Student loan debt is soaring. In fact, it's considered to be the second-highest type of debt, right behind mortgages. Students were borrowing at astronomical levels in order to fund their education. In the U.S. outstanding student loan debt skyrocket to an all-time high—$1.41 trillion in 2019.
It's a grim picture for debt-saddled students and graduates, many who are desperate for any strategy that may help them escape this 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 new rules that could tighten what can be forgiven have been discussed. (See Student Loan Forgiveness: How Does it Work?)
Student Loan Forgiveness Basics
The burden of student loans can be pretty overwhelming. Many students who graduate college have to worry about paying back their loans as they try to start their professional careers while juggling their personal lives. Let's face it, it can be pretty daunting. But there is a light at the end of the tunnel—and for some, that can come in the form of student loan forgiveness.
There are several ways you can take advantage of this option. You can do so by working in the government or non-profit sector, applying for the income-based repayment plan, joining the military or working in a certain profession like teaching or nursing. Keep in mind, these come with certain conditions, requirements, and limitations, so it's a good idea to review them ahead of time. And remember, none of these options are always easy or quick.
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Public Service Forgiveness Plan
This program started in October 2007. In order to get some debt forgiven under this program, you need to be working in a public service job. The range is fairly broad, so it's not necessarily the job, but who you work for that counts. This could be for the government or a non-profit organization.
You need to make 120 payments (which don't need to be consecutive) in order to meet the eligibility requirements. This option definitely isn't for the recent graduate, because you have to have been paying your loan back for at least 120 months—or ten years—before you can qualify. Not all types of loans qualify, so you should check with the U.S. Department of Education if yours is on the list.
- Check the U.S. Department of Education's website for information on student loan forgiveness programs.
- Graduates in the military may be eligible for student debt relief programs via the Military College Loan Repayment Program (MCLRP.)
- Many student loan forgiveness programs are connected to a specific kind of profession like working in the field of education and health.
- Unfortunately, any student loan account balance wiped out through the income-based repayment plan can be considered as income by the IRS and taxed.
Income-Based Repayment Plan
This program makes you stretch out payments between 20 and 25 years and caps your payments at 10% to 15% of your take-home pay. After that term, whatever balance is left on the loan is forgiven. This is a good option for people who are in low-paying fields but will typically have higher student loan debt.
But if your income level changes, participants must notify their loan provider or services. And like the public service program, not all loans qualify, so it's a good idea to check before applying. Applications can be made through the StudentLoans.gov website. Students may be required to submit additional documents including proof of income as well as their most recent tax returns.
Military Forgiveness Program
If you're planning on joining the military, you may be pleasantly surprised. Student loans can be forgiven by as much as $65,000 through the Military College Loan Repayment Program (MCLRP.) This figure depends on the length of time you serve your contract with the military, and the level of forgiveness depends on which branch of the military you join. In order to qualify for the MCLRP, you must be a new recruit or you must reenlist. Check with the recruitment office to see which loans qualify for this program.
Forgiveness for Professionals
Certain loan forgiveness programs are tailored to help solve a labor shortage in specific fields. These include teaching and nursing. For teachers to qualify, they must be working in a participating school for at least five years. These must be consecutive years of service, so you can't take a break.
The size of forgiveness depends on the level of teaching you undertake so elementary school teachers will get a lower level of forgiveness compared to high school teachers. Loans that were issued before October 1998 do not qualify. And you must be licensed or certified to teach.
Nurses, on the other hand, qualify for as much as 60% forgiveness if they work in a qualifying area for two consecutive years. If that is extended to the third year, then the program will forgive another 25% of the student debt. The caveat is that you need to work in an area that has a very high need for trained nurses and hold a license to practice nursing.
There are other professions that qualify for loan forgiveness as well, so check with your financial aid office to see what other options are out there.
Other Forgiveness Options
The U.S. Department of Education has a list of other forgiveness programs in place for student loans. Some of these include the income-contingent repayment program. Payments are recalculated each year based on gross income, family size, and federal loan balance.
There may be tax obligations tied to any loan forgiveness.
Forgiveness eligibility after 25 years of qualifying payments. For the pay, as you earn (PAYE) repayment program, maximum monthly payments will be 10% of discretionary income. Forgiveness eligibility after 20 years of qualifying payment.
Potential Pitfalls of Forgiveness
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, and there may be tax obligations to the IRS if you receive loan forgiveness.
For example, any balance wiped out through the income-based repayment plan can be considered as income, and will be taxed. So it's important to know what you're getting into before you end up with a large, and unexpected, tax bill.
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 into one Direct Consolidation Loan that would make you eligible. Non-federal loans (those handled by private lenders and loan companies) are not part of this program.
As with anything else, it's best to read the fine print or check with your local financial aid office, your loan service provider or the education department to see whether your loan qualifies for forgiveness.
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.