Student loan forgiveness is often considered a smart “way out” for borrowers struggling with debt – but is it really the great solution people seem to think it is?
As with so many student-loan related questions, the answer is: it’s complicated. So let’s take a closer look at some of the “gotchas” of federal student loan forgiveness programs to find out if forgiveness is the right solution for you.
Downsides to student loan forgiveness
1. You have to wait a decade or more to receive forgiveness
If you are seeking Public Service Loan Forgiveness (PSLF), your loans will be forgiven after 120 qualifying payments, or 10 years. Under the Income-Based Repayment (IBR) plan, your loans will be forgiven after 20 or 25 years of qualifying payments, depending on when you initially borrowed.
Another popular income-driven repayment plan, Pay As You Earn (PAYE), requires you to hold out for 20 years before qualifying for student loan forgiveness. And the Revised Pay As You Earn (REPAYE) program awards forgiveness after 20 years for undergraduate loans and 25 years for loans taken out to fund graduate or professional study.
Regardless of which of these programs you end up on, there’s no denying that 10 to 25 years is a long time to have student loans in your life. If you can reasonably afford your monthly payments, it may be better for your peace of mind to pay them back faster instead of having debt hanging over your head during a time in your life when you are trying to reach other financial milestones.
If you aren’t interested in PSLF, answer a few questions below so we can help point you towards other repayment options. Otherwise, scroll down to read on.
2. Your balance could grow while you wait
Most federal student loan forgiveness programs require you to get on an income-driven repayment plan first, such as the ones outlined above. One of the big draws of these plans is that you can have your monthly payments lowered significantly – sometimes down to $0 per month.
Sounds great in theory, right? Well, it can be if the government is paying your interest in the meantime. However, there are some instances when interest charges will keep accruing even if your monthly payments aren’t high enough to cover them. This leads to a situation called negative amortization, meaning your balance is growing instead of decreasing over time.
There are a few potential downsides to negative amortization. The first is the chance that you end up paying off your balance before you’re eligible to receive forgiveness. If you went on an income-driven plan with the primary goal of having your loans forgiven, but pay them off before the 10-25 years are up, you extended the repayment term and possibly paid more in interest for no good reason.
It’s also possible your financial situation changes (i.e., your income increases) and you are no longer eligible for income-driven repayment. In this case, you are no longer eligible for forgiveness, either, and you’ll have to pay back your loans in full – likely more than you initially borrowed.
Similarly, you could run into a problem if you were holding out for PSLF, but leave your public service career before the 10 years are up. You might still be eligible for forgiveness under an income-driven plan, but you’ll have to wait an extra decade if you still qualify. Plus, that forgiven balance will now be subject to income taxes; if your balance ballooned over the years due to accruing interest, expect a big tax bill.
3. You’ll probably end up with a big tax bill
Speaking of taxes, you will probably end up paying them for any forgiven debt (unless you earn student loan forgiveness through PSLF). And they’ll be due in full the year that debt is forgiven.
Let’s say that when your loans are forgiven, you have a balance of $30,000 and your income puts you in the 25 percent marginal tax bracket. That means you will have a tax liability of $7,500 that’s due to the IRS immediately when you file your taxes.
I don’t know about you, but I would find it difficult to come up with that much money in a lump sum – particularly if I wasn’t expecting it. While owing $7,500 is better than owing $30,000, the IRS is much less flexible than the Department of Education.
If you’re not sure whether or not you’ll owe taxes under a certain forgiveness program, check out our guide to forgiveness and taxes.
4. No one has actually received student loan forgiveness under these programs yet
PSLF was implemented in 2007, while the 20-year forgiveness term for income-based repayment plans was implemented in 2014. PAYE only applies to new borrowers as of 2007, and REPAYE was very recently implemented in December of 2015.
What does this mean? In short, none of these programs has been around long enough for anyone to actually attain forgiveness. While this does not necessarily mean that the programs are ineffective, skeptics may be reluctant to put their trust in a program that has yet to actually benefit any borrowers.
In addition, the rules for these programs could be changed between the time when you begin making qualifying payments and when you hope to attain forgiveness. While no changes have been made yet, it would be unfortunate to make payments for 10 years or more, only to have Congress pass a law that abolishes the program or renders you ineligible.
Student loan forgiveness isn’t a quick fix
When deciding the best way to handle your student loan debt, it’s important to consider both sides – that includes the potential drawbacks and consequences of any plan, too.
We’re definitely not trying scare you out of taking advantage of student loan forgiveness programs; they can make life easier for many borrowers in a variety of ways. Simply think of student loan forgiveness as a potential perk rather than the cure-all to your debt situation.
Whatever you decide, know that being proactive about handling your student loans puts you miles ahead of millions of other borrowers and well on your way to a debt-free life.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|