With the total U.S. student loan debt at $1.4 trillion and the average per-borrower student loan debt at $14,872, having a college loan discharged, canceled or forgiven sounds like a dream come true for young Americans burdened with student loan debt.
But how do student loan forgiveness programs work, and more importantly, how can borrowers have their loans forgiven? Here's a tutorial that can help you get the job done.
Student Loan Forgiveness Defined
For starters, college loan borrowers need to get up to speed what student loan forgiveness is, and how it works.
There are two main student loan forgiveness programs, Public Service Loan Forgiveness (PSLF) and Income-Driven Repayment Forgiveness, explains Michael Lux, founder of The Student Loan Sherpa, a student loan strategies company in Indianapolis, IN.
"With PSLF, borrowers who work for the government or a non-profit can get their federal loans discharged after 10 years," Lux says. "Under the income-driven repayment plans, borrowers can have their loans forgiven after 20-to 25-years of payments, depending upon the plan."
With the various income-driven repayment plans, the remaining debt is canceled after 20 or 25 years in repayment, if the borrower does not qualify for public service loan forgiveness, says Mark Kantrowitz, publisher and vice-president of strategy at Cappex.com LLC, an online college planning company. "This forgiveness is taxable, as it is not conditioned on working in a specific occupation," Kantrowitz notes.
Corporate America is also beginning to support student loan forgiveness programs. "About 4% of employers are offering recent college graduates an employer-paid student loan repayment assistance program, partly as an employment incentive and partly as a retention incentive," says Kantrowitz. "This forgiveness is considered taxable income to the employee under current law."
Additionally, there are up-front loan forgiveness plans, like Teacher Loan Forgiveness, says. "These plans forgive a portion of the debt (e.g., a specific dollar amount or a specific percentage of the debt) for each year of service," explains Kantrowitz. "They're also incremental in nature."
Under "up-front" programs, the loan forgiveness is tax-free under current law because it is restricted to specific occupations, Kantrowitz adds.
It's worth noting the future of Public Service Loan Forgiveness is uncertain. "President Trump's FY2018 budget proposed eliminating the program for new borrowers, as of July 1, 2018," says Kantrowitz. "It is unclear how Congress will act."
How Do Student Loan Forgiveness Programs Work?
PSLF requires borrowers to meet three basic requirements with each payment, Lux says:
- Eligible loans
- Eligible Repayment Plan
- Eligible employer. Borrowers are required to make 120 certified payments. Once they meet this requirement, their federal student loan balance is forgiven.
"For loan forgiveness with the income-driven repayment plans (like Income Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE), each of which is based on repayment plans based on the borrower's income) there is no employer requirement, but only certain loans are eligible (other loans can become eligible through federal consolidation), and the borrower must be on the plan for 20-to-25 years depending upon the plan," Lux notes.
What Benefits Can Student Loan Forgiveness Programs Provide?
The primary benefit is getting the debt wiped away, says Lux. "An additional advantage to PSLF is that when the debt is forgiven, it is not taxed," he says. "With other types of forgiveness the forgiven debt is treated as income the year it is discharged."
Another key benefit to these programs is that your monthly payment is based upon how much you can afford to pay rather than what you owe, Lux states. "This is a huge consumer protection and helps borrowers keep their debt at manageable levels," he says.
How Can Student Loan Borrowers Use Forgiveness Programs to Maximum Advantage?
The most important thing with student loan forgiveness is to make sure you're meeting all of the requirements.
"The government does not want to forgive thousands of dollars of your debt, so you have to make sure they don't have a reason to deny your application," Lux explains. "As far as maximizing forgiveness, making the minimum payment is the best way to maximize the amount forgiven."
Additionally, college loan borrowers who set money aside in their 401(k) have a lower adjusted gross income (AGI), which means a reduced discretionary income, which means lower monthly payments. "Any borrower working towards forgiveness should look to maximize above the line deductions, because these tax breaks will also lower their monthly payments," Lutz says.
$100 Billion In Student Loans Forgiven
The U.S. Government Accountability Office estimates it will forgive more than $100 billion in student loan debt over the next several decades.
What Are the Downsides of Student Loan Forgiveness Programs?
One big downside that is often overlooked with student loan forgiveness programs is that some borrowers will spend more money chasing forgiveness than what they would have spent if they just paid off their loans or consolidated their student loans. "Paying the minimum each month results in a lot of money spent on interest," Lux notes. "Once it is all forgiven, there is also the large tax bill to consider. Between the interest and the taxes, borrowers can easily spend more chasing forgiveness than they would have had they just paid off the loan aggressively."
With PSLF specifically, a large downside is that the loan servicers have been guilty of giving borrowers bad information, resulting in year's worth of payments not counting towards forgiveness. "My research shows that over one-in-three applications have payments count towards PSLF that are rejected."
"Borrowers who are hoping to qualify for PSLF would be wise to submit employer certification forms on a yearly basis to ensure they are making progress towards forgiveness," he adds.
Where to Find Student Loan Forgiveness Programs
The college loan strategy website, StudentLoanHero.com, offers a handy and comprehensive guide to the major student loan forgiveness programs.
Keep Making the Payments
With Washington politicians mulling over the future of student loan forgiveness programs, it's unclear what they'll look like, or even they'll exist, 10 years from now.
What's certain, though, is that once you qualify for a debt forgiveness program, it's imperative that you keep making your payments — that's the most effective way of ensuring your debt will one day be removed under current loan forgiveness program statutes, no matter what happens in Washington, D.C going forward.