What Is a Forgivable Loan?

What Are Forgivable Loans?

With a forgivable loan, you can have part or all of the balance discharged—or forgiven—if you satisfy certain criteria. But if you don't, you could be on the hook for repaying all or part of what you borrowed, depending on the terms.

Forgivable loans may be available from government agencies, nonprofit organizations or employers and are typically designed for a specific purpose, such as attracting people to work in a particular field or helping low-income earners buy a home.

Tip: Most loans aren't forgivable. Typically when you borrow money, you have to pay it back, with interest.

How Does a Forgivable Loan Work?

For a loan to be forgiven, you must:

1. Agree to the conditions. Requirements vary by loan program and may include living in certain areas, working in particular industries or staying employed with a specific company.
2. Meet the requirements. It can take years to satisfy the conditions of a forgivable loan. For example, loans that provide closing cost or down payment assistance often require you to live in your home for a certain amount of time before selling.
3. Confirm loan forgiveness. Once you've met the necessary requirements, the loan should be forgiven. Confirm with the lender and check your credit reports to be sure. You can get free copies of your credit reports from each of the credit bureaus once a week at AnnualCreditReport.com. If you don't satisfy the forgiveness criteria, it can trigger repayment requirements.

What Are the Requirements to Get a Loan Forgiven?

Loan forgiveness requirements vary by program, and may include working in a specific field for a certain amount of time, making on-time payments for a number of years or living in a designated area.

Public Service Loan Forgiveness (PSLF)

The Public Service Loan Forgiveness program has forgiven more than $78 billion in eligible student loans since its inception, according to the National Education Association. To qualify for loan forgiveness under the program, you must:

• Have direct loans or other federal student loans you've consolidated into a direct loan.
• Work full time for a local, state or federal government organization or a tax-exempt nonprofit or volunteering full time with AmeriCorps or the Peace Corps.
• Repay your loans under an eligible repayment plan.
• Have made 120 on-time monthly student loan payments. Payments don't have to be consecutive, but some payments made during a forbearance or deferment period may not count toward your total.

Tip: Private student loans don't qualify for forgiveness under the PSLF.

Learn more: How to Choose the Best Student Loan Repayment Plan

Teacher Loan Forgiveness (TLF)

Eligible teachers can qualify for up to $17,500 in student loan forgiveness when they meet the program's requirements, including:

• You have an eligible federal student loan.
• You've worked in an elementary, middle or high school or educational service agency that serves low-income students.
• You didn't have an outstanding direct loan or federal family education loan (FFEL) balance as of October 1, 1998, or when you got a direct loan or FFEL loan after October 1, 1998.
• You've worked full time as a "highly qualified teacher" for five complete and consecutive academic years with at least one year of service after the 1997-98 academic year.
• You received your loan proceeds before your five years of qualifying teaching service ended.

Tip: Teachers can't receive credit for the same years of service under the TLF and PSLF programs. Think carefully about which program offers the greatest benefit before applying for loan forgiveness.

Learn more: What Is Student Loan Forgiveness?

Homebuyer Loan Forgiveness

Many forgivable loans that are available to home buyers offer down payment or closing cost assistance. While eligibility requirements vary by program, here are some criteria you might see.

• You must purchase a home in a certain location.
• The house must be your primary residence.
• You must live in the home for a certain number of years, often around five years.
• You must be a first-time homebuyer.

Employer Loan Forgiveness

Employers may offer forgivable loans to attract and retain employees. If you accept a position with an employer that provides a forgivable loan, you often need to remain in the role for a set amount of time. And you may need to meet certain performance goals.

While these loans may not be given for a specific purpose, such as purchasing a home, the fact that repayment is required if you don't meet certain criteria does make them loans rather than straight incentives or bonuses.

Example: You are recruited to work at a top law firm and offered a $5,000 forgivable loan upon signing your contract. You can use the funds for whatever purpose you like, and you will only need to repay the loan if you leave the firm within three years, your caseload drops below a certain level or you don't meet other performance-based metrics.

What Are the Pros and Cons of Forgivable Loans?

Forgivable loans can be a good option in certain circumstances, but they also have some drawbacks.

Are Forgivable Loans Worth It?

A forgivable loan could be worth it if you meet the eligibility requirements, are certain about the type of career you want to pursue or have no plans to move. They can provide much-needed financial relief that allows you to achieve certain goals, such as going to college or buying a home. But because forgivable loans generally require you to stay put for an extended period of time, they can be a gamble, especially if you're uncertain about your future plans.

Before taking on a forgivable loan, be sure you understand the requirements for erasing debt and are willing to accept the consequences if you don't meet them. Weigh the benefit of the amount that will be forgiven against the commitment you'll have to make to qualify for loan forgiveness. And compare alternative financing methods or financial assistance programs to choose the option that's best for you.

How to Get a Forgivable Loan

The process for getting a forgivable loan varies by loan type. Generally speaking, you'll need to search for programs you qualify for and meet the eligibility requirements. Major student loan forgiveness programs are available from the federal government, but states may offer separate programs to help pay down your student loan debt.

You might find homebuying assistance from state and local governments or nonprofit organizations. If you're looking for a new job, you can check with potential employers to learn about potential forgivable loan opportunities.

Tip: An online search can help you identify loan forgiveness programs. To start, check with local, state and federal government websites and nonprofit organizations.

The Bottom Line

If you think you might be eligible for a loan forgiveness program, it's worth the time to learn what they are and how they work. Understanding how they work and the criteria you need to meet can help you make smart financial decisions and prevent the need to repay loans you thought would be forgiven.

When applying for a forgivable loan, you'll need to meet the lender's criteria to qualify. If necessary, take steps to improve your credit before you apply. With an Experian account, you can get your FICO^® Score^Θ for free anytime, making it easy to track your progress.