Student loan forgiveness is really confusing. Your loan servicer stinks, your advisor probably doesn’t know enough about student loans to give you good advice, and you’re struggling to figure out what to do when you’re busy as heck with a full-time job and other life responsibilities.
Going for student loan forgiveness is not the right strategy for everyone, but pretty much everybody should study the numbers to see if it is. These are the best 50 tips you’re going to find anywhere. If you’d like me to help figure out if this strategy is for you, check out my 1 on 1 consult service or use the contact button below.
Almost nobody truly understands student loan forgiveness. Sadly, there are a bunch of scam student loan companies out there that tout “payments as low as $0 a month!” and “Obama student loan forgiveness!”
Basically, nobody out there is giving ninja level advice on student loan forgiveness. If you owe more than $50,000 in student loans, this page is going to save you thousands of dollars and a lot of hours banging your head against the wall trying to get good info.
Student Loan Forgiveness: Often the Cheapest Way to Pay Back Your Debt
I’m going to focus this article on folks in the private sector who aren’t working for tax-free loan forgiveness in 10 years under Public Service Loan Forgiveness. If you’re looking for help on PSLF, check out these 40 tips here.
So assuming you owe a bunch of student loan debt, why would you consider student loan forgiveness? The main reason is it could allow you to pay way less than any other repayment option for your loans.
We’ll explain how to work towards student loan forgiveness, what the concept really means, how to save for retirement and health needs, how to prepare for the student loan tax bomb, how to hedge against future repeal efforts, and when you should ditch forgiveness entirely in favor of refinancing instead.
How Do You Get Student Loan Forgiveness?
1) Make 20-25 years of payments on an income-based student loan repayment program.
There are four income-based student loan repayment options that you can choose from. They are Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income Based Repayment (IBR), and Income Contingent Repayment (ICR). If you make payments on one of these plans for 20-25 years, at the end of that period any remaining balance would be subject to taxed forgiveness.
2) You probably don’t want to use Income Based Repayment (IBR)
I rarely find a situation in the hundreds of clients I’ve advised where using Income-Based Repayment (IBR) is the right long-term strategy. You have to pay 15% of your income on IBR, and why pay more than you have to if you could do PAYE or REPAYE and pay 10%?
3) You definitely don’t want to use Income Contingent Repayment (ICR)
If IBR is lousy at 15% of your income, then ICR is downright noxious at 20%. If you’ve been advised to sign up for ICR, most likely you’re being advised by some fly by night law firm in South Florida pretending to be an expert in student loan repayment (real example).
4) Use PAYE if you want forgiveness the fastest
Pay As You Earn (PAYE) allows you to make 20 years of payments and have the loans forgiven at the end of it. The downside? PAYE has no interest subsidies, so you’ll be dealing with a monster balance at the end of the 20 years. That’s OK if you plan on paying the large tax penalty you’ll owe. Generally, PAYE shows up the best when there’s a huge difference in earnings at the beginning of your career compared with the end.
5) Use REPAYE is you want the slowest growing loan balance
Revised Pay As You Earn gives generous interest subsidies if you’re earning a comparatively low income. In fact, the government picks up the tab for half the interest not covered by your payments under REPAYE. So if your income is steady Eddie and you prefer to watch your loan balance grow slower, then REPAYE can be an excellent option for student loan forgiveness.
What are the Tax Consequences of Student Loan Forgiveness?
6. It’s a taxable benefit
You better plan on owing six figures to the IRS in a lump sum at the end of your 20-25 year repayment schedule. If you don’t, you could be in for a rude awakening. If you’re in the private sector, then loan forgiveness is a taxable benefit.
7. The student loan tax bomb you’ll owe will probably be six figures
If you’re going for student loan forgiveness, you most likely owe a lot, meaning your tax bomb could easily be $100,000+. Remember that the IRS adds the forgiven amount to your income all at once. Since that would push you into a higher marginal bracket, you could easily owe six figures.
8. You need to save for this tax penalty over time
The only way to save up enough to cut a huge check to the IRS in 20-25 years is to prepare over time. You can put $200-$1000 a month into a taxable brokerage account at a place like Vanguard (if you want to manage your own money) or Wealthfront (if you want it managed for you).
9. Use index funds to save for student loan forgiveness taxes
The money you’ll need for the student loan forgiveness tax bomb needs to be accessible. That means the money has to be in a taxable account. If you use high turnover strategies like active mutual funds, you’ll lose a lot of your return over time. The way I suggest to save for this liability is by using low-cost index mutual funds and ETFs. Start out aggressive with a high stock allocation then gradually include more tax-free municipal bond funds as the date of forgiveness gets closer.
10. If you’re broke when you owe the tax bill, the IRS student loan forgiveness might be a thing, but don’t count on it!
I don’t want ANYONE planning on this, but it is likely that with the magnitude of debt that exists, the IRS will be forced to offer some sort of relief when the billions of dollars in tax bills start coming due. Since the average American has less than $1,000 in emergency savings, many people will not be able to pay.
If you’re broke in 20-25 years, IRS student loan forgiveness due to insolvency will probably apply. However, if you’re broke at that time, then you’re going to be working basically til your mid-70s. Plan on owing the tax bill, and if they bail out student loans then you get to keep the money.
Minimize Student Loan Repayment Cost
11. Your Adjusted Gross Income (AGI) matters
What’s AGI? It’s basically your taxable income. Student loan servicers like Navient, Fedloan, Great Lakes, and Nelnet all use it to determine your required monthly payment. If AGI is high, you pay more. If it’s lower, then you pay less. When going for student loan forgiveness, you want to pay less and thus AGI matters.
12. Max pre-tax retirement accounts
The single best way to minimize your AGI is saving for retirement. Roth accounts don’t help. Only pre-tax traditional retirement accounts actually lower your income. For most people, that means maximizing your 401k at $18,000 per year.
13. Think twice before choosing the Roth option
There’s plenty of hype surrounding the Roth IRA and 401k. If you live in a no income tax state, earn a low income, and have no student debt, then there should be. Others tout the Roth because it allows you to save more in terms of future account value. While that’s true, the vast majority of people do not max their retirement accounts and enter retirement with too little saved. That means the value of the tax break now plus the lower student loan payment makes the decision easier to choose the pre-tax option.
14. Max health savings accounts
Many of you will have access to a high deductible health insurance plan. Often, you can pair that with a health savings account (HSA). An HSA lowers your taxable income, and you can use it to cover your deductible tax-free. Moreover, an HSA is an excellent way to save for future health expenses in retirement as withdrawals are tax-free if used for health-related purchases.
15. Apply for repayment when your income is low
If you have an opportunity to certify your income for the coming year when you’re not making a big salary, then jump on it. You’ll get low payments for a full year and if your income increases you’ll get a delay in the jump in payments. Low payments increase the value of the loan forgiveness you receive at the end of the 20-25 year repayment period.
When is Student Loan Forgiveness Probably not a Good Idea?
16. If you’d rather pay it off to not worry about student loans anymore
Everybody deals with debt in a different way. For some, having debt is sickening. If you’re truly bothered by the idea of trusting your financial future to a government student loan forgiveness program, then refinancing will make life simple. Pay the loans back as fast as you can while cutting your interest rate. Make sure you pick up a cashback refinancing bonus too.
17. When your household student debt to income ratio is below 1.5
Say your work at a private employer. You owe $150,000 in student debt and you make $80,000. Your spouse earns $40,000 with no debt, and you’ve got a couple kids. The combined debt to income ratio in this case is $150,000/($80,000+$40,000)= 1.25. Both of you will receive raises over time, and thus going for student loan forgiveness will just result in you paying back the debt in full at a high-interest rate over a long period.
One of the most common mistakes I see is families who think they’ll get a big forgiveness benefit when mathematically there’s no such thing coming. In this scenario, the borrower would’ve been better off just refinancing and paying off the debt.
18. If you’re expecting large increases in your compensation in the future
Maybe you graduated with a salary of $120,000 with a debt of $300,000. You’re single, and your debt to income ratio is comfortably below 2 to 1. While REPAYE or PAYE could make sense short term, long term your strategy depends upon how high your income will rise. Professionals who know their income will be increasing rapidly could think they’re set for student loan forgiveness only to find out later once their payments soar that refinancing might have been a better option.
19. When your loan servicer is wasting a huge amount of your time, and your monthly student loan payments are significant
Maybe you run the numbers with my student loan calculator and decide that student loan forgiveness still offers some projected savings. However, is the amount of money you stand to gain worth the time you’ll spend dealing with federal student loan servicers?
I’ve advised countless clients who’ve spent hours on the phone with companies like FedLoan Servicing or Navient getting the runaround. If you could save a ton of money, then dealing with their awful customer service might be worth it. Perhaps the savings are marginal. In that case, I would just refinance and get rid of the debt as quickly as you can. If the monthly payments are similar on the federal and income-driven plans, you’ll likely save a lot of headaches.
How to Protect Against Repeal of Student Loan Forgiveness
20. Examine the alternatives to the proposed Trump plan
One of the only things I feel confident in telling you about the future of student loan policy is that there will be an option to pay based on your income. How do I know this? There’s $1.4 trillion in student loans and we’d suffer a financial crisis if everyone had to pay it back. Default rates are probably a third of what they would be without income driven payment options.
Before you abandon student loan forgiveness because you think everything will be repealed, know what the proposals are. Trump wants to replace everything with a 30-year repayment plan at 12.5% of income for graduate professionals. If you owe a lot, then even that plan makes sense when compared to the high monthly payment you’d make under refinancing.
21. Save more than you need in the tax side account
To adequately prepare for long-term forgiveness, you need to save for the associated tax penalties. One way to “overprepare” is simply to save more than you think you need. If the numbers say to save $1,000 a month, save $3,000 a month in your taxable brokerage account.
22. If student loan forgiveness rules ever change for the worse, make a big lump sum payment then refinance
If forgiveness ever went away, you’d want to make a big payment to reduce the total loan amount. That reduces the monthly payment in a refinancing since the amortization schedule is based on a smaller total dollar figure.
23. Have an emergency fund with at least six months’ expenses
A lot of the borrowers I work with have significant credit card debt. Any policy change requiring higher payments could put them in a world of trouble. That’s why everyone should have at least six months’ worth of expenses sitting in the bank in a savings or checking account to cover unexpected emergencies. The folks most worried about the repeal of student loan forgiveness have a very little cushion to protect them.
24. Focus on building a secure financial life outside of your student debt through conservative spending
If you have two leased cars, have a mortgage three times your joint income, and go out to eat often, then you’re in way more danger if student loan forgiveness goes away. The habits that make you wealthy are similar if you have $1,000,000 of student loans or $0. Spend conservatively and if something happens to the federal student loan programs, you’ll be able to devote a lot of discretionary income to payments.
Student Loan Forgiveness Scams: How to Identify and Avoid Them
25. Never pay another company that promises to make payments on your student loans
This is the most damaging student loan forgiveness scam that I see. A company tells you not to pay your loan servicer and to stop communicating with them because they can deal with the loan servicer directly. They’ll also ask you to make your loan payment out to their company, which they claim will be forwarded to your debt. In reality, they steal every dollar of what you give them.
26. Almost no one can help you settle your debt because of student loan bankruptcy rules
Some folks claim they can reduce your student loan burden if you hire them to negotiate a settlement. In rare cases, that might be true. However, the most common thing I see is a credit card bankruptcy shop that does not understand student loans asks you to pay them hundreds a month while they attempt to settle the student debt.
Unfortunately, student debt has insanely high hurdles to settle anything. Many companies collect almost the entire amount a borrower defaults on because of the unique protections afforded to student loan lenders in federal law. Anyone who wants to help you settle your student loans most likely just wants to rack up monthly fees.
27. No such thing as Obama student loan forgiveness, Trump student loan forgiveness, or the Student Loan Forgiveness Act
If you see that kind of language on a website, the folks running that operation in my view want to deliberately mislead you. The most common trick is to make you think you’re missing out on some secret government benefit that only they can obtain for you.
They’ll list a phone number to call all over the website and their representatives will try to sign you up for a consolidation service that could run anywhere from $500 to $1,000 or more. If you want help consolidating your federal loans, call the Department of Education hotline at 1-800-557-7392.
28. Any company that calls itself a “document preparation service” is probably a waste of your money
I must be careful here because technically these places are not scams but they might as well be in my opinion. They sneakily list in the fine print on their website that their company is a “document preparation service” and “in no way is affiliated with the Department of Education.”
While that kind of language makes the lawyers happy, it should be a signal to you that all the company does is charge you money to send in income driven or consolidation forms that you can easily do for free.
Marriage, Family, and Student Loan Forgiveness
29. When you get married, your student loans affect your spouse no matter what
I hear a lot of married couples express the desire to “not have my loans impact my wife/husband.” Here’s the truth, your loans always impact your spouse’s finances. If you file jointly, then you’ll pay more under income-driven repayment. Filing taxes separately causes your IRS bill to be higher.
Divorce when there’s student debt probably impacts your cut of the marital assets. While there are exceptions, the couples who successfully tackle student debt usually ask the question, “how do we best tackle this together?”
30. Filing taxes separately is usually not a good idea
Many borrowers going for forgiveness file taxes separately to lower their monthly payment. Often, the tax penalties of doing this don’t get included in the equation. If the difference in your incomes is more than $20,000 and there are kids in the picture, filing taxes separately long term likely comes out to a wash at best.
31. Your loan servicer will consider your spouse’s income in the year following your marriage
When does your spouse’s income start impacting your student loan payment? You probably have a month each year when you send in your income tax returns to set your monthly payment for the year ahead. They’ll use the most recent available filing to do this. So if you get married in December 2017 and you certify in November, your spouse’s income would increase your student loan payment starting November 2018.
32. Large families make student loan forgiveness look more attractive
The income-driven payment calculation depends on your family size. They take your taxable income and deduct 150% of the Federal Poverty Line then multiply by 10% to 20% depending on the plan. The larger your family, the lower your monthly student loan payment. Hence, if you have a lot of children, student loan forgiveness in general looks more mathematically appealing because of the lower monthly payments.
33. Student loan forgiveness depends on household income and career goals
Maybe one spouse plans on reducing hours when kids come around. Perhaps both people in the relationship want max career growth and plan on hitting a high income in their field. To know if loan forgiveness is a good long-term strategy, ask what the future holds. If it involves a lot of income, then that tips the scales in favor of refinancing.
34. If you both have loans, use the same repayment plan
Maybe one spouse qualifies for PAYE and one doesn’t. Generally, you want each partner to be on the same plan so the tax bomb hits in the same year and planning can be done together. Having two different forgiveness dates could cause the couple overall to pay significantly more than would have paid otherwise.
What About Private Loan Forgiveness?
35. Private student loan forgiveness is not really a thing, so pay ‘em back
Yes, there are sporadic forgiveness programs that also apply to private student loans, but while there are awesome federal loan forgiveness programs, they don’t really exist for private student loans. If you have debt with a private lender, just figure out a way to cut back and throw the money at the debt to get rid of it.
36. Private student loan settlements are like 95 cents on the dollar, so don’t default
In the mid-2000’s, lenders convinced Congress to make student loans almost impossible to discharge in bankruptcy. Only in extraordinary circumstances can you get your principal reduced with defaulted private student loan debt. All you’ll accomplish by not paying is add a bunch of penalties and interest to deal with later.
37. You can usually refinance private student loans over 4% interest, but you might need a cosigner
Maybe you’re going for federal loan forgiveness, but your private loans can’t qualify. Hence, you’ll need two different strategies for each. Even folks who owe a bunch can often receive a better deal on their interest rate. Sometimes all you need is a family member willing to cosign for you so you can extinguish the private debt quickly. In my experience, private student debt always gives borrowers the most trouble because the payments don’t relate to how much income you make.
How to Find State and Occupation Specific Student Loan Forgiveness Programs
38. Search listings with your student professional organization
For example, ASDA has an excellent list of state-specific loan forgiveness programs for dentists who work in rural areas or fulfill specific needs. Other professions have these lists too. The best way to find them is to check out their websites.
39. Literally Google your state + loan forgiveness
You could find something like Oklahoma’s $25,000 a year health provider program or Iowa’s rural health care program.
Forbearance, Deferment, and Student Loan Forgiveness
40. Forbearance is the worst
No credit towards student loan forgiveness, all interest for all loan types accrues interest, and your loan balance continues to balloon. The only case I’ve ever seen a forbearance used rationally was in the case of a borrower who attended a fraudulent school who was waiting to hear if the loans would be forgiven or not.
41. Deferment is also usually lousy
While certain kinds of subsidized interest loans do not accrue interest during deferment, they also don’t accrue interest during the first three years of repayment on REPAYE, IBR, and PAYE. It’s generally always better to get your loans onto an income-driven repayment program instead as soon as you can.
42. If you know forgiveness is the right path for you, take whatever steps you can to start paying on an income-driven plan asap
There’s no point in delaying the inevitable. Furthermore, if you just lost your job or are experiencing some form of economic hardship you can generally call your loan servicer and get your payment adjusted so that it aligns with your income. In almost any scenario, your federal student loan payments should be affordable.
How to Deal with Student Loan Servicers
43. Proactively communicate with them
To understand why most student loan servicers stink, just know how they’re paid. They get a flat fee for each borrower they service regardless if they deliver A+ or F- help. When you’ve got a company that’s completely insulated from how their customers feel, they don’t have to give you know what. I find the best way to deal with loan servicers is to always be calling. Yes, it wastes time, but you don’t want to wait around for their useless response when you get placed into an administrative forbearance for six months (common story).
44. When in doubt, call back
Often, you’ll get advice from one of the call center reps at a FedLoan or Navient that sounds kind of off. That’s because it probably is. I have a “call twice” rule of thumb that if you hear something from a loan servicer and it sounds weird, call back and get someone different and see if they say the same thing. Quality control with student loans is seemingly non-existent, but sometimes you get an unusually helpful person on the line. It’s luck of the draw.
45. Submit documentation that’s most helpful to you while being honest
There are many ways to verify your income when submitting an income-driven plan. Obviously, if you want loan forgiveness then you want the lowest payment possible. Submit the documentation that’s most beneficial to you. Do not read that to mean be dishonest. If you have the choice of using paystubs or last year’s income tax returns to figure your monthly payment, pick the one that works in your favor.
Putting Federal Student Loan Forgiveness into Perspective
46. You’re not in as much trouble as you think
If the lion’s share of your student loans resides with the federal system, you have options. Yes, the sum can be staggering and make you not want to open your loan statements. The reality is that if you set up a plan you can achieve financial success long term. The political reality is that federal student loan forgiveness programs will protect you from ending up on the street.
47. If this is the worst financial problem you have to deal with in life, you’re lucky
Talking with hundreds of clients with student loans puts things in perspective because sometimes the student debt is low on the worry list. The premature death of a partner, serious illness, and mental health struggles are all things that can hurt a family a lot more than significant student debt. I know debt is difficult to deal with, but keep a positive outlook and count your blessings. At least there’s something you can always do with student debt if it’s a problem.
48. Learn what the worst-case scenario is and prepare
Once you realize that in a total disastrous situation you would owe $3,000 a month, you’re empowered. If your budget can handle that, then you do not need to worry about student debt at all. Tackle debt head on and you can remove it from the worry list.
49. But then know the best-case scenario: the student loan bailout
For those committed to student loan forgiveness as a strategy, realize you might benefit from a future federal student loan bailout. Let’s be real, how many of the people you went to school with could cut a check to the IRS for $100,000? Given that reality, I expect the widespread tax bomb defaults in 20 years will cause mass political pressure to make forgiven student debt a tax-free benefit. Just prepare under the current rules and party with some of the windfalls if the bailout happens.
50. Build wealth and save more than you have to, even with huge student loan balances
For 90% of my clients, they are not saving enough. Even if you have student debt larger than most people’s mortgage, see if you can put away $50 more a month in retirement and $50 more in a taxable brokerage account. Then take little steps to increase that. Live below your means, grow wealth, and have a rock-solid student loan plan.
Student Loan Relief Happens When You Get a Long Term Plan in Place
I hope you use these tips and put together an awesome way to approach student debt if you owe a crazy high amount. That said, not everybody wants to spend their free time becoming a student loan expert.
If you’ve got a ton of debt and aren’t confident in what to do, I can solve that uncertainty for you with my flat fee student loan plan service.
A goal without a plan is a wish. Don’t wish for student loan forgiveness. Plan for it.
Just for fun, here’s a video I made with an example of how student loan forgiveness could save you a lot of money. You can get your own copy of the calculator in the video by entering your email below.