6 Reasons Student Loan Forgiveness Might Not Be Worth It

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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

The federal government offers a few loan forgiveness options, including Teacher Loan Forgiveness, Public Service Loan Forgiveness (PSLF) and forgiveness from income-driven repayment plans.

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 6 lenders of 2020!
LenderVariable APREligible Degrees 
1.89% – 6.66%1Undergrad
& Graduate

Visit Splash

1.89% – 5.90%2Undergrad
& Graduate

Visit Laurel Road

2.25% – 6.09%3Undergrad
& Graduate

Visit SoFi

1.99% – 5.34%4Undergrad
& Graduate

Visit Earnest

1.97% – 8.54%5Undergrad
& Graduate

Visit Lendkey

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

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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 October 1, 2020.


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.

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.

  1. Checking your rate with Laurel Road only requires a soft credit pull, 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.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. 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. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

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 September 9, 2020. Information and rates are subject to change without notice.
 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Earnest.

Earnest Disclosures

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.


5 Important Disclosures for LendKey.

LendKey Disclosures

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 11/13/2020 student loan refinancing rates range from 1.97% to 8.54% Variable APR with AutoPay and 2.95% to 8.77% Fixed APR with AutoPay.