Special Report Your Job

Get a job, ditch your student loans

New loan forgiveness programs encourage graduates to pursue careers in public service.

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By Jessica Dickler, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Many college graduates are struggling with heavy student loan debt and steep monthly payments that limit their professional options. But for some, choosing the career of their dreams could actually lift that burden.

Two-thirds of college graduates leave school nearly $20,000 in debt, according to the National Postsecondary Student Aid study. With mounting job losses and unemployment at a 25-year high, those considering changing careers and pursuing passions must weigh the risk of a pay cut.

But now some students can reduce - or even wipe out their debt - just by following their calling. More liberal loan forgiveness programs are adding a financial incentive to working in traditionally low-paying fields.

Under certain circumstances, the federal government will reduce payments, and ultimately forgive all or part of an educational loan for those who choose a career in the military, volunteering, teaching or practicing law or medicine in low-income communities. And some may even be able to reduce their payments, based solely on their income and family size.

"Knowing that the payments will be manageable and then have them forgiven allows [graduates] to achieve their dreams," says Edie Irons, a spokeswoman for the Project on Student Debt.

Under the College Cost Reduction and Access Act of 2007, two federal loan forgiveness programs could provide greater assistance to those who decide to pursue careers that serve the public. Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF) could make student loan forgiveness much more accessible to the masses.

"Both of these programs are much more widely available than anything that's been available in the past," says Irons.

Income-Based Repayment. Starting in July, IBR will help borrowers keep their federal student payments under control with monthly payment caps based on their income and family size. That way, borrowers with lower earnings and bigger families will have smaller payments.

Borrowers must have enough debt relative to income to qualify for a reduced payment. While the formula is a little complicated, one rule of thumb is that those who owe more than they make will definitely qualify. (IBRinfo's calculator will help others determine if they are eligible.)

Monthly payments are capped at 15% of monthly discretionary income. (For the formula that determines the monthly payments go to: www.ibrinfo.org/.)

And after 25 years of reduced payments, the remaining balance on the loan is forgiven.

But the program comes with caveats: Under current law, the amount of debt that is forgiven is considered taxable income. That's one thing to watch out for, warns Alan Collinge, founder of StudentLoanJustice.org.

Plus, "if you don't pay for a year, then you are kicked out of the program," Collinge said, "that's a huge risk that people need to be aware of."

Unlike its predecessor, Income Contingent Repayment, IBR is not just for loans made by the Department of Education but covers most types of federal loans made to students, including Stafford, PLUS and consolidation loans.

"It could potentially affect many millions of people," said Lauren Asher, president of the Project on Student Debt.

While the program wll not begin until July 1, 2009, appicants can sign up on the IBRinfo Web site to receive more information.

Public Service Loan Forgiveness. The second provision of the College Cost Reduction and Access Act will not only alleviate debt, but also encourage national and community service - without a tax burden.

The Public Service Loan Forgiveness program, which began in July 2008, lets borrowers off the hook from their remaining student loan debt after 10 years of full-time employment in public service.

To be in the program, borrowers must be employed by the federal, state or local government; or any nonprofit, 501(c)(3) organization; or work full-time for AmeriCorps or Peace Corps.

To qualify for loan forgiveness, the borrower must have made 120 payments during a decade as part of the Department of Education's Direct Loan program. (For more information on eligibility, go to: www.finaid.org/loans/publicservice.phtml.)

But, if the payments fall short or the borrower stops working full time, then there is the same risk of being kicked out of the program, with no loan forgiveness.

Ideally, these programs will be as accessible as possible and encourage students to seek careers in the nonprofit sector, teaching and social work, Irons said.

"These kinds of programs really will give students the peace of mind that they need to go into public service," she said. "Luckily that helps everyone else in our society too," Irons added.

To apply for either the PSLF or IBR, call the US Department of Education at 1-800-557-7392.  To top of page

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