Hello, and welcome to the third installment of our “What is Financial Aid?” series! Today we’ll be talking about paying off student loans, or more specifically, how you can’t get around paying off these loans.
Do I have to pay off student loans? Can I pull a Michael Scott and just declare bankruptcy?
In general, you are completely on the hook for student loans, even if you do declare bankruptcy. The reason you can’t discharge this debt is because loan holders cannot repossess your education like they can repossess your house or car, Total Recall notwithstanding. If students were able to declare bankruptcy immediately upon graduation, you’d see hordes of students throwing their caps in the air and banks coming to sweep them up because in all likelihood, those robes are the only thing of value you own once you graduate (no one wants to repossess your beard oil or vinyl collection).
The only instance in which you would not have to pay off your student loans are if you have your loans forgiven. In general, student loan forgiveness programs are designed to push graduates into serving their communities through nonprofits and other initiatives, though Texas has a unique B-On-Time (BOT) loan forgiveness program.
Public Service Loan Forgiveness
PSLF is a government-sponsored program that will discharge all federal student loan debt after serving for 10 years with any registered 501(c)3 nonprofit, which includes most hospitals, schools, and charitable organizations. As long as you are continuously employed by a nonprofit for these 120 months, and as long as you make the minimum payment for each of these 120 months, whatever debt is left at the end of 10 years is paid off by the federal government. The minimum payment is at least $50/month and is ultimately decided by a sliding scale based on your current income. The one caveat for PSLF is that whatever debt is discharged by the government at the end of the 10 years must be reported to the IRS as taxable income. This is colloquially known as a “tax bomb” because though this was not technically income you earned (rather, it is debt you no longer owe), the IRS considers this taxable income, which you are responsible for. For the year you receive this forgiveness, you might have an unduly large tax burden, but this should return to normal the very next year.
Texas has a special loan program called the B-On-Time Loan. The BOT Loan is a zero-interest loan available to Texas residents attending 4-year colleges in Texas. Not all schools participate in the BOT Loan, and the amount of loans available every year is variable, dependent on the number of students applying for BOT Loans. What’s especially important is that BOT Loans are offered on a rolling basis, meaning the earlier you apply, the higher the chance you have of receiving it, so APPLY EARLY. Contact your schools to see when you should submit the application, though many start immediately after January 1.
Besides being zero-interest loans, if you meet a specific set of requirements:
- If you graduate with at least a 3.0 GPA
- Received a bachelor’s within four calendar years of enrolling (or five years for architecture or specific five-year programs)
- And do not exceed more than 6 credit hours beyond what your degree requires you to complete.
If you have a BOT Loan and meet this set of requirements, then congratulations! Just submit a few forms, and the Texas state government will pay off your loan. If you fail to meet these requirements for whatever reason, there is no penalty, and you still made it out with 4 years of interest-free loans, which is the best deal you can get!
And as with the PSLF, whatever loans are discharged are considered taxable income by the IRS, so you will be paying taxes on that amount.