What Is Student Loan Forgiveness

13 Jul 2020

Nearly 45 million Americans are currently weighed down by student loan debt, making this a dangerous financial burden for the country. Being unable to pay off these loans adversely affects credit scores and these young adults are unable to take out other loans or mortgages. Fortunately, there are certain circumstances that allow for some or all of this debt to be discharged or “forgiven”. 

Student loan forgiveness is essentially when a part or all of someone’s federal loan debt is alleviated. By definition, this sounds too good to be true, so of course, not everyone is eligible. Requirements will often vary with the type of loan but most forgiveness offers are associated with certain public service occupations. You can also be qualified under some repayment plans. However, there are also ways of receiving student loan forgiveness that are out of the borrower’s control. 

Circumstances That Lead To Student Loan Discharge

  • Permanent disability of the borrower
  • School closed during the time of enrollment 
  • Borrower defrauded 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
  • Death of the borrower

If you don’t fall under any of these circumstances, you can also earn forgiveness through two methods: public service employment or through an income-contingent payment plan. 

Earning Loan Forgiveness Through Public Service Employment

The Public Service Loan Forgiveness Program was created by the College Cost Reduction and Access Act of 2007 to incentivize graduates to take on careers in the public service sector. Under this program, however, loan forgiveness is only available for Direct Federal Student Loans. To be eligible, you must be a full-time employee (at least 30 hours per week) at your public service job and make 10 years of on-time payments. 

Qualifying Public Service Jobs include:

  • Any government job at the federal, state, local or tribal level
  • Non-profit organizations that are tax-exempt under Section 501(c)(3)
  • Other non-profit organizations that are not tax-exempt but provide a qualifying public service
  • Full-time AmeriCorps and Peace Corps volunteers
  • Most careers in education, law enforcement, health, public law, and veterinary medicine

To apply for Public Service Loan Forgiveness, it’s crucial that you and your employer fill out an Employment Certification Form every year to ensure your eligibility. 

Earning Loan Forgiveness Through Repayment Plans

Repayment plans are designed to assist graduates who are having trouble with student debt, past the standard ten year payment time frame. These plans are income-based and allow borrowers who aren’t employed within the public service sector to receive loan forgiveness. Not only do these plans provide the possibility of complete forgiveness later on but they also offer lower monthly payments from the get-go.  

Qualifying Repayment Plans include:

  • Income-Based Repayment Plan

    • Maximum monthly payment is 15% of discretionary income 
    • Forgiveness after 25 years
  • Income-Contingent Repayment Plan

    • Payments are recalculated yearly based on gross income, family size, and the outstanding loan balance
    • Forgiveness after 25 years 
  • Pay As You Earn Repayment Plan or Revised Pay As You Earn Repayment Plan

    • Maximum monthly payment is 10% of discretionary income
    • Forgiveness after 20 years
    • The government may even pay part of the interest on the loan

You’ll need to work with your student loan servicer in order to enrol in a repayment plan or change your current plan. 

Federal Family Education Loan or Perkins Loan

The FFEL and Perkins Loan have a separate forgiveness program since they are issued by the school rather than the federal government. To apply, you should contact the financial aid office at your academic institute and request an application. You still need to be a full-time employee at an eligible job. 

Drawbacks of Loan Forgiveness and Repayment Plans

Although the idea of your outstanding loan balance being dropped seems excellent, there are several issues to consider that make it a difficult decision. Under income-based repayment plans, since your time period is lengthened, you end up accumulating a great deal of interest. This can sometimes have a negative effect on the borrower and make it even harder for them to pay off the loan. To counter this, you may want to opt for an extended repayment or graduated repayment plan, which recalculates your monthly payment as your income increases while also accounting for added interest. In other words, your new monthly payment will always be more than the interest you owe so you aren’t negatively affected in the long run. If your income allows, this plan is definitely more ideal. 

Another thing to keep in mind is that most jobs that are eligible for forgiveness plans pay significantly less than private-sector positions. Many times, having a higher paying job will alleviate your debt burden quicker than repayment and forgiveness plans. So these plans are usually only recommended when a graduate is already employed under one of the eligible jobs and has little to no option of switching into a higher paying position. 

Bottom Line

Student Loan Forgiveness is the ability to alleviate some or all of your student debt after a certain time period. However, seeing the listed eligibility requirements and drawbacks, this isn’t easy to receive and rarely ideal. Most well-paying careers will provide you with a sufficient income to manage your debt, which is a far more practical option than forgiveness plans. With that said, if you are working for a public sector position and your income is insufficient, these programs are worth checking out. They’re made specifically for those who lack alternative options or those who willfully chose to pursue public service jobs to better our society.