Public service may winnow student loan debt

Dear Liz: I am the single mother of four daughters, including one who has a serious heart condition that causes $10,000 to $30,000 in out-of-pocket medical expenses each year. These medical bills have caused me to file bankruptcy twice, but the bankruptcies have not wiped out my student loans.

I have qualified for minimum payments and deferments a couple of times but have been on a payment schedule the vast majority of the time. The interest grows faster than I can keep up, and I keep getting deeper into the hole. I am now 51 and have over $45,000 in student loans. After a year and a half of being unemployed, and depleting my retirement funds to pay for COBRA health coverage, I finally found a job — I am making $30,000 a year working for a nonprofit as a social worker — but I still can’t make any progress on these loans.

The only program I can find is one in which I have to make payments, no matter how little I have, for the next 10 years if I continue to work for only nonprofits. No one can explain to me why all the money I have already paid, plus only working for nonprofits, plus my volunteer service over the years, doesn’t count for something. I am holding my breath hoping you might have some suggestions to share.

Answer: The Public Service Loan Forgiveness Program you discovered is actually a fairly recent development. Before 2007, people in your situation didn’t have an option to have their balances erased.

It’s unfortunate you didn’t know about the program earlier, since if you’d signed up when it first became available you could be partway through your required payments by now and only a few years away from having your balance forgiven.

But better late than never. The program is ideal for those who have big federal student loan debts and small incomes. If you sign up for the “income-based repayment” option, your monthly payments will be limited to 15% of your “discretionary income,” defined as the amount of your income over 150% of the poverty line for your family. Since the poverty line for a family of five is $27,010 in 2012, your required monthly payment may well be zero. Even if your household is smaller, payments under the program typically are less than 10% of your gross income, said Mark Kantrowitz, publisher of the FinAid and Fastweb financial aid sites.

If you didn’t have a public service job, your required repayment period would be 25 years — so you are receiving some credit for your service. Public service jobs include, among others, those in public safety and law enforcement, military service, public health, public education, public interest legal services, social work in public or family service agencies and jobs at tax-exempt 501(c)(3) organizations. Government employees also are considered to have public service positions, although interestingly enough, time served as a member of Congress doesn’t count.