Student loans are a fact of life for most graduates these days. Many borrowers see a light at the end of the tunnel in the form of student loan forgiveness. This is a good option for those who qualify for forgiveness programs due to military service or employment with a nonprofit. For others, relying on forgiveness has potentially dire unintended financial consequences.
Types of Student Loan Forgiveness
While there are a couple different routes to loan forgiveness, the only loans that qualify for student loan debt forgiveness are federal student loans. Loans from a private lender are always subject to the specific terms of the original loan agreement.
Let’s look at the various forgiveness programs for which many borrowers may qualify.
The Public Service Loan Forgiveness (PSLF) Program
In this program, workers at qualifying organizations will have their remaining balance forgiven after 10 years worth of on-time payments. Working for nonpartisan government organizations, 501(c)(3) nonprofits, and some other not-for-profit service providers qualifies borrowers for public service loan forgiveness. Military service also counts toward PSLF program benefits.
Teacher Loan Forgiveness/Cancellation
This program is designed to encourage graduates to become elementary or secondary school teachers in low-income communities. Those who remain in the profession for five years qualify to have $17,500 of their student loans forgiven. Additionally, borrowers of Federal Perkins Loans are eligible to have their loans canceled after completing one full academic year of service.
Loan Forgiveness with Enrollment in an Income-Based Repayment Plan
For those who don’t qualify for forgiveness based on their profession, there is a forgiveness option through income-based repayment. This option is available to many borrowers, but it is not without risk. To be eligible, a borrower must simply be enrolled in a repayment plan that sets payment amount by a percentage of income. These plans include IBR, ICR, PAYE, and REPAYE.
In these plans, payments can be as low as $0 and are capped at 10% or 20% of income. More importantly, income must be low enough that payments are lower than in the Standard repayment plan. After 20 or 25 years (depending on plan and type of loan) of consistent timely payments, the remaining debt is forgiven.
However, it is important to be aware of the risks when relying on this type of forgiveness. Unlike with the Public Service or Teacher forgiveness plans, forgiven debt counts as income for tax purposes. As such, borrowers with large amounts of remaining debt can end up with a crippling tax burden.
Additionally, with extremely low payments there is a risk of negative amortization, which is where payments don’t cover accruing interest resulting in a constantly growing balance. In this case, losing eligibility or eventual tax liability could leave borrowers drowning in debt.
Make an Informed Decision
Understanding if loan forgiveness is a good option requires research. In order to make the right decision, borrowers need to calculate their payment timeline as well as contact their loan servicer. There are additional program details and resources available at the Federal Student Aid website.