Church Finances and Business: Student Loan Reduction for Ministers and Others

Following up his earlier comment, reader Cary McCall has provided this explanation for how ministers (and many others) can reduce or even eliminate student loan payments.

Student Debt Relief for Ministers: The Basics

Cary McCall

One of the most burdensome financial obligations faced by many young ministers is an increasing student debt load. The rising cost of higher education is forcing many to rely heavily on financial aid, both for undergraduate and graduate educations. This is compounded for ministers who have sought education at private Christian universities, some of which have tuitions surpassing $700 (or more) per credit hour. The Master of Divinity, the most common ministry degree for preachers, is 84 hours. Although some schools help with scholarships and grants, most students end up with significant amounts of debt.

Most churches try to offer reasonable living wages to their ministers, but with heavy debt obligations, many ministers still struggle to keep things under control financially. Many ministers have no choice but to take on second jobs or rely on spouses to make up the difference in needed family income.

However, as of July 2009, many ministers now have a way to substantially reduce, and in some cases eliminate, the burden of their student loan debt. This is made possible by taking advantage of two programs now offered by the Federal Government: Income-Based Repayment and Public Service Debt Forgiveness.

About Public Service Debt Forgiveness and Income-Based Repayment

Public Service Debt Forgiveness is part of the federal College Cost Reduction and Access Act of 2007. This program discharges the remaining principal and interest after 10 years of monthly payments on loans serviced through the Direct Loans program of the Department of Education and applies to those who work in any number of public service fields. By law, this includes employees of all non-profit 501(c)(3) organizations, which includes the vast majority of ministers. However, Public Service Debt Forgiveness is only of limited value by itself because standard repayment plans have loans completely paid off in ten years. The only option for reducing actual payment amounts before the end of ten years was the Income Contingent Repayment plan.

Income-Based Repayment is a new payment plan made available on July 1, 2009. This plan, combined with Public Service Debt Forgiveness, is what produces the most value for most ministers. Income-Based Repayment introduces an entirely new formula for calculating monthly payments based largely on Adjusted Gross Income (taxable income), marital status, and family size. Ministers gain a distinct advantage in these calculations in that significant portions of income are not included in most ministers’ Adjusted Gross Income. A married minister (filing separately) with two children, a $50,000 per year income with $17,000 in housing and other allowances, and a loan balance of $35,000 will most likely have his monthly payment reduced to zero under Income-Based Repayment. Assuming ten more years of work in ministry, his entire loan balance will have been covered by the federal government.

Qualifying for Debt Forgiveness and Income-Based Repayment

Loans qualifying for both Public Service Debt Forgiveness and Income-Based Repayment must be loans serviced by the William D. Ford Direct Loans program through the Department of Education. However, loans serviced through other providers may be consolidated into the Direct Loans program for free at any time so long as they are Federal Family Education Loans (usually subsidized and unsubsidized Stafford loans, Perkins loans, SLS loans, or Grad PLUS loans).

Once loans are consolidated into and serviced by the Direct Loans program, the borrower may enter the application process for Income-Based Repayment. After 120 monthly payments under the Direct Loans program while employed in a qualifying public service position, the borrower may apply for Public Service Debt Forgiveness.

How Do I Do This?

The consolidation and payment plan enrollment process is relatively simple, although it can take up to several months to complete.

• Step 1: If you are a minister employed by a church that is officially registered as a 501(c)(3) non-profit organization? If yes, ask yourself if you truly believe that you will work in ministry for the next ten years. If yes, continue.
• Step 2: Determine if your current loans are eligible for consolidation into the Direct Loans program. Any kind of Stafford, Perkins, SLS, or Grad PLUS loan counts.
• Step 3: Determine if Income-Based Repayment plan will benefit you. Use the calculator at http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp to determine if it will lower your current monthly payment.
• Step 4: Consolidate loans into the Direct Loans Servicing Center by initiating the process at www.loanconsolidation.ed.gov . This can take several weeks, and up to two months in some cases.
• Step 5: Enroll in the Income-Based Repayment Plan through the Direct Loans Servicing Center.
• Step 6: Make 120 of your new monthly payments.
• Step 7: Apply for Public Service Debt Forgiveness.

Additional Information

• For married ministers, the IBR formula is most advantageous for those filing taxes separately from their spouses. However, as of July 1, 2010, the law allows couples filing jointly to include the loan balances of both individuals in the formula. Forgiveness will not extend to spouses, however, unless they work in qualifying employment and apply the same processes to their own loan balances.
• Before the Public Service Debt Forgiveness provision, all loans amounts that were forgiven were considered taxable income. Under the new law, the amounts forgiven under Public Service Debt Forgiveness will not be taxable.

Personal Experience

I work as a campus minister with a student debt load of approximately $32,000, the vast majority of that amount coming from two years of graduate seminary. Under the standard repayment plan I was enrolled in with Sallie Mae (a popular loan servicer), I was paying almost $400 per month. The IBR plan with my current Adjusted Gross Income – even as a single minister with no family – has produced a new monthly payment of zero. It looks likely that this payment amount will continue into the future, and will be all but guaranteed if I become married and start a family.

Resources:

• IBR Info – www.ibrinfo.org – Lots of clear, easy to understand information on the IBR plan and PSDF.
• Informative Brochure – www.ibrinfo.org/files/IBRinfo_brochure.pdf – Brochure outlining the basics of IBR and PSDF.
• IBR Calculator – studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp – The IBR calculator from the Department of Education’s website.
• Direct Loan Consolidation – www.loanconsolidation.ed.gov – The starting place for consolidating qualifying loans into the Direct Loans program.
• Direct Loans Servicing – www.dl.ed.gov – the Department of Education’s loan servicing division which handles all loans that qualify for Public Service Debt Forgiveness.

Questions:

While I am not an expert in this area, I am experienced with it and have researched it thoroughly. Feel free to send any questions you have about the programs or the process to [email protected].

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Additional notes from Jay

This governmental publication gives the details for the Public Service Loan Forgiveness Program. The key is that a religious organization, with a few exceptions, must have an IRS determination letter finding it to be a charity qualified under Internal Revenue Code section 501(c)(3). Churches are exempted from this requirement for income tax purposes, and so most do not have such a letter.

A church wanting to obtain an IRS ruling must file an IRS Form 1023 and pay a filing fee of $850. It’s a lengthy form and requires you to be quite meticulous in your submission, but churches should normally have little problem in getting a letter.

This governmental publication gives the details on the ICR program that allows you reduce payments to even as little as zero based on income.

Normally any forgiveness of indebtedness is taxable income to the debtor, but Congress has created an exception for this program, so that the forgiveness is also tax free.

Many thanks to Cary for digging this information out and sharing it with the community. There are countless ministers, missionaries, and other employees of charitable organzations who would benefit from this program.