At a Glance
Dealing with student loan debt can be a massive burden. Some graduates leave college with over $100,000 in debt, and it seems like it’ll take a lifetime (or several) to pay it off. While we can’t tackle the issue of rising college tuition, we can provide information on programs that have the potential to forgive college loan debt in certain circumstances.
Read on for more details about these forgiveness programs, what it takes to qualify, and potential downsides to choosing to pursue a student loan debt forgiveness plan:
What is student loan debt forgiveness?
There are a few words that jump out if you’ve taken the time to look into debt forgiveness: forgiveness, cancellation, and discharge. While seemingly similar concepts, they each mean something different as it relates to the alleviation of loan debt.
Forgiveness means that after a certain period, the remaining balance of a loan will be forgiven and will not require further payments.
Cancellation is extremely similar to forgiveness. It is used mostly concerning Perkins loans (low-interest, need-based federal loans).2 When a cancellation occurs, all remaining loan debt will not require further payments.
Discharge is a little different from forgiveness and cancellation in that it is brought about by an extenuating circumstance, such as a school closure or major disability.
Each of these options are available under a particular set of circumstances for federal loans. Unfortunately, if you’ve taken out private student loans, repayment in full is currently the only option available.
Common types of student debt forgiveness programs
Public Service Loan Forgiveness
As the name describes, the Public Service Loan Forgiveness program (PSLF) requires you to perform a set amount of time in a public service occupation for a qualifying employer. There are many qualifying employers, such as the federal government and not-for-profit organizations.
In addition to working full-time for a qualifying organization, you must also make 120 qualifying payments before your loan forgiveness kicks in.3 Given these parameters, it will be a minimum of ten years before you see any returns from this program.
The PSLF program is only available for direct loans. This means other loan types may need to be consolidated into the direct loan program to be eligible.
Teacher loan forgiveness
The teacher loan forgiveness program requires that a qualified teacher perform work full-time for five years. Qualifying work must be in a low-income school or educational service agency. Teachers could see a forgiveness amount up to $17,500 for certain loans, including direct subsidized and unsubsidized loans and Federal Stafford Loans.4 Given the many stipulations on this plan, including the requirements to be a qualified teacher and work at a low-income school, it’s best to consult government resources to confirm eligibility.
Forgiveness for income-based repayment plans
The first step to forgiveness under this plan is to enroll in an income-based repayment plan. These types of programs enable people with eligible federal student loans to make payments based on income and family size, as opposed to a standard minimum payment amount. With these repayment plans, the remaining balance on your loan is often forgiven after 20 to 25 years of repayment, depending on the plan.
Most income-based repayment plans require you to pay a certain percentage, often 10-15% of discretionary income.5 You can use a tool provided by the government to see if an income-based repayment plan may be a good option.
Perkins loan cancellation
Certain types of professions-like teachers, firefighters, and police officers, among others-may be eligible to seek out Perkins Loan cancellation. Your loan must be a Perkins loan to qualify. The standard rate of cancellation in this program is up to 100% after five years. Larger amounts may be canceled with each consecutive year of service. Check with your school or Perkins loan servicer for more information and how to enroll.
Common types of loan discharge
As discussed above, student loan discharge differs from forgiveness in that it requires a more rare, extenuating circumstance. Some of the major circumstances for discharge are outlined below. Consult your loan provider if you believe you’re eligible for loan discharge under a qualifying circumstance.
- Closed school discharge (if your school closes during enrollment or shortly after withdrawal)
- Disability discharge (if you experience total/permanent disability you may be eligible)
- Discharge due to death (although I’m not sure anyone really wants to take this route)
Does student debt forgiveness impact your credit score?
For many people, student loans can reflect positively on your credit score. They are more stable, lower-interest, long-term loans that creditors like to see. Assuming that you’ve been making on-time payments, loan forgiveness should not negatively impact your credit score any more than paying off the loan outright. Missed payments and loan delinquency (or default) are where you run a high risk of hurting your score. So, whatever you do, be sure to make timely payments, even if enrolled in a forgiveness plan.
Could college debt forgiveness be a bad idea?
If you qualify, student loan forgiveness sounds like a dream. A few years of steady repayment and service means you’re on the path to a student loan-free future! But is it ever a bad idea to pursue a loan forgiveness program?
There are a few circumstances where seeking loan forgiveness might be a bit more complicated than it seems. Reconsider loan forgiveness if:
- You’re stuck working a career you don’t love. Things tend to seem a bit rosier fresh out of college. The reality is that by year two or three of a public service or teaching job, you may find that you don’t want to continue down that path. This leaves you with the dilemma of staying in your job solely to pursue loan forgiveness vs. make a career change and losing that option.
- You can pay off your student loan(s) in a shorter time frame. Since most loan forgiveness programs take many years to kick in (5, 10, or even 20), you may be able to pay off loans in less time by making regular payments. Calculate how quickly you can pay off loans based on what you can afford to put toward them each month.
- There are potential tax implications. This mainly applies to people on the income-based repayment plan. The amount of your loan that’s forgiven is considered taxable income. So, you may face a huge tax spike on the 20 or 25th year, depending on your plan.
If you’re contemplating a college debt forgiveness program, remember that no program is a magic bullet solution. Loans are still borrowed money and need to be repaid one way or another. But if you are willing to put in the time, the right option could set you up for a debt-free future.