non-501(c)(3) organization that provides certain types of qualifying public services. Qualifying payments are a little less of a tongue-twister. Any of the income-driven repayment plans offered for Direct Stafford loans qualify.
Two additional things are very important to remember if considering this route:
One, having and submitting a paper trail is crucial. Each year, you need to submit the Employment Certification for Public Service Loan Forgiveness form and keep a copy for your records (You can find the form here). The DOE will use this information to let you know if you are making qualified payments and keep you on track to actually receive forgiveness after 120 payments. This is a step where many people make the mistake of forgetting to file or thinking this will be handled automatically.
Two, this program is still relatively new by governmental standards. It was enacted in 2007, so the first cohort of people applying for loan forgiveness will be doing so very soon. There has been some controversy already. In December 2016, it was reported some employees who had been previously told by the Federal government that their jobs were eligible for the program were later told they were not eligible. The have also been proposals to cap the benefit at $57,500 for new borrowers or completely eliminating the program for all new borrowers. So, when evaluating this option, it’s important to factor this potential uncertainty into the equation.
Consolidating your student loans is another option to evaluate. People typically use the term “consolidation” when discussing this option, but it’s important to recognize the difference between “consolidating” your student loans and “refinancing” them.
Consolidating your loans allows you to combine the Direct Loans you may have outstanding with different servicers in the form of a Direct Consolidation Loan. Once combined under one roof, the loans fixed interest rate is the weighted-average of the individual loans that were consolidated and you’re able to pick a repayment plan that works best for you, including maintaining the use of income-driven repayment plans.
Refinancing your loans is similar. They are still combined but this time through a private company. The company will typically be able to offer you a fixed or variable interest rate along with different repayment options. The big thing to consider here is that once completed, the company is now your lender. You may be able to obtain a lower rate, based on your credit, than with a Direct Consolidation Loan; however, you also give up the protections built into Federal loans and the ability to utilize the different repayment plans available and will forfeit the possibility of utilizing either of the forgiveness programs discussed earlier.
For educators, it’s very important to analyze this option carefully because whether consolidation or refinancing is best for you depends on your specific situation. Things like being married, household income, short and long-term career intentions along with running all of the numbers need to be considered to ensure you’re making the right decision.
If you have any questions or would like assistance evaluating the best way to tackle your student loans we’re happy to help. Learn more at ww.AnExceptionalLifeFinancial.com or get in touch at Info@AnExceptionalLifeFinancial.com.
Mychal Eagleson, CFP®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers and families with special needs. He frequently writes and speaks regarding personal finance topics relating to these clients. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media.
To read more of his articles or learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.