With student loan figures soaring, debt-saddled students and graduates are desperate for any strategy that may help them escape their burden. For many, the prospect of debt forgiveness may seem like a dream come true. In reality, only some borrowers may be eligible for forgiveness – and their window of opportunity may be closing.
Earning Debt Forgiveness
Student loan forgiveness can be earned in two ways: by working in public service or by making payments through income-contingent payment plans for a (long) period of time. Each has its own conditions, requirements and limitations. Neither route is quick or easy.
Still, borrowers have rushed to get on board. According to figures released by the Department of Education, there are currently more than 2.2 million Americans enrolled in income-based repayment plans that offer a chance of forgiveness. These borrowers account for a total outstanding debt of more than $108 billion.
The surge in enrollments can likely be attributed to the two-pronged appeal: the possibility of lower monthly payments now, plus the chance for balances to be forgiven later.
Experts and lawmakers fear there might now be an unintended consequence of these plans, in that borrowers will take forgiveness for granted and intentionally incur more debt than they can afford to repay. At the same time, there’s the worry that colleges will take advantage of this mindset and charge students more or coerce them to take on debt by promoting these forgiveness programs.
In an apparent attempt to limit the potential financial fallout, the President proposed a cap of $57,500 in total forgiveness per borrower.
How Public Service Forgiveness Works
In order to get some debt forgiven under the public service program, you must first make 120 qualifying payments (meaning, required payments made on time). These payments must be made while you are working for a qualified employer – generally, a government organization or a non-profit with tax-exempt status. Only payments made after October 1, 2007, qualify towards earning eligibility so borrowers won't reach the 120-payment milestone to qualify for forgiveness until 2017.
Other Debt-Forgiveness Programs
If you aren’t working in a public service position, you may still be able to get some of your student debt forgiven – but it will take longer. Federal income-based repayment plans allow for some debt forgiveness after a minimum of 20 years (terms and conditions vary by program).
Which Loans Are Eligible?
Only direct loans made by the federal government are eligible for forgiveness. If you have other federal loans, you may be able to consolidate them all into one Direct Consolidation Loan that would make you eligible. Non-federal loans (those handled by private lenders and loan companies) aren’t part of this program.
Finding a Plan
All federal repayment plans allow for eligibility for public service forgiveness. The income-based repayment plans also include forgiveness for borrowers not in the public sector after a certain period of time. These plans include:
- Income-Based Repayment (IBR): Maximum monthly payments will be 15% of discretionary income. Forgiveness eligibility after 25 years of qualifying payments.
- Income-Contingent Repayment: Payments are recalculated each year based on gross income, family size and federal loan balance. Forgiveness eligibility after 25 years of qualifying payments.
- Pay as You Earn Repayment (PAYER): Maximum monthly payments will be 10% of discretionary income. Forgiveness eligibility after 20 years of qualifying payment.
How to Enroll
Your student loan servicer handles the repayment for your federal student loans, so work with the servicer to enroll in a repayment plan or change your current plan. You can usually do this online via the company’s website. To apply for the public service forgiveness program, both you and your employer need to complete and file a specified form.
The Future of Forgiveness
As with anything related to the federal government, the terms related to student loan forgiveness are subject to change. As mentioned previously, the President is already proposing a limit to the total that can be forgiven for each person.
Mark Kantrowitz, senior vice president and publisher of Edvisors.com and author of "Filing the FAFSA," suspects it’s unlikely that this particular provision will pass. However, some changes are possible – and it’s not known how they will affect borrowers currently in repayment. “It is unclear whether or how existing borrowers will be grandfathered in,” he says. “Congress could make changes effective only for new borrowers as of July 1, 2015. So it isn’t clear whether borrowers can do anything to retain eligibility for the current version of public service loan forgiveness.”
Regardless of any changes that may be on the horizon, Kantrowitz warns borrowers against betting their financial future on the hope of debt forgiveness, especially the kind that's tied to public service. For one thing, there's a rigid time limit: “Public service loan forgiveness occurs after 10 years of full-time service. It is an all-or-nothing benefit, so borrowers who stop working before reaching the 10-year mark will get no forgiveness.”
Income-based plans can also have another downside – more interest will accrue because the repayment is stretched over a longer period of time. “Loan payments under IBR and PAYER can be negatively amortized, digging the borrower into a deeper hole,” Kantrowitz notes. “Borrowers who expect to have a significant increase in their income a few years into repayment should perhaps prefer a repayment plan like extended repayment or graduated repayment, where the monthly payment will be at least as much the new interest that accrues and the loan balance will not increase.”
Reyna Gobel, author of "CliffsNotes Graduation Debt: How to Manage Student Loans and Live Your Life, 2nd Edition," puts it more bluntly: “If you're currently racking up more debt because you expect these plans in the future: stop! You never know what will or won't exist for graduates if the law changes in the future. Ask yourself, 'Could I afford to repay this on a regular extended repayment plan?' If not, you could be getting yourself into very high debt and a difficult situation. Also, remember payments change annually based on income. When your income rises, your payment can, too.”
The Bottom Line
Student loan forgiveness might be a welcome possibility, offering some relief to student borrowers toward the end of their repayment period, but its future is uncertain. Students should be wary of incurring debt beyond their means based on the assumption that a good chunk of it will be forgiven.