How can people get rid of their student loan debt—and, specifically, when is loan forgiveness an option? We don't need another statistic to tell us how deep in student loan debt U.S. college graduates are. Total debt and average debt figures don't mean much, except to say that if the sums you owe keep you up at night, you're in good company. What really matters is finding a solution.

Key Takeaways

  • Forgiveness is the best kind of student loan debt relief, but it's hard to come by.
  • Income-driven repayment plans and Public Service Loan Forgiveness can erase people's remaining debt after many years of payments.
  • Only federal student loans can be forgiven.
  • Forgiveness can leave recipients with a big tax bill.
  • Forgiveness and forbearance sound similar, but are totally different.

Student Loan Forgiveness: Which Loans Are Eligible?

Only direct loans made by the federal government are eligible for forgiveness. Stafford loans, which were replaced by direct loans in 2010, are also eligible. If you have other federal loans, you may be able to consolidate them into one direct consolidation loan that would make you eligible. Non-federal loans (those handled by private lenders and loan companies) are not eligible for forgiveness.

In addition, borrowers with federal student loans who attended for-profit colleges and are seeking loan forgiveness because their school defrauded them or broke certain laws were dealt a setback recently. On May 29, 2020, President Trump vetoed a bipartisan resolution that would have overturned new regulations that make it much more difficult to access loan forgiveness. The new, more onerous regulations are set to go into effect on July 1, 2020.

Income-Driven Repayment Plan Forgiveness

For federal student loans, the standard repayment period is 10 years. If a 10-year repayment period makes your monthly payments unaffordable, you can enter an income-driven repayment (IDR) program. There's no cost to apply, and you can complete the paperwork yourself.

Income-driven programs stretch out payments for a term of 20 or 25 years and cap your payments at 10% to 15% of your take-home pay. After that term, assuming you've made all your qualifying payments, whatever balance is left on the loan is forgiven. Payments are based on your household income and family size and will be 10% to 20% of your discretionary income.

IDR can be a good option for people who are in low-paying fields but have high student loan debt. You must be accepted into the program and recertify your income each year.

Teacher Loan Forgiveness Program

Student loan forgiveness for teachers is neither generous nor easy to qualify for. Teachers can have up to $17,500 of their federal direct and Stafford student loans (but not PLUS or Perkins loans) forgiven by teaching for five complete and consecutive academic years at a qualifying low-income school or educational service agency. Loans that were issued before October 1, 1998, are not eligible.

You must be classified as a highly qualified teacher, which means having at least a bachelor's degree and having full state certification. Only science and math teachers at the secondary level, and special ed teachers at the elementary or secondary level, are eligible for $17,500 in forgiveness. Forgiveness is capped at $5,000 for other teachers.

You can qualify for both teacher loan forgiveness and public service loan forgiveness (see below), but you can't use the same years of service to qualify for both programs. So you'd need 15 years of teaching service to qualify for both programs, along with meeting all the specific requirements to earn each type of forgiveness.

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Public Service Loan Forgiveness (PSLF)

If you work full time for a U.S. federal, state, local, or tribal government—or a not-for-profit organization—you could be on your way to student loan forgiveness. You'll need to make 120 payments, which don't have to be consecutive, to qualify.

This option definitely isn't for the recent graduate, because it takes at least 10 years to earn. You'll need to have a federal direct loan or consolidate your federal loans into a direct loan.

This program has been plagued by problems. The government created the PSLF program in 2007, and when the first borrowers became eligible for forgiveness in 2017, a major controversy emerged. A year after the first round of borrowers gained eligibility, almost all of their applications had been denied. Many borrowers were being denied the forgiveness they had earned over technicalities. Some discovered their loan servicers had misled them about their eligibility. As of April 2020, only 2,215 borrowers had gotten their loan balances discharged under the program.

Temporary Expanded Public Service Loan Forgiveness might help you if your Public Service Loan Forgiveness application was denied. TEPSLF grants qualifying borrowers the forgiveness they were denied under PSLF, but only until the program runs out of funds.

Student Loan Forgiveness: Not the Same as Forbearance

Forgiveness eliminates your debt; forbearance postpones your payments. If you're having trouble making student loan payments, you can ask your lender for forbearance. Your lender may not give you forbearance if you don't meet eligibility requirements, such as being unemployed or having major medical expenses.

Interest on your loan will still accrue, and you can pay that interest during the forbearance period if you want. If you don't pay it, the accrued interest will be added to your principal balance once your forbearance period is up. Your new monthly payment will be slightly higher as a result, and you'll pay more interest in the long run.

The only relationship between forbearance and forgiveness is that when you're in forbearance, since you're not making payments, you're not making progress toward the payment requirements of a forgiveness program you might be participating in. 

CARES Act Automatic Federal Student Loan Forbearance

If you have a student loan owned by the U.S. Department of Education, the government has granted you automatic forbearance on this loan under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. From March 13 through September 30, 2020, no interest will accrue and you don't need to make any payments. No late fees will apply if you stop paying during this period. You'll know you have this benefit if you see a 0% interest rate when you log in to your student loan account.

Under normal circumstances, you can't make progress toward loan forgiveness during forbearance. But under the CARES Act, you can. You'll receive credit toward income-driven repayment forgiveness or public service loan forgiveness for the payments you normally would have made during this period.

Potential Pitfalls of Forgiveness

The IRS likes to tax things, and forgiven debt is no exception. Public service loan forgiveness is not taxable. But, any balance wiped out through an income-driven repayment plan can be counted as income and taxed. It's important to prepare for this eventual tax bill. Consider setting aside money in a dedicated savings account.

There may be tax obligations tied to any loan forgiveness.

The Bottom Line

The burden of student loans can be pretty overwhelming, and student loan forgiveness is not easy to earn no matter which route you pursue. It takes years and ultimately may not pay off. It puts you at the mercy of powerful student loan servicers. It subjects you to the ever-shifting political winds that seek to change forgiveness programs.

All student loan forgiveness programs come with certain conditions, requirements, and limitations. You must follow the rules to a T to qualify. If you're already in deep, forgiveness may be the most appealing way out, especially if you've made life and career choices with a reasonable expectation of getting your remaining student debt erased after years of payments. Forgiveness is not the only solution to out-of-control student loan debt, however. In dire circumstances getting student loans discharged in bankruptcy may be an option.

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.