Eligibility for College Cost Reduction and Access Act of 2007

The College Cost Reduction and Access Act of 2007 established a new public service loan forgiveness program. This program discharges any remaining debt after 10 years of full-time employment in public service. The borrower must have made 120 payments as part of the Direct Loan program in order to obtain this benefit. Only payments made on or after October 1, 2007 count toward the required 120 monthly payments. (Borrowers may consolidate into Direct Lending in order to qualify for this loan forgiveness program starting July 1, 2008.)

This contrasts with the loan forgiveness of the remaining balance after 25 years of repayment under the income-contingent and income-based repayment plans for borrowers who are not employed full time in public service jobs.

Eligibility

The public service loan forgiveness program has several restrictions:

* Term: The forgiveness occurs after 120 monthly payments made on or after October 1, 2007 on an eligible Federal Direct Loan. Periods of deferment and forbearance are not counted toward the 120 payments. Payments made before October 1, 2007 do not count. Likewise, only payments on a Federal Direct Loan are counted.

* What is forgiven?The remaining interest and principal are forgiven.

* Employment: The borrower must be employed full-time in a public service job for each of the 120 monthly payments. Public service jobs include, among other positions, government, military service, public safety and law enforcement (police and fire), public health, public education, public early childhood education, public child care, social work in a public child or family service agency, public services for individuals with disabilities or the elderly, public interest legal services (including prosecutors, public defenders and legal advocacy in low-income communities), public librarians, school librarians and other school-based services, and employees of tax exempt 501(c)(3) organizations. Full-time faculty at tribal colleges and universities, as well as faculty teaching in high-need areas, also qualify.

* Eligible Loans: Eligible loans include Federal Direct Stafford Loans (Subsidized and Unsubsidized), Federal Direct PLUS Loans, and Federal Direct Consolidation Loans. Borrowers in the Direct Loan program do not need to consolidate in order to qualify for loan forgiveness. Borrowers in the FFEL program will need to consolidate into Direct Loans.

(Beginning on July 1, 2008, FFEL borrowers may obtain a Federal Direct Consolidation Loan in order to qualify for public service loan forgiveness even if they had previously consolidated in the FFEL program.)

Although Perkins Loans are not eligible for public service loan forgiveness, if they are included in a Federal Direct Consolidation Loan the entire consolidation loan, including the Perkins Loans, is eligible for public service loan forgiveness. One may use income-based repayment and income-contingent repayment on such a consolidation loan.

Perkins loan borrowers will need to consider the tradeoffs of including the Perkins loans in a federal direct consolidation loan. When Perkins loans are consolidated, they lose several favorable benefits, such as subsidized interest, a 9 month grace period, and a generous loan forgiveness program.

Grad PLUS loans are eligible for forgiveness. However, the language in section 455(d)(1)(D) of the Higher Education Act of 1965 precludes the use of income-contingent repayment for PLUS loans. This is fixed by section 493C(b)(3), which amends the exclusion to apply to just Parent PLUS loans. But that amendment is effective July 1, 2009. So until July 1, 2009, income-contingent repayment cannot be used for Grad PLUS loans. On or after July 1, 2009, one can use income-contingent repayment for Grad PLUS loans. (Income-based repayment also becomes available for all direct loans except Parent PLUS and Perkins Loans on July 1, 2009.) However, as with Parent PLUS loans, Grad PLUS loans can become eligible for income-contingent repayment provided that they are included in a Federal Direct Consolidation Loan and the borrower did not enter repayment before July 1, 2006. Consolidation loans that include a Grad PLUS loan are also eligible for income-based repayment starting July 1, 2009.

Note that borrowers who took advantage of the early repayment status loophole to consolidate their loans during the in-school period technically entered repayment before July 1, 2006.

* Eligible Repayment Plans: Borrowers may use income-based repayment, income contingent repayment, standard repayment or a combination of these repayment plans. Payments made under other repayment plays (e.g., extended repayment and graduated repayment) do not count. To maximize the amount of forgiveness, borrowers should use income-based repayment. When income-based repayment is not available (e.g., prior to July 1, 2009), they should use income-contingent repayment.

If a borrower were to use only standard repayment for repaying their loans there would be no balance remaining after 10 years and so no debt to cancel. Standard repayment is only provided as an option to address situations when a borrower is unable to continue under income-based repayment because they no longer have a partial financial hardship and the payments under income-contingent repayment exceed standard repayment. In such a situation the borrower would use standard repayment for the remaining payments and obtain some loan forgiveness at the end of the ten years of payments.

Bottom Line Advice

Although the details may seem complicated, the advice for taking advantage of this program is more straightforward.

* Borrowers who will be employed in public service jobs and who have loans under the FFEL program should obtain a Federal Direct Consolidation Loan as soon as possible. (Before July 1, 2008, they will need to consolidate into direct loans by stating that they were unable to obtain acceptable income-sensitive repayment terms. On or after July 1, 2008, they will be able to consolidate into direct loans to obtain public service loan forgiveness.)

* Parent PLUS borrowers who entered repayment on or after July 1, 2006 will need to consolidate their PLUS loans even if they are already in the Direct Loan program.

* Borrowers should start off with income-contingent repayment, if they can. They should switch to income-based repayment as soon as it becomes available on July 1, 2009, if they can. (Consolidation loans that include Parent PLUS loans are not eligible for income-based repayment.)

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