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.
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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.
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2 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.
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3 Important Disclosures for SoFi.
4 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.
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5 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 0.16% effective August 10, 2020.