Student loan forgiveness is often considered a smart way out for borrowers struggling with debt. But is it really the great solution people think it is?
As with many student loan-related questions, the answer is a little complicated.
Let’s take a closer look at some of the “gotchas” of federal student loan forgiveness programs to find out if student forgiveness is the right solution for you.
6 potential downsides to student loan forgiveness
Getting your student loan balance forgiven is the dream, but unfortunately, the road to forgiveness isn’t without its twists and turns. Before pinning your hopes on getting your debt discharged, consider these six potential downsides to student loan forgiveness programs.
1. You might have to wait a long time to receive forgiveness
But all these plans require years of service or repayment before canceling your debt. The Teacher Loan Forgiveness program has the shortest service requirement at five years, but it only offers either up to $5,000 or $17,500 toward your debt, depending on the subject you teach.
PSLF promises to forgive all your debt, but only after you’ve worked for an entire decade in a qualifying nonprofit, government agency, or other qualifying organization. Unless this kind of work lines up with your career goals, dedicating 10 years of your life might not be worth the loan forgiveness you’d get.
The government will also forgive your balance if you still owe money at the end of your term on an income-driven repayment plan, such as income-based repayment or Pay As You Earn. But on these plans, your term will be 20 or 25 years, so you won’t see loan forgiveness for a very long time.
Instead of pinning your hopes on student loan forgiveness after 20 years (or more), you might be better off paying back your student loans faster. Otherwise, you could have debt hanging over your head most of your life while you’re 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
If you’re counting on loan forgiveness from income-driven repayment, you’ll have to put your loans on one of the four income-driven plans. And if you’re looking at PSLF, you’ll need to be enrolled in income-driven repayment or extended repayment.
Why? Well, if you kept them on the standard 10-year plan, you’d have no balance left to forgive after 10 years of paying off your debt.
Because they extend your terms to 20 or 25 years, these long-term repayment plans typically lower your monthly payments. This can be helpful if you’re struggling to pay your bills every month.
But the downside is that you end up in debt for longer, and your loans will accumulate interest that whole time. Over the years, you’ll end up paying a lot more interest than you would have if you’d stayed with a shorter term.
For example, let’s say you owe $30,000 at a 5.05% interest rate. Over 10 years, you’d pay $8,272 in interest. But over 20 years, you’d pay $17,716, and over 25 years, you’d pay $22,876, nearly as much as you borrowed in the first place.
Adding years to your debt also adds interest, which could cost you a lot of money before you see loan forgiveness.
3. Your career or financial circumstances could change
In most cases, federal student loans automatically go on the standard 10-year plan. To get on income-driven repayment, you’ll have to apply every year. That way, Federal Student Aid can make sure your income qualifies you to stay on this plan.
But if your income increases, you could become ineligible for income-driven repayment. In this situation, you’d have to go back to regular repayment, and your years on the income-driven plan would have been for nothing.
You could run into a similar problem if you were working toward PSLF but leave your public service career before 10 years are up. Even if you think you want to commit to public service for such a long time, it’s hard to predict how your career goals could change over the years.
What might seem like a foolproof path to loan forgiveness shortly after graduation could end up changing after years in the workforce. That said, earning a higher income in a stable job could make you a good candidate for another useful strategy: student loan refinancing.
Through refinancing your debt, you could qualify for a lower interest rate. And by saving on interest, you might be able to pay off your debt ahead of schedule, even without the help of student loan forgiveness.
4. You could end up with a big tax bill
When you get loan forgiveness from an income-driven plan, your balance will be wiped out completely. But you still might have to pay one more bill before you can say goodbye to your loans forever.
Under forgiveness from an income-driven plan, your forgiven amount is treated as taxable income. And those taxes will be due in full the year your debt is forgiven. And while a PSLF award is currently not taxed by the federal government, that could always change.
Let’s say that when your loans are forgiven via an income-driven plan, you have a balance of $30,000 and your income puts you in the 25% marginal tax bracket. That means you will have a tax liability of $7,500 that’s due to the IRS in its entirety when you file your taxes.
Coming up with a lump sum of that size could be difficult, especially if you weren’t preparing for it. While owing $7,500 is better than owing $30,000, the IRS tends to be much less flexible than the Department of Education in terms of repayment options.
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.
5. Not many people have received student loan forgiveness so far
Not everyone supports student loan forgiveness programs. In fact, programs such as PSLF and borrower defense to discharge (which allows loan cancellation to defrauded borrowers) have become hot-button political topics as of late.
These issues have come to a head recently as the first borrowers apply for PSLF. This program was implemented in 2007, so the first borrowers became eligible in 2017. Only a fraction of applicants have received loan forgiveness so far, so it remains to be seen if future borrowers will have a smoother time getting their applications approved.
What’s more, none of the income-driven plans have been around long enough for anyone to attain loan forgiveness yet. If you’re wondering whether student loans are forgiven after 20 years, the only real answer is that it remains to be seen. Likewise, it’s tough to say what changes future administrations will make to these policies.
While this does not necessarily mean these programs are ineffective, skeptics may be reluctant to put their trust in something that has yet to benefit many borrowers. 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.
6. Your private student loans might not be eligible
So far, we’ve mainly focused on federal student loan forgiveness programs, which only wipe away federal student loans, such as unsubsidized or subsidized direct loans. If you have private student loan debt, however, you don’t have as many options.
Although federal forgiveness programs aren’t applicable, you might find some student loan repayment assistance programs (LRAPs) that will help you pay off your debt. Some states and private organizations offer partial student debt relief in exchange for qualifying service.
Often, these LRAPs only require two or three years of service, rather than the 10 years you’d need to put in for PSLF. Some common careers that qualify for LRAPs include doctor, lawyer, nurse and teacher.
Another option is to look for an employer that offers a student loan repayment assistance benefit. Although rare, some jobs do offer this perk to help the 44 million borrowers currently burdened by student loan debt.
If you’re drowning in private student loan debt, a federal forgiveness program won’t be able to help, but you might find alternative options that could offer relief.
Student loan forgiveness is rarely a quick fix
When deciding the best way to handle your student loan debt, it’s important to consider the pros and cons of any strategy.
We’re not trying to scare you away from student forgiveness programs by any means. But you must also be realistic and recognize that loan forgiveness might not be a cure-all to your debt situation — and it certainly won’t happen overnight.
Whatever you decide, know that being proactive about your debt already puts you a step ahead. By chipping away at your debt, you’re well on your way to a life free of student loans.
Honey Smith contributed to this report.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 6.15%1||Undergrad & Graduate|
|1.99% – 5.64%2||Undergrad & Graduate|
|3.80% – 9.36%3||Undergrad & Graduate|
|1.91% – 5.25%4||Undergrad & Graduate|
|2.25% – 6.53%5||Undergrad & Graduate|
|2.15% – 4.42%6||Undergrad & Graduate|
|1.89% – 5.90%7||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|2.00% – 5.63%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews! |
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2021.
2 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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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 protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
5 Important Disclosures for SoFi.
6 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.15%-4.42% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
7 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
8 Important Disclosures for Nelnet.
Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.
Request for the cosigner to be released can be made by the borrower after 24 consecutive, on-time payments (not later than 15 days after the due date) of principal and interest have been made. Borrowers in deferment or forbearance must make 24 consecutive, on-time payments after re-entering repayment to qualify for the release. The borrower must be current on their payments at the time of the cosigner release request and show the ability to assume full responsibility of the loan(s) by meeting certain credit criteria on their own at the time of the request, including, but not limited to, being a U.S. citizen or having permanent residency in the United States, being the age of majority in their permanent state of residency, providing sufficient proof of income, and having no student loans in default.
Hardship forbearance allows you to temporarily suspend payments on your loan(s) while you are experiencing financial hardship. It is offered in increments of two or three months, with a maximum of 12 months available, in aggregate, over the life of the loan. If your loan(s) are in good standing at the time of your request, you will be eligible for forbearance in increments of two monthly payments. If, at the time of your initial request, your loan(s) are considered past-due, you will be eligible for forbearance in increments of three monthly payments. Future increments of forbearance, up to a life-time maximum of 12 months, may be requested upon the completion of making a certain number of principal and interest payments. During the two- or three-month forbearance period, you will not be required to make payments; however, any unpaid interest will continue to accrue and will be capitalized (added) onto your principal balance at the end of the forbearance period. You may continue making payments in any amount without penalty during the forbearance period. Your loan repayment term will be extended by the number of months in the forbearance period.
Refinance Loan Eligibility: You must be a U.S. citizen or permanent resident alien with a valid U.S. Social Security number, and be the legal age to enter into binding contracts in your permanent state/territory of residency, or be at least 17 years of age and apply with a cosigner who is at least the age of majority in their state/territory. Non-residents can apply with an eligible cosigner who is a U.S. citizen or permanent resident alien with a valid U.S. Social Security number. The student loans you refinance must be in their grace or repayment period, and you can no longer be enrolled in school on a half-time or more basis. You must have at least $5,000 in student loans to refinance. You, or your eligible cosigner, must have an annual income of at least $36,000. Approval subject to credit review. Other credit criteria may apply.
Refinance Loan Limits:
Loan Refinancing Risks: Federal student loans include benefits that may not be offered with private student loans. Carefully review any potential benefits that may be lost by refinancing federal and private education loans, such as the loss of any remaining grace periods. To learn more about what to take into consideration when refinancing federal student loans with private education loans, click here
Selecting ‘Get Started’ results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Fixed interest rates range from 2.99% APR (with auto debit discount) to 6.25% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. The fixed interest rate will remain the same for the life of the loan.
Variable interest rates range from 2.00% APR (with auto debit discount) to 5.63% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. Variable rates may increase after consummation. The variable interest rate is equal to the One-Month London Interbank Offered Rate (“One-Month LIBOR”) plus a margin. The One-Month LIBOR in effect for each monthly period (from the first day of the month through and including the last day of the same month) will be the highest One-Month LIBOR published in The Wall Street Journal “Money Rates” table on the twenty-fifth (25th) day (or if such day is not a business day, the next business day thereafter) of the month immediately preceding such calendar month. The Annual Percentage Rate (APR) for a variable interest rate loan will change monthly on the first day of each month if the One-Month LIBOR index changes. This may result in higher monthly payments. The current One-Month LIBOR index is 0.15% as of 5/4/2021.
The lowest interest rate for each loan type requires automatically withdrawn (“auto debit”) payments, a five-year repayment term, and the borrower making immediate principal and interest payments. Not all borrowers will receive the lowest rate. The interest rate and Annual Percentage Rate (APR) may be higher depending upon (1) the credit history of the borrower and, if applicable, the cosigner, (2) the repayment option and loan term selected, (3) the loan type selected, and (4) the highest level of education attained. If approved, applicants will be notified of the rate qualified for within the stated range.
*Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score. **Your actual savings may vary based on interest rates, outstanding balances, remaining repayment terms, and other factors.