4 Reasons Student Loan Forgiveness Might Not Be Worth It

student loan forgiveness

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.

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Published in Public Service Loan Forgiveness, Student Loan Forgiveness

  • oh_sailor

    I found this article misguided. Debt forgiveness repayment programs are a huge help for people who are struggling to make ends meet right now. It’s also a huge help for many low income people who were lured into attending for profit colleges and either never graduated, or graduated with a degree that has not earned them any advantage in getting employed. For most low and middle income people debt forgiveness can be a lifesaver. I think its detrimental to dissuade them from signing up. Furthermore, many people have said that if they do change PSLF, it will be capped (at $57,500), not cancelled, and the cap will only affect new borrowers. Those who have already been participating in PSLF will be grandfathered in. Each person’s loan situation is different, and should be advised based on their goals, needs and work/home situation. For a factual snapshot of what the student loan debt crisis looks like, check out the Boston Globe: https://www.bostonglobe.com/magazine/2016/05/18/hopes-dreams-debt/fR60cKakwUlGok0jTlONTN/story.html

  • Hi,

    Those are some good points. We’re definitely not saying that no one should attempt to get student loans forgiven. However, it’s simply not an option that works for everyone, as discussed in this post.

    There are many borrowers who may never benefit because they’ll have their loans paid off before they hit the 20 year mark. For those people, attempting to get forgiveness could result in more interest charges

    It’s definitely something borrowers should consider, but it should be considered carefully to make sure the math works out.



  • Jenn W

    When I went to nursing school, I was already employed at a hospital and received a “scholarship” for $8,000. I would need to complete a 2 or 3 year work requirement after graduation, which was fine, because I was planning on working there anyway. I had to sign some forms, and the HR rep explained the fine print was regarding if I didn’t complete the work requirement. Fast forward 5 years, after I completed school and my work requirement, the month my requirement was fulfilled, the hospital withheld 30% taxes of the original $8,000-$2400 from my paycheck, then that amount was also reported to the IRS as earned income, placing my husband and I into the next bracket. Of course, we are also earning a comfortable joint income already. Furthermore, we had just purchased a new home, yet with the extra $8000, we now earned too much money to claim all of the pre-paids, such as 1 year PMI, insurance, etc that you can normally deduct at tax time. My accountant explained when it was all said and done, that $8,000, cost us just over $10,000. The really frustrating part, is it wasn’t even a scholarship. The hospital still advertises it that way.
    I’m about 4 months away from completing my master’s degree and I haven’t accepted a dime from the hospital, nor will I be working towards any loan forgiveness programs the government offers. I spend a lot of time reading the fine print, and if you make a decent income, and what nurse practitioner doesn’t?, you can hardly even qualify!
    This article does an excellent job of shedding light on people needing to look at their long term financial goals, as well as how debt grows. Also, with programs which require long periods of commitment, it is too hard to judge where you will be financially or what your needs will be!

  • Frank Rodriguez

    When I was in college from 2000 to 2004, I never lost sight of the fact that I would have to “repay” the sum of every check I deposited, plus interest. For that reason, I used my loan money ‘very sparingly’, and I managed to set aside $6,000 from the $30,000 I borrowed to make a massive payment toward my first student loan installment in 2004. The lenders then set me up on a payment plan of $144 per month for 20 years (at 3.38% APR) which is significantly less than many borrowers are paying against $30,000 in loans. In addition, I pay more than I owe whenever I can. For example, I take 10 percent of my tax return every year and put that amount toward my loans. At this point, if I just paid the minimum due going forward, then I’d pay off the full balance in 17 years instead of 20. Not everyone can do what I’ve done, and many people have borrowed more than I have, but if you can afford to take one-fifth (20 percent) of the total amount you borrowed, and put that toward your first student loan installment, and/or pay more than the minimum each month, then not only will your monthly payments be lower each month, but you will accrue significantly less interest over time.

  • Ryan Bowlen

    Public Service Loan Forgiveness (PSLF) is a crock of crap! I went into public service thinking it would help me but come to find out FedLoan ensures that you are on a “graduated” repayment plan that pays off your entire loan in … wait for it… 120 payments! The exact amount necessary to reach loan forgiveness… how convenient.