There’s no way to sugarcoat it: student loan forgiveness really isn’t free. It behooves everyone to fully understand what options are available to consolidate loans and to take full advantage of programs that can help alleviate some of the pain of the student loan burden.
When I applied for federal student loans, I remember the FAFSA quiz that I had to take in order to qualify. The quiz was fairly straightforward and essentially stressed the fact that the money was to be borrowed and must be paid back.
You might think that such a fact would be obvious, but in reality, the student loan system is set up in a way that makes borrowed funds seem almost unreal.
It’s similar to how Las Vegas casinos give you chips instead of dollars, and how Monopoly money always feels decidedly low stakes because of the pink and blue off-size bills. Student loan money can feel fake as well because you never actually hold it in your hand. Often times, you never even receive a check since that can go straight to your school’s bursar’s office.
Add in the fact that student loans are often for dollar amounts so large as to seem inconceivable. Factor in the way that repayment terms can stretch out to ten years or more spent in school earning the degree, plus another ten years or more to pay it back, and the entire process begins to feel very unreal indeed. Here are some supporting reasons why student loan forgiveness really isn’t free.
What is Student Loan Forgiveness?
Luckily, there are some options available to help alleviate some of the pain of large student loan debt. It’s important to keep in mind that there is no magic bullet. There is no program, federal or otherwise, that will waive your student loan balance to make it magically disappear.
When I talk about “student loan forgiveness,” I am referring to some government programs that will alleviate a portion of a very large balance, providing you meet certain employment criteria and still make payments for a specified period of time.
The Difference Between Forgiveness and Discharge
Student loan forgiveness means different things. You can qualify for Public Service Loan Forgiveness if you work 10 years full time at a government or non-profit job while paying based on your income.
The kind of student loan forgiveness that everyone qualifies for is utilizing an income-driven repayment option for 20-25 years while planning to pay taxes on the forgiven balance.
Hence, there is “tax-free” and “taxable” loan forgiveness.
- Your school committed fraud up by falsely certifying your eligibility to receive the loans
- Your school committed fraud by not returning loan money after you were no longer a student (otherwise known as theft)
- You were the victim of identity theft or fraud
- Your school closed and you are no longer able to receive a degree from them or continue classes
- You cannot become employed due to mental, physical, or criminal status, any of which must be documented
It’s important to note that if you drop out, take a break from school, or for any reason voluntarily stop taking classes, you are still obligated to repay your debt. The above reasons for student loan discharge only apply when the school is at fault or when you are incapable of working in order to repay the loans.
There is no easy out, I’m afraid, though that does not mean that all hope is lost.
There are programs designed to alleviate the student loan burden that involve waiving a significant portion of your debt. They are frequently lumped together and known as “student loan forgiveness” plans. Understanding these plans and how they can work for you can help you take a purposeful long-term view of how to resolve your student loan debt.
So, Student Loan Forgiveness Really Isn’t Free?
Not entirely, no.
But, it can be helpful.
First, it’s important to understand that student debt forgiveness is only for certain types of loan products, specifically Direct Loans.
Second, it’s important to know that you will still have to pay off a significant portion of your loans.
Here’s the basic way that it works:
Go to school, and earn any degree you want. Then, go to work. If you choose a non-profit or job in some sort of service or public capacity, you could be eligible for a program that allows you to waive the remaining balance of your student loans provided you worked at that public service job for a set amount of time (currently ten years), and made payments on your loans throughout that time.
This is a great option if you planned to go into public service anyway, though won’t help you if you work in the corporate world. It really all depends on your situation.
Details on Public Service Loan Forgiveness
To take advantage of the program, where you work for a government or non-profit agency for ten years, and make 120 consecutive payments (10 years’ worth) so that at the end of the ten years, your remaining loan balance is waived, requires the following:
- Working for a government or non-profit agency – great if that was your plan all along, but potentially restricting if you planned to go into the corporate world or another career path
- Understand that the law allowing for this program could change – this holds true even once you are in the midst of the program. There is no being grandfathered in. You could be on year nine of making payments, working at a non-profit, and the law could change and eliminate the loan forgiveness option
- Working for partisan political organizations do not qualify for this program
- Neither does working for a labor union or a religious-based nonprofit
- Or a non-profit that doesn’t meet a certain status qualifying public service as their primary function
- Changing jobs is okay, as long as your new job also meets the non-profit rules and you keep making payments, you can stay in the program
- The employer itself is what matters, not the job itself. This means you can work at a non-profit university but in the writing center or as an administrator or even as the gardener if you like and still qualify.
As For Those Laws Changing…
Unfortunately, there have been some recent efforts to make it harder to achieve loan discharge even when the university is at fault. Proposed changes to the law make it harder to hold universities accountable for bad business practices.
The key takeaway here is that laws can and do change, and the best bet you have to weather these changes is to be proactive in how you manage your debt long term.
Teacher Student Loan Forgiveness
There is also a program specifically for teachers to help alleviate student loan debt.
To qualify for this program, you must teach full time for five “complete and consecutive academic years,” in a low-income area. What constitutes “low-income” is subjective, so you will have to apply for the program to get approval to enroll. This also means that you’ll need to obtain the job first, and then see if you qualify.
There is a limit to how much debt can be forgiven – currently $17,500 – on certain government loan products, though $17,500 is no small amount of money so this program is worth considering if teaching is your vocation.
Why Student Loan Forgiveness is a Good Idea (In Some Cases)
Public Service Loan Forgiveness takes a minimum of ten years, limits where you can work, and could go away without notice. Yet, this is still an astonishingly good option for many people.
If a non-profit career is for you, PSLF allows you the flexibility to change jobs within the non-profit sector as many times as you like. This provides a viable light at the end of the tunnel for alleviating some of the burdens of debt. Ten years may be a long time, but taking steps to pay back what you owe is honorable and empowering.
After all, you will work over the next ten years anyway. Why not do so in a manner that moves you towards climbing out from under your debt?
Plus, if public service was your goal all along, this makes even more sense. If you hadn’t considered a career in public service, this could be the inspiration you need to find a rewarding career path you might not have otherwise considered.
Of course, PSLF is not the only loan forgiveness plan.
Other Student Loan Forgiveness Programs
If a career in public service is not for you, there are some other options worth considering. Keep in mind you’ll pay income tax on any forgiven balance if you do not specifically qualify for the PSLF program.
Pay as You Earn, known as PAYE, caps your monthly payment at 10 percent of your discretionary income. After 20 years of making these adjusted payments, the remaining balance will be waived (or, “forgiven”).
Income-Based Repayment (IBR), caps your monthly payment at 15% of your discretionary income. This plan also forgives any remaining balances after 25 years of payments.
Revised Pay As Your Earn offers loan forgiveness after 20 or 25 years. Your monthly payment is calculated based on your student loan debt, income, spouse’s income, family size, and is capped based on your discretionary income (which is calculated by the difference between your adjusted gross income and 150% of the poverty line amount for your family’s size).
These programs are available to all borrowers, regardless of career path, and require annual applications to re-calculate your payment amount.
Pros and Cons of These Programs
Pro: You only have to make a limited amount of payments and then you can stop, with the remaining balance wiped out.
Con: That time frame will be between ten and twenty-five years.
Pro: These programs can be a reasonable way out of long-term debt that otherwise hampers your ability to save for a house, start a family, or simply use your income the way that you choose.
Con: Laws can and do change and you could end up still having to pay for the entire balance anyway, though this is extremely unlikely. This will likely make a large difference in your long-term financial planning as well as your career choices.
What About the Psychological Burden?
The stress associated with student loans is real. Even with viable options such as Student Loan Forgiveness programs, there are limitations that everyone must consider. To take advantage of Pay As You Earn and Revised Pay As You Earn programs, your monthly payment is calculated by your disposable income.
This can and does change each year, and can cause some stress as people work to decide whether to keep their income and thus loan payments down or earn more and have to pay more, all for a long period of time. This can take its toll.
My honest belief is that it’s better to have a plan and work toward it step by step, month by month, then to be beholden to the debt monster one minute more than you have to be, though I realize that is an easy thing to say when I don’t owe six figures worth of debt.
That’s where a call with our loan specialists can make a real difference. They can help you determine the best course of action with the least amount of stress so you walk away with a long-term plan for meaningful debt reduction.
Is There a Way Out?
Of course there is. Is the way out from under student loan debt easy? No one said it is. Will it require work? Absolutely. Is there such a thing as free money? No, there really isn’t and student loan forgiveness really isn’t free.
But, there are ways to be smart about your approach to paying off your debt. There are ways to maximize available programs to work toward a viable end goal. There are choices that you can make today that will have a positive effect on your future.
Just like earning your degree, though, the way out is not necessarily an easy one. Earning the degree was hard work. Paying back the money is also hard work. Taking care of this debt is ultimately your responsibility.
So what do you do? Start by signing up for a student loan consult with Student Loan Planner. Your consultant can look at your personal situation to determine how to leverage existing programs and formulate a plan for you.
Work to learn about the financial principles surrounding debt, such as compounding interest, loan repayment terms, and credit scores. This way you are an educated financial consumer as you work toward the repayment of your student loans.
You will be in a better position to teach your children and others about student loan debt to help them avoid being in the position of having crippling loans to repay in the future.
Tackling student loan debt requires taking the long view, but luckily, there really is light at the end of that tunnel.
Is student loan forgiveness one of your options for debt repayment? Why or why not?