If you are in or going into public service and anticipate having low income and high debt, you should get into direct lending now and start off with income-contingent repayment. When income-based repayment becomes available July 1, 2009, switch to that.

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Public service workers - including school, government, health care, nonprofit and military employees - can have their remaining student loan balances forgiven after 10 years in public service and 10 years of loan payments.

To qualify, employees must make 120 monthly loan payments while they are employed in one or more eligible jobs and they must be in an eligible job when the loan is forgiven.

The program covers only government guaranteed Stafford, graduate Plus and consolidation loans that were issued under the U.S. Department of Education's direct lending program. A minority of colleges offer these direct loans.

Most students get their Stafford and Plus loans from banks and other private-sector lenders through the Federal Family Education Loan Program. Loans made through this program are not eligible for the forgiveness program.

However, a student with what are called FFELP loans can consolidate or re-consolidate them into a direct loan, which would be eligible for forgiveness. Perkins loans are eligible only if they are consolidated into a direct loan.

Private student loans are not eligible for the new program. Neither are Plus loans taken out by parents.

Normally, Stafford and Plus loans are paid off over a 10-year period that starts after the student has left school. A student who pays off loans over the normal repayment period will have nothing left to forgive after 10 years.

To take advantage of the program, borrowers would have to stretch their payments beyond 10 years. One way to do this is by entering an income-contingent repayment program. This program is open to anyone regardless of occupation, but it is restricted to federal direct student loans, so a borrower would have to have or consolidate or reconsolidate into direct loans to participate.

In this program, borrowers can have their monthly payments capped. In most cases, the cap is 20 percent of the amount by which a borrower's adjusted gross income exceeds the poverty line.

The poverty line today (in the 48 contiguous states) is about $10,210 for one person, plus $3,480 for each additional family member.

Suppose a borrower has $40,000 in income and a family of four. His poverty line is $20,650.

His annual income exceeds his poverty line by $19,350. Twenty percent of that number is about $3,870 annually or roughly $323 per month. His monthly payment would be capped at $323.

Any amount over $323 a month is deferred. After 25 years, any remaining loan balance is forgiven.
Source(s):
http://www.law.georgetown.edu/searchresultscss.htm?cx=014877459243074284443...

http://kennedy.senate.gov/imo/media/doc/HR2669_conf_report.pdf

http://www.finaid.org/calculators/icr.phtml

http://www.finaid.org/calculators/ibr.phtml


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