Federal Student Loan Repayment & Forgiveness Plans

I am just finishing up my MSOT program and have begun to consider how to best approach paying back the $60k student loan that looms large on my ledger sheet somewhere. As it turns out, there are a number of federal payment programs to navigate when optimizing your pay back strategy of a federally administered loan. What follows does not apply to privately financed loans you may have originated.

One approach I have yet to see promulgated here at SDN is combining an income based repayment plan with a public service loan forgiveness program. This approach would be especially applicable to those working in public schools, municipal hospitals, or qualifying non-profits. The way the first part of this strategy works is, after consolidating your loans from each semester into one lump sum, you establish your payment based on your discretionary income(10% of income for loans originating after July 2014, 15% for those before this date.) The calculation of this payment is a fairly complex calculus that is best figured using the FAFSA online repayment calculator linked below. It involves deducting 150% of the federal poverty guideline (about $18k for a single person) as well as your standard OR itemized IRS deduction from your first year OT salary. That means if your OT salary is $65k your payment will be based on about $35k of your income. The Income Based Repayment (IBR for the acronym inclined) plan is then spread out over as many as 25 years. This is where the public service loan forgiveness (PSLF) strategy enters the picture.

While working for a qualifying organization or agency at least 30 hours weekly, you are given 1 credit for each on time payment you make based on your IBR plan. After 120 qualifying payments (10 years worth) you can petition to have the remaining loan amount forgiven. As The Donald would say, this is HUGE! For example, whether your loan is $60k or $150k, your payments are still based on your income. In fact, the more you owe, the more that will be forgiven after 10 years

There is, of course, no completely free lunch, just a reduced one. The IRS does require you to pay income tax on any amount of loan that is forgiven. This could be a hefty sum to those with a significant portion of their loan forgiven, but certainly far less (about 20% of the forgiven amount) than repaying the entire loan.

I would love to hear back from the SDN members who are now in the process of consolidating loans and applying for both an IBR & a PSLF combination plan.

To those preparing to embark on OT school, you might want to begin with the end in mind. This means only take out federally originated loans- private loans cannot be forgiven via this method. Further, base school choice more on the total of tuition & living expenses, minus financial aid grants. For example, attending Columbia U in the white hot Manhattan real estate market will be far more expensive than say Creighton in Nebraska or USD in South Dakota. In addition, some OT schools award significant grants to OT students while others make everyone pay the published tuition rate. The bottom line is do not take out more loans than the federal graduate student limit (about $20k per year). This actually means a lengthier OTD program that allows you to accrue more federal student loans because it is longer than an MSOT program will actually allow you to have more loan forgiven after 10 years at a qualifying agency.

As long as you can dedicate 10 years to public service, loan forgiveness is a real option you might want to look into. Below are useful links. The happiest of holidays to you all as you embark on your OT journey.

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Federal Student Loan Repayment & Forgiveness Plans