Loan Forgiveness

Loan Forgiveness
Loan forgiveness means you are no longer expected to repay your loan. Certain circumstances might lead to forgiveness, cancellation, or discharge of your outstanding federal student loan balance.

What is Loan Forgiveness?

If you’ve ever wished your student loans would just disappear, there might be a way. Under certain circumstances, the federal government might cancel all or part of an educational loan. Referred to as loan forgiveness, this means to qualify you must:

  • Perform volunteer work
  • Perform military service
  • Teach or practice medicine in certain types of communities
  • Meet other criteria specified by the forgiveness program

Through these qualifications, you might receive loan forgiveness for student debt. However, there is no loan forgiveness for mortgages, car loans, personal loans, or credit cards. And while student loan programs will vary, most federal loans can be discharged in the following situations:

  • Permanent disability
  • Closure of the school during the time of study
  • Use of identity theft to secure a loan
  • Failure of the school to refund required loans to the lender
  • Death of the borrower1

To determine what student loan programs meet your individual needs, it’s important to contact a qualified student loan consultant—together you can find the best plan.

What are the different student Loan Forgiveness plans?

There are four primary programs for loan forgiveness:2

  1. Public Service Loan Forgiveness – After you’ve worked full time for a nonprofit organization or the government for at least 10 years, your remaining federal loan balance can be forgiven. Careers that qualify for this forgiveness are firefighters, teachers, military personnel, nurses, and others. If you repay your loans on an income-driven plan for your 10 years in these careers, you will save the most money.
  2. Teacher Loan Forgiveness – If you are a teacher and have worked full time for five consecutive years, you might be eligible for teacher loan forgiveness, which gives you up to $17,500 in direct or Stafford loans forgiveness. This program is only available to teachers working in low-income public elementary or secondary schools who took out their first loans after October 1, 1998. Many participants will also qualify for Public Service Loan Forgiveness, but Teacher Loan Forgiveness reduces or eliminates your loans in half the time—five years instead of 10.
  3. Perkins Loan Cancellation – If you have a federal Perkins loan, you can have up to 100% of your loans canceled if you work in public service jobs for five years. You qualify for the Perkins loan cancellation if you are a teacher, firefighter, nurse, police officer, school librarian, or public defender, among others. You can check this chart to see if your career makes you eligible.
  4. Income-driven Repayment – For this program, the federal government offers four main income-driven repayment plans, including income-based repayment, income-contingent repayment, pay as you earn, and revised pay as you earn. Each program automatically forgives your remaining loan balance after 20 or 25 years. These are typically designed for borrowers with large loan amounts relative to their incomes. However, the Revised Pay As You Earn (REPAYE) plan is open to any federal student loan borrower no matter their income.

How do I qualify for Loan Forgiveness?

To qualify for loan forgiveness, your loans cannot be in default, which means they have gone unpaid for more than nine months. Private student loans also do not offer forgiveness. However, some lenders might let you make interest-only payments or take a temporary interest rate reduction if you cannot afford your loan repayment. If you have private loans, contact your lender to learn more about what options are available to you.

What are the Cons of Loan Forgiveness?

While loan forgiveness sounds like you’ve just hit the jackpot, there are still some downsides you might want to pay attention to. In some instances, loan forgiveness can take a decade before you receive forgiveness. For example, the Public Service Loan Forgiveness (PSLF) plan requires 120 qualifying payments to be made, which amounts to 10 years. And under the Income-Based Repayment (IBR) plan, your loans will be forgiven after 20 or 25 years.

As you wait for loan forgiveness to kick in based on income-driven plans, your balance might be growing. In some instances, interest charges keep accruing even though your monthly payments aren’t high enough to cover them. When this occurs you have what is called negative amortization, which means your balance is growing instead of decreasing over time. You’ll even have to pay taxes on your loans that have been forgiven. For example, if you have a balance of $30,000, and your income puts you in the 25 percent marginal tax bracket, you will have a tax liability of $7,500 that will be due to the IRS immediately when you file taxes.3

Bottom Line

While loan forgiveness sounds like a dream come true, it isn’t a quick fix. When it comes to handling your student loan debt, consider all your options.

References:

1 “Student Loan Forgiveness” Investopedia, http://www.investopedia.com/terms/s/student-loan-forgiveness.asp. Accessed 13 March 2017.

2 “Forgiveness, Cancellation, and Discharge.” Federal Student Aid, https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation. Accessed 15 March 2017.

3 “4 Reasons Student Loan Forgiveness Might Not Be Worth It.” Student Loan Hero, https://studentloanhero.com/featured/student-loan-forgiveness-really-worth-it/. Accessed 13 March 2017.