No doubt about it, student loans have become a crushing burden on young adults. Sure, we older folks can be all self-righteous and make speeches about how we put ourselves through college—I did, both college and graduate school. I don’t believe it’s possible any more—what a student is able to earn summers and part-time will not be the $30,000 or so that is needed to attend a year at the University of Illinois. Forget the $60,000 needed at a private school. Even if you could do it, I’d hate to see your grades.
Yes, of course there’s the extraordinary student who can put together a scheme to spend two years at a junior college, start a business on the side, etc., etc. That’s not my kid, probably not yours, and it’s not do-able public policy for how to go through college. I’m not even going to get into how the Europeans have it so good, because I’ll only start frothing at the mouth. Queue up the methods of loan forgiveness.
Actually, no. If you want to know about how you can work for a non-profit for 10 years and get the remainder waived at the end, read this. For certain mostly health-care professions, you might be able to unload the Perkins loans this way.
I doubt anyone has actually had their loans cancelled in these ways. If you have, I’d like to talk to you.
Here are some reasons why I think you need to be extremely careful about depending on these programs for a solution to your debt. No such thing as a free lunch and you’re going to jump through a lot of hoops and there’s a pretty good chance they’ll still get you in the end. So be careful:
The non-profit repayment is only good for money you borrowed under the Ford Federal Direct Loan program. Perkins loans and others can be consolidated under a Direct Consolidation program, but all the payments you made before you consolidated will not be counted towards the 120 required payments (10 years). No payments before October 1, 2007, will be counted. So as far as I can tell, NO ONE yet has had their loans actually forgiven.
The Perkins loans are often the smallest of your loans, because the limit per year is $5,500 for undergrads, $8,000 for grads, and an interest rate of 5%. Even if you were granted the limit (and most people aren’t granted the full amount), getting this forgiven may not help you much.
Being chained to working for a non-profit for many years may cost you more in lost salary and promotion potential than the loan forgiveness is worth. It may not seem like it for a year or two, but the forgiveness for public service is because public service may pay so low (and have low promotion potential) that no one with loans could afford to work in it.
You must be fully employed in a non-profit. Want to take time off to have a baby or stay home with a child? Uh-uh. Get fired? Quit an untenable job? Get reduced from full-time to part-time? Your forgiveness evaporates. You are now responsible, again, for the full amount of the loan (even though your earnings for some part of your career were lower by working for a non-profit).
Income based repayment is another option that has some hidden consequences. If you’re drowning in the amount of loans in relationship to your salary (or lack thereof), you will probably look into it. This is probably a situation where you would be considering bankruptcy if those loans were anything but student loans. However, don’t get married. If you do, family income will be taken into account and unless you file separately (costing the higher earning spouse a nice chunk of change in increased taxes) you may lose eligibility. You will also pay a lot more in interest under these plans (for 20 years) than you would under a standard 10 year payment plan.
In most cases, your energies would be better focused on making a financial plan that includes job strategizing, spending reduction, and minimizing living costs.
These plans have been touted as relief for student borrowers crushed under our now-outrageously inflated college costs, as if they are some kind of get-out-of-jail free card. I wonder if anyone can actually use these programs, or if they’re just window dressing with some pretty heavy penalties.