According to the ABA, 87% of law students borrow money for their law school education. The average law student at a private school graduates with over $83,000 in student debt, while those who graduate from public schools have, on average, over $54,000 in debt.
In 2007, the College Cost Reduction and Access Act (CCRAA) was signed into law by President Bush. (Public Law 110-084). The CCRAA provides for the forgiveness of federal student loans after i) 10 years of public service work, or ii) 25 years. One of the notable aspects of the CCRAA is that the ten years of public service work does not have to be continuous. Students clerking for a judge for a year or two before entering private practice can apply those years of service towards the ten-year requirement if they later chose to accept another government position or work for a 501(c)3 organization.
Qualifying for Public Service Debt Forgiveness:
To qualify for Public Service Debt Forgiveness, the borrower must:
A) make 120 payments after October 1, 2007, based on one of the following programs:
i) IBR – Income Based Repayment (available after July 2009)
ii) ICR – Income Contingent Repayment (borrowers must have Federal Direct Loans or consolidate under a Federal Direct Consolidation). The one noteworthy difference IBR and ICR, for the extent of this discussion, is that the IBR program allows students to pay a smaller percentage of their discretionary income as a qualified monthly student loan payment.
iii) 10 Year Standard Repayment
B) be employed in “public service”
C) consolidate any federally-backed private student loans with a Direct Consolidation Loan directly from the Department of Education. (http://www.loanconsolidation.ed.gov/)
In the above example, a student graduating with $100,000 in eligible debt, entering a public service position for 10 years, will pay $430 per month instead of $1,150.80, and have $86,496.00 in outstanding interest and principal forgiven. I’ve made the spreadsheet available here, so that users can calculate their own IBR repayment terms by changing the variables highlighted in yellow.
Public Service Defined:
The CCRAA defines a “public service job” broadly. The definition includes full-time jobs in any government position, public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization), military, public education, and positions with 501(c)3 non-profit organizations. The Department of Education is expected to provide more guidance on what jobs qualify as public service jobs.
Loans Eligible for Federal Direct Consolidation:
Stafford Loans
Grad PLUS
Certain Perkins Loans.
Ineligible Loans:
Parent PLUS Loans
Private loans that are not backed by the government.
Potential Tax Liability Arising from the CCRAA:
One of the initial problems identified with the CCRAA was the potential “marriage penalty” since qualification for loan forgiveness and the repayment terms are based on the adjusted gross income from the taxpayer’s income tax return. Commendably, the House and Senate both recognized marriage penalty and passed an amendment to prevent this from becoming an issue. On December 21, 2007, S. 2371 was signed into law allowing married borrowers to file separate tax returns and calculate each spouse’s AGI and income-based repayment separately for purposes of the CCRAA.
However, there still remains the issue of whether the CCRAA loan forgiveness will trigger tax liability. Traditionally, forgiven loans are treated as taxable income. Despite this, section 108(f) of the Internal Revenue Code provides that the forgiveness of certain loans made by the federal government to facilitate higher education does not constitute income “if the individual worked for a certain period of time in certain professions for any of a broad class of employers.” However, it is unclear whether the Direct Consolidation Loan will qualify under 108(f) because the consolidation loan is made after the borrower graduates, rather than beforehand to “facilitate” the education. Given the Congressional amendment addressing the marriage penalty, an amendment favorable to borrower’s pursuing public interest work can be expected.
Students who are interested in working for the government or pursuing other public interest work on graduation should utilize Federal Stafford and Grad Plus loans while avoiding private loans that are not backed by the federal government. Upon graduation, students interested in taking advantage of the CCRAA provisions should consolidate their loans through a Direct Consolidation Loan. Students who do not remain in public service work for a period of ten years, but have consolidated under a Direct Consolidation Loan, will have their loan balance forgiven after twenty-five years from the date of consolidation.
Sources and additional reading:
http://www.abanet.org/lsd/legislation/
http://www.nasfaa.org/publications/2008/negloans011608.html
Schrag, Philip G., “Federal Student Loan Repayment Assistance for Public Interest Lawyers and Other Employees of Governments and Nonprofit Organizations” 36 Hofstra L. Rev. 27 (2007), available at: http://ssrn.com/abstract=1014622.
Thanks to Stuart Rees at http://stus.com for use of his cartoon.
