What Is Student Loan Forgiveness?

Student loan forgiveness is a release from having to repay federal student loans, in full or in part, that have been borrowed to pay for a post-secondary education. Student debt has reached an all-time high in the U.S., with an estimated 43 million Americans each owing an average of nearly $40,000. Under certain circumstances, however, some of that debt may be discharged or forgiven. Here is how student loan forgiveness works.

Key Takeaways

  • Student loan forgiveness releases you from the obligation to repay part or all of your federal loan debt.
  • Only federal direct loans qualify for loan forgiveness—you can't get it for private loans.
  • Student loan forgiveness can be earned in two main ways: by working in public service or by making payments through an income-contingent payment plan for a (long) period of time.
  • Federal loans may also be discharged under circumstances beyond the borrower's control, such as disability or the closing of the college.
  • Students who feel their educational institution defrauded or seriously misled them, in violation of state law, can apply to the Department of Education for loan forgiveness under the category of "borrower defense."

How Student Loan Forgiveness Works

Student loan forgiveness releases you from the obligation to repay part or all of your federal loan debt. The prospect of seeing that debt evaporate may seem like a dream come true. In reality, though, not that many people end up being eligible. Requirements vary depending on the type of loan, but most offer forgiveness only for those employed in certain public service occupations.

There are also repayment plans that include forgiveness of some debt. Finally, there can be situations in which a loan is forgiven because the educational institution defrauded the student in some way.

$1.71 trillion

The amount of student loan debt in the U.S., according to a report by EducationData.org. The majority of that amount, over $1.56 trillion, is part of the Federal Loan Portfolio.

Student Loan Forgiveness vs. Loan Discharge

Although their end results are similar, student loan forgiveness is not quite the same as student loan discharge, which immediately stops the borrower's obligation to repay the debt. In some cases, a discharge may also entitle a borrower to receive a refund of payments previously made on a loan.

In general, federal education loans may be eligible for discharge under certain circumstances beyond the borrower’s control. Most loans can be discharged in the following situations:

  • Permanent disability or death of the borrower
  • Closure of the school during the time of study
  • Falsification of the loan qualifications by the school
  • Use of identity theft on someone else's part to secure the loan
  • Failure of the school to refund required loans to the lender

"Circumstances beyond the borrower's control" do not include things like having to drop out of college before graduating or being unable to find a job after graduation.

However, increasingly, such circumstances do include a school engaging in illegal recruiting tactics—such as guaranteeing the student a well-paid job upon graduation—or other sorts of misconduct as grounds for a loan discharge (see Borrower Defense, below).

How to Get Student Loans Forgiven

Loan relief comes in a variety of forms. Student loan forgiveness can be earned in two primary ways, with its own conditions and limitations: by working in public service or by making payments through an income-contingent payment plan for a (long) period of time. As just described, there are also student loan discharges, which may result from malfeasance on the part of the school—as has happened with for-profit educational institutions.

Public service loan forgiveness

The Public Service Loan Forgiveness Program (PSLF) is designed specifically for people who work in public service jobs, either for the government or for a nonprofit organization. You may also be able to get all or part of your loan forgiven through certain types of volunteer work, military service, or medical practice.

In order to have debt forgiven under the public service program, you must first make 120 qualifying payments (which means paying the minimum amount due on time). These payments must be made while you are working for a qualified employer—generally, a federal, state, or local government or a nonprofit organization with tax-exempt status. In effect, you qualify after 10 years on the job and 10 years of monthly payments.

Potentially eligible positions include those in nursing, government, police and fire departments, and social work. Only payments made after October 1, 2007, qualify toward earning eligibility.

Only direct loans made by the federal government (currently known as the William D. Ford Federal Direct Loan Program) are eligible for student loan forgiveness. Non-federal loans (those issued by private lenders and loan companies) aren’t part of this program.

If you do not have a William D. Ford Direct Loan and, instead, borrowed through the Federal Family Education Loan Program (FFEL) or the now-defunct Perkins Loan Program, you are allowed to consolidate those debts into a Direct Consolidation Loan. The new consolidated loan would then be eligible for public service loan forgiveness, under the same terms as those described above. Keep in mind that only payments made on the combined loan count toward the 120-payment minimum; earlier payments made on the old loans aren't considered.

The terms for student loan forgiveness are subject to change and the shifting political winds. Regardless of any changes that may be on the horizon, Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com, 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," Kantrowitz says.

To apply for the public service forgiveness program, both you and your employer need to complete and file the program's employment certification form.

Important

If you have an FFEL or Perkins Loan, you can consolidate those debts into a federal loan that is eligible for forgiveness. But only payments made after consolidation will count toward the 120-payment minimum, so do this as early as possible.

Repayment plans with loan forgiveness

If you aren’t working in a public service position, you may still be able to get a portion of your student debt forgiven—but it will take longer. Federal income-driven repayment plans, which are designed to help graduates who would have trouble making payments within the standard 10-year time frame, also allow for some debt forgiveness after a certain period.

These plans include:

  • Income-Based Repayment (IBR). Maximum monthly payments will be 10% to 15% of discretionary income. Forgiveness eligibility comes after 25 years of qualifying payments.
  • Income-Contingent Repayment. Payments are recalculated each year based on gross income, family size, and outstanding federal loan balance; generally, they're 20% of discretionary income. Forgiveness eligibility is after 25 years of qualifying payments.
  • Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). Maximum monthly payments will be 10% of discretionary income. Forgiveness eligibility is after 20 years of qualifying payments. The government may even pay part of the interest on the loan.

In addition, if you work for a federal agency, your employer may repay up to $10,000 of your loans per year, with a maximum of $60,000, through the Federal Student Loan Repayment Program.

Your student loan servicer handles the repayment of 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 at the servicer’s website.

Borrower defense

If your school misled you or engaged in other misconduct in violation of certain state laws, you may be eligible for a loan discharge, officially known as "borrower defense to loan repayment forgiveness."

Applicable to any William D. Ford Direct Loan (Direct Loan) Program loan, "borrower defense" originally involved the cancellation of all of your current federal student loan debt if you could demonstrate you had been defrauded or substantially deceived by the college you attended. Implemented during the Obama administration, borrower defense applied mainly to private, for-profit schools that engaged in dubious practices.

In June 2015, for example, the U.S. Department of Education promised debt relief to students of the Corinthian Colleges chain, which abruptly closed campuses and declared bankruptcy in the wake of federal and state investigations into its operations.

During the Trump administration, however, Secretary of Education Betsy DeVos attempted to dismantle the program: delaying claims processing, denying claims without due process, increasing the burdens of proof, or offering only partial forgiveness, calculating relief via a complex methodology that awarded applicants $0.

Under the Biden administration, in March 2021, the Department of Education announced it "will be rescinding the formula for calculating partial loan relief" and instead will forgive the student loans in borrower defense applications completely and promptly.

72,000

The approximate number of applicants the Department of Education anticipates its revisions to the borrower defense program will ultimately help to receive $1 billion worth of discharged loan money.

To have your loans discharged under the borrower defense program, you file a claim by submitting an application on the Department of Education's website, along with evidence that the school broke the law, significantly misled you, or misrepresented itself.

Drawbacks of Student Loan Forgiveness and Repayment Plans

Income-based repayment can also have a downside: More interest will accrue on your loan because the repayment is stretched over a longer period of time. "Loan payments under IBR and PAYE 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 as the new interest that accrues, and the loan balance will not increase."

"Remember, payments change annually based on income. When your income rises, your payment can, too," notes Reyna Gobel, author of "CliffsNotes Graduation Debt: How to Manage Student Loans and Live Your Life." 

Under the American Rescue Plan Act of 2021, student loan debt that is forgiven won't be included in taxable income for the tax years 2021 to 2025.

Even if you succeed in lowering monthly payments, don't go on a spending spree with the newly available funds, she adds. “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." 

All is not perfect with forgiveness plans, either. The kinds of jobs that may make you eligible for student loan forgiveness often pay significantly less than private-sector positions. You might be able to repay your loans more quickly through a job with greater earning potential, even if it doesn't qualify you for loan forgiveness.

If you do have all or part of your student loans forgiven, be aware that the IRS may consider the forgiven debt to be income, so you could have to pay tax on that amount. Fortunately, this won't be true for the next few years: Section 9675 of the American Rescue Plan of 2021 makes student loan forgiveness received from 2021 to 2025 not includable in your taxable income for those years.

If you choose to participate in any loan-forgiveness program, be sure to obtain written verification of the amount that will be forgiven and under what circumstances.

Specialized Loan Forgiveness Programs

If you work or volunteer for certain organizations, you may be eligible for additional programs that will forgive or reduce your student debt. Here are some examples:

  • AmeriCorps VISTA, AmeriCorps NCCC, or AmeriCorps State and National programs—Volunteers for these programs can receive up to the maximum Pell Grant award toward repaying qualified student loans (loans backed by the federal government) through the Segal AmeriCorps Education Award. For the 2021-2022 school year, this amounts to $6,495.
  • Army National Guard—The Army National Guard's Student Loan Repayment Program can help you earn up to $50,000 toward loans. Covered loans include Federal Direct, Perkins, and Stafford Loans.
  • Full-time teachers in low-income schools or educational service agencies—Through the Teacher Loan Forgiveness Program, teachers may be eligible for forgiveness of up to either $5,000 or $17,500 on their Federal Direct and Stafford Loans after five consecutive years of service. The higher amount is for certain math, science, and special-ed teachers. The Education Department has further details on its website.
  • Medical and nursing school graduates—Working in underserved areas can qualify doctors and nurses for student loan forgiveness under some state programs.

Federal Policy Changes Regarding Student Loans

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020 included some temporary changes to the rules on student loan repayment.

Specifically, the new rules provided for the suspension of loan payments, stopped collections on defaulted loans, and imposed a 0% interest rate on loan balances. Those rules are currently set to remain in effect at least until Sept. 30, 2021.

During the time that your monthly loan payments are suspended, those suspended payments will count toward Public Service Loan Forgiveness, just as if you had continued to make them, as long as you meet the program's other requirements.

While you are still allowed to make loan payments if you wish to, the Department of Education points out that doing so could be counterproductive. "If you make payments during the period of suspended payments, they won’t make you eligible for PSLF sooner," it explains in its official blog. "The suspended $0 payments already qualify toward your required 120 PSLF payments, so not making additional payments maximizes the amount to be forgiven."

Special Considerations

The collapse of for-profit colleges and the COVID-19 pandemic have intensified pre-existing concerns about the mounting problem of student debt. The concept of broader loan forgiveness—for all borrowers, not just those who work in public service, participate in a repayment plan, or are created by a for-profit college—is being discussed with increasing fervor in political circles.

President Biden has made several proposals, including more liberal income-driven repayment programs (dropping monthly payments down to 5% of income, granting relief for national or community service) and the outright cancellation of $10,000 in debt per borrower. Senators Chuck Schumer and Elizabeth Warren have led a Congressional group calling for canceling as much as $50,000 per loan—by executive order, if necessary.

Congress could also act to further loosen the borrower defense rules, returning them to their Obama administration standards, and enact student debt cancellation through legislation.