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 Laurel Road.
Laurel Road Disclosures
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. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of June 23, 2020 and is subject to change.
2 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Splash Financial loans are available through arrangements with lending partners. Your loan application will be submitted to the lending partner and be evaluated at their sole discretion. For loans where a credit union is the lender, or a purchaser of the loan, in order to refinance your loans, you will need to become a credit union member.
The Splash Student Loan Refinance Program is not offered or endorsed by any college or university. Neither Splash Financial nor the lending partner are affiliated with or endorse any college or university listed on this website.
You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the public sector, are in the military or taking advantage of a federal department of relief program, such as income based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.
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, 2020.
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan).
Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. 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.
3 Important Disclosures for SoFi.
4 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 3.19% APR (with Auto Pay) to 6.43% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.43% 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 June 15, 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 6/15/2020. 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.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). 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 0.2% effective May 10, 2020.