What Is Student Loan Forgiveness?

What Is Student Loan Forgiveness?

Student loan forgiveness releases borrowers from their obligation to repay part or all of their federal student loan debt. These borrowers have taken out loans to pay for their post-secondary education. Forgiveness is available for some types of loans, but eligibility is limited to borrowers in certain public service, educational, or military professions.

A Biden administration proposal for widespread loan forgiveness is on hold while court challenges are decided.

How Student Loan Forgiveness Works

Loan forgiveness means a debt (or part of a debt) is eliminated or forgiven in finance parlance—relieving the borrower of the obligation to repay it. Although any student loan can theoretically be forgiven, student loan forgiveness generally applies to U.S. government-issued or government-backed loans.

In other words, the widely publicized forgiveness programs do not apply to any privately issued loans, like those from a commercial bank or lenders like Sallie Mae—even if those loans are earmarked for students.

For borrowers with eligible loans, forgiveness may be an option. Individuals who want their loans forgiven must apply and may have to continue making payments until their application is approved.

The highly publicized collapse of several for-profit colleges and the pandemic-induced 2020 economic crisis intensified longstanding concerns about the mounting burden of student debt. Broad loan forgiveness for all borrowers, not just those who work in public service, participate in a repayment plan, or have been defrauded by their college, has become a widely debated political issue.

While many borrowers would love to shed their student debt, few actually get the chance to do so given the current strict eligibility rules. Requirements vary with the type of loan, but most offer forgiveness only for those employed in certain public service occupations. These include teachers, government employees, some nonprofit employees, and members of the military and AmeriCorps.

And not all federal loans are eligible (though that’s temporarily changing—see “A 2021 Temporary Revamp for PSLF” below). Student loans eligible for forgiveness are primarily direct loans (also sometimes called Stafford loans), Perkins loans, and, for certain special groups such as teachers, Federal Family Education Loans (FFELs). There are also repayment plans offered to student loan borrowers that include the discharge or forgiveness of some of their debt.

Types of Student Loan Forgiveness

Public Service Loan Forgiveness (PSLF)

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

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 (120 payments overall).

Potentially eligible positions include those in nursing, government, police and fire departments, and social work. Only payments made after Oct. 1, 2007, qualify for the purposes of determining 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 FFEL Program or the now-defunct Perkins Loan Program, you are allowed to consolidate those debts into a direct consolidation loan. The new consolidated loan is then eligible for the PSLF mentioned earlier.

A 2021 Temporary Revamp for PSLF

Under regular PSLF rules, only payments made on the combined loan counted toward the 120-payment minimum; earlier payments made on the old loans weren’t considered. Also, you had to be enrolled in one of the government’s four income-driven repayment plans (see below).

However, on Oct. 6, 2021, the U.S. Department of Education announced considerable relaxation of program restrictions. For a limited period that lasted until Oct. 31, 2022, borrowers were able to receive credit for past payments made on loans that otherwise would not qualify for PSLF (like those FFELs or Perkins Loans) to hit that 120-payments mark. More payments qualified even if they weren’t in full or were tardy. Also, payments made under any repayment plan counted, not just income-contingent ones.

You still had have to have direct loans or had to have applied to combine them into direct consolidation loans by the Oct. 31, 2022 deadline. Of course, the rule changes also apply to those already in the PSLF program.

Applying for Forgiveness 

To apply for PSLF, both you and your employer need to complete and file the program’s Public Service Loan Forgiveness (PSLF) & Temporary Expanded PSLF (TEPSLF) Certification & Application (PSLF form). First, consolidate your FFEL Program loans and Perkins Loans into a Direct Consolidation Loan (you had to have by Oct. 31, 2022, to take advantage of the temporary waivers. If you consolidated loans after that date, you cannot receive credit for payments under the limited-time period). After the consolidation is complete, you must then submit a PSLF form to your loan servicer.

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, 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 requires 20 or 25 years of qualifying payments.
• Income-Contingent Repayment (ICR). 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 requires 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 requires 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 Program loan, borrower defense originally involved the cancellation of all of your current federal student loan debt if you could demonstrate that you had been defrauded or substantially deceived by the college you attended. Implemented during the Obama administration, borrower defense applies mainly to private, for-profit schools that engage in dubious practices.

During the Trump administration, however, then-Education Secretary Betsy DeVos allegedly attempted to dismantle the program by 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, the Department of Education announced in March 2021 that it would rescind “the formula for calculating partial relief” and instead forgive the student loans in borrower defense applications entirely and promptly.

To have your loans discharged under the borrower defense program, you must 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.

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 2022–2023 school year, this amounts to $6,895.
• Army National Guard: The Army National Guard’s Student Loan Repayment Program can help you earn up to $50,000 toward 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 FFEL Program loans after five consecutive years of service. The higher amount is for certain math, science, and special education 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.

Student Loan Forgiveness vs. Student Loan Discharge

Although their end results are similar, student loan forgiveness is not quite the same as student loan discharge. Loan forgiveness (also known as cancellation) usually occurs because you're no longer required to make payments because you're in a certain government or nonprofit job.

Loan discharge often occurs when the borrower declares bankruptcy, dies, or becomes permanently disabled. A discharge can also happen in cases of borrower defense where the educational institution is guilty of fraud or misleading a student in a meaningful way.

Drawbacks of Student Loan Forgiveness and Repayment Plans

Student loan forgiveness terms are subject to change with the shifting political winds. So, 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.

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 says. “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,” says Reyna Gobel, author of Graduation Debt: How to Manage Student Loans and Live Your Life.  Even if you succeed in lowering monthly payments, don’t go on a spending spree with the newly available funds, Gobel 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.” 

The Bottom Line

All is not perfect with forgiveness plans. 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 by getting a job with a higher 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 Internal Revenue Service (IRS) may consider the forgiven debt to be income, so you could have to pay tax on that amount. Fortunately, this won’t be a problem for the next few years: Under the American Rescue Plan Act of 2021, any forgiven student loan debt won’t be considered taxable income for the 2021–2025 tax years.

If you choose to participate in any loan forgiveness program, be sure to obtain written verification of the amount and terms of the loan forgiveness.