In 2007, President George Bush signed into law the Public Student Loan Forgiveness Program. This program allows people working in certain industries to have their student loans forgiven, tax-free, after 10 years. Usually, people believe this program only applies to governmental employees. However, the law allows for employees of a 501(c)(3) not-for-profit to also qualify for student loan forgiveness. This is a great way to attract employees who may otherwise require a larger salary and a great way to keep employees at your not-for-profit.
A not-for-profit that is not a 501(c)(3) can also qualify if the organization works with: emergency management, military service, public safety, law enforcement, public interest law services, early childhood education, public service for the elderly and public service for individuals with disabilities.
In order to qualify, the employee must work full time for the not-for-profit, which is defined as the greater of 30 hours a week or whatever your not-for-profit considers full-time work. The type of loans that apply for this program is limited to government loans, so private loans will not receive forgiveness. It may be wise to consult an adviser to help consolidate some loans that would not specifically qualify without consolidating them into a direct loan.
After the employee makes 120 qualifying payments, all of the employee’s student loans will be forgiven. Typically, we recommend employees trying to qualify for this program use income-based repayment in order to reduce the amount of repayment. There are downsides to this plan as the employee may incur negative amortization on the loan and the loan amount due will continue to rise.
We recommend income-based repayment because there is no cap on the amount of student loans that can be forgiven. For example, a not-for-profit may hire an employee who has $200,000 of public student loan debt. At the end of 10 years, due to negative amortization, the employee now owes $250,000. If the employee stays with the not-for-profit for 10 years, while making payments on his loan, then the entire $250,000 balance will be forgiven. Under the Public Student Loan Forgiveness Program, the entire cancellation of debt will be tax-free. (There is also a longer student loan forgiveness program in place for everyone else, but the current law would make the forgiveness of debt as a taxable transaction).
The Department of Education has a form employees can use in order to track the number of qualifying payments they made to determine how many more payments are required.
If you want to know more about the Public Student Loan Forgiveness program, we at PBMares would love to discuss with you or your employees about the program.