Escape the crush of student loans

By Kathy Kristof

Gina Z., a young psychologist, could wipe out nearly $100,000 in student loan debt just by taking the right job.

The problem is that it's tough to get information about which jobs qualify for a government program designed to forgive debt for graduates who choose public service. And Gina's so deep in debt elsewhere that she's not sure she could meet the terms.

We'll guide Gina past those roadblocks and show you how to do the same.

Understand the program

In an effort to aid highly indebted college graduates who go to work in critical but often low-paying professions, Congress passed a law in 2007 that aims to eliminate their federally guaranteed student loan debt.

Public Service Loan Forgiveness allows people working in qualifying jobs to have federal loans forgiven if the borrowers are unable to repay their debt in 10 years of regular payments. Once you've made those 120 payments while employed in the right job, the remaining interest and principal are forgiven.

Which jobs? Among others:

• All government jobs, whether federal, state or local.

• Military service.

• Police and fire departments.

• Public education and public health care.

• Social work.

• Public and school libraries.

• Public-interest legal services.

• Education in high-need areas.

• Nonprofit, tax-exempt 401(c)3 organizations.

The catches

If you're in trouble right now, the program isn't going to help. Forgiveness comes only after 10 years of steady payments. And because standard student loans are only 10 years in length, most borrowers would have their loans paid off before there was anything left to forgive.

But there are alternative repayment plans that can leave a substantial balance even after 10 years. Some qualify for forgiveness; some don't.

Many borrowers, for example, reduce their payments by choosing a graduated repayment plan, whereby payments rise over the years as income does, or an extended repayment plan, which can stretch up to 30 years. Neither of those plans qualifies.

Other borrowers have turned to income-based options that limit the payment to a percentage of their paychecks, then forgive whatever is left after 25 years of payments. Those loans do qualify.

Last, only payments made to the federal Direct Loan program count, and only those made after the law was enacted, in October 2007.

The first step: Consolidate

When the government enacted the loan-forgiveness program for people working in public service, Gina was ecstatic.

The 30-something, who works in a state mental hospital, figures the fledgling program could wipe out about $100,000 of her $172,000 in student debt.

• Free help: Drowning in debt? Ask a credit counselor today

But Gina's loans were held by NelNet, a private student lender. Her first step was to move her loans over to the government's Direct Loan program, because payments made to NelNet do not count for the necessary 120 payments under the loan-forgiveness plan.

To move her loans, she went to the government's Federal Student Aid site and filled out an online consolidation application.

But the biggest challenge for Gina was changing her repayment formula. She's now repaying her loans on an extended plan that allows her to pay just $700 a month for 30 years. This repayment formula does not qualify for the forgiveness program.

For her to qualify for loan forgiveness, her only current option is to choose income-contingent repayment, which would boost her required monthly outlay to more than $1,200. A second qualified plan, income-based repayment, will launch in July 2009. That would allow her to pay about $860 per month on her loans.

Although she clears roughly $4,700 a month after taxes, she says, she is barely able to make the smaller payments. Gina's real problem isn't the student loans; it's out-of-control spending. She has more than $25,000 in credit card debt.

Continued: It's time to get real and sacrifice

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