Student loan forgiveness is an exemption from repaying all or part of federal student loans borrowed to fund post-secondary education. Student debt is at an all-time high in the US, with an estimated 43 million Americans each owing an average of nearly $40,000. However, in certain circumstances, part of this debt may be paid or waived. This is how student loan forgiveness works.
The central theses
- Student loan forgiveness relieves you of the obligation to repay some or all of your federal loan debt.
- Only federal direct loans qualify for lending — you can’t get them on private loans.
- Student loan forgiveness can be earned in two ways: through public service work or payments through an earnings-related payment plan for a (long) period.
- Federal loans may also be made in circumstances beyond the borrower’s control, such as B. Disability or College Closure.
- Students who feel that their educational institution has cheated or seriously misled them in violation of state law may apply to the Department of Education for loan forgiveness under the Loan Defense category.
This is how student loan forgiveness works
Student loan forgiveness relieves you of the obligation to repay some or all of your federal loan debt. The prospect of the debt disappearing may seem like a dream come true. In reality, however, not that many people qualify. Requirements vary by loan type, but most only offer forgiveness to those employed in specific public services.
There are also repayment plans that include debt relief. After all, there may be situations when a loan is given because the educational institution somehow cheated the student.
Student loan forgiveness vs. loan relief
Although their results are similar, student loan forgiveness is not quite the same as student loan relief, which immediately ends the borrower’s obligation to repay the debt. In some cases, relief may also entitle a borrower to receive a refund of payments previously made on a loan.
In general, federal education loans may be relieved in certain circumstances beyond the borrower’s control. Most loans can be repaid in the following situations:
- Permanent disability or death of the borrower
- Closure of the school during the study period
- School falsification of credit qualifications
- Use of identity theft to secure the loan
- School’s failure to repay required loans to lender
“Circumstances beyond the borrower’s control” does not include things like dropping out of college before graduation or being unable to find a job after graduation.
Increasingly, however, these circumstances include a school using illegal recruitment tactics — such as guaranteeing the student a well-paying job upon graduation — or other types of misconduct as grounds for a loan dismissal (see Defense Against Borrowers, below).
How to Get Student Loans Granted
Loan relief comes in a variety of forms. Student loan forgiveness can be acquired in two ways with their terms and restrictions: by working in the public sector or by making payments through an earnings-related payment plan for a (long) period. As just described, there are also student loan layoffs that can be the result of school misconduct – as is the case with for-profit educational institutions.
Remission of loans for the public service
The Public Service Loan Forgiveness Program (PSLF) was specifically designed for people who work in the public sector, either for the government or for a non-profit organization. You may also be able to have all or part of your loan granted through certain types of volunteer work, military service, or medical practice.
To receive public utility debt relief, you must first make 120 qualifying payments (ie, pay the minimum amount due on time). These payments must be made while you are working for a qualifying employer—usually a federal, state, or local government, or nonprofit organization with tax-exempt status. You qualify after 10 years on the job and 10 years of monthly payments.
Potential positions to consider include those in nursing, government, police and fire services, and social work. Only payments made after October 1, 2007 qualify for eligibility.
Only direct loans from the federal government (currently known as the William D. Ford Federal Direct Loan Program) are eligible for student loan forgiveness. Non-federal loans (originated by private lenders and lending companies) are not part of this program.
If you don’t 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 can consolidate that debt into a Direct Consolidation Loan. The new consolidated loan would then be eligible for public sector loans under the same conditions as described above. Note that only payments for the combined loan count toward the 120 payment minimum; previous payments on the old loan are not taken into account.
Important
If you have an FFEL or Perkins loan, you can combine that debt into one federal forgiveness loan. But only payments made after consolidation count toward the 120 payment minimum, so do this as early as possible.
Loan repayment schedules
If you don’t work in the public sector, you might still be able to forgive some of your student debt — but it will take longer. The federal income-based repayment plans, designed to help graduates who would struggle to make payments within the usual 10-year timeframe, also allow for some debt relief after some time.
These plans include:
- Income-Related Repayment (IBR). Monthly maximum payments are 10% to 15% of discretionary income. Eligibility for forgiveness comes after 25 years of qualifying payments.
- Income-Related Repayment. Payments are recalculated each year based on gross income, family size, and outstanding federal loan balance; generally, they make up 20% of discretionary income. Eligibility for forgiveness comes after 25 years of qualifying payments.
- Pay-As-You-Ear (PAYE) and Revised Pay-As-You-Ear (REPAYE). The maximum monthly payment is 10% of disposable income. Eligibility for forgiveness exists after 20 years of qualifying payments. The state can even pay part of the loan interest.
Additionally, if you work for a federal agency, your employer can 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 sign up for a repayment plan or change your current plan. You can usually do this online at the service provider’s website.
Borrower Defense
If your school has misled you or otherwise committed wrongdoing in violation of certain state laws, you may be eligible for loan relief, officially known as the “borrower defense against loan waiver.”
Applicable to all loans under the William D. Ford Direct Loan (Direct Loan) program, the “loan defense” originally included cancellation of all of your current federal student loan debt if you could show that you were created by the college you attended or were significantly deceived. The borrower defenses introduced during the Obama administration applied primarily to private, for-profit schools engaged in dubious practices.
In June 2015, for example, the U.S. Department of Education promised debt relief to students at the Corinthian Colleges chain, which abruptly closed campuses and filed for bankruptcy after state and federal investigations into its operations.
However, during the Trump administration, Secretary of Education Betsy DeVos attempted to dismantle the program: Delayed claims processing, denial of claims without due process, increased burden of proof or only partial forgiveness, calculation of exoneration via a complex methodology that awarded claimants $0 Has.
Under the Biden administration, the Department of Education announced in March 2021 that it would “remove the formula used to calculate partial credit relief” and instead fully and immediately waive student loans in borrower defense applications.
The approximate number of applicants the Department of Education expects will ultimately help alleviate $1 billion in loans.
To redeem your loans under the Borrower Defense Program, file an application by submitting an application to the Department of Education website along with evidence that the school broke the law, significantly misled you, or misrepresented itself.
Disadvantages of Student Loan and Repayment Plans
Income-related repayment can also have a downside: your loan will pay more interest because the repayment is spread over a longer period. “Loan payments under IBR and PAYE can be written off negatively, putting the borrower in a deeper hole,” notes Kantrowitz. “Borrowers who expect a significant increase in income after a few years may want to prefer a repayment schedule, such as extended principal or staggered principal, where the monthly payment is at least as much as the accrued interest and the loan balance will not increase.”
“Remember that payments change annually based on income. As your income increases, so can your payments,” 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, forgiven student loan debt will not be included in taxable income for tax years 2021 through 2025.
Even if you do manage to lower monthly payments, don’t go on a spending spree with the newly available funds, she adds. “If you are currently incurring even more debt because you expect these plans in the future: stop! You never know what graduates will or will not get if the law changes in the future. Ask yourself, ‘Could I afford to pay this back on a regular, extended repayment schedule?’ If not, you could find yourself in very high debt and a difficult situation.”
Even with forgiveness plans, not everything is perfect. The types of jobs that may qualify you for student loan forgiveness often pay significantly less than positions in the private sector. You may be able to pay off your loans faster by getting a higher-earning job, even if it doesn’t qualify you for loan forgiveness.
If you have been forgiven all or part of your student loans, be aware that the IRS may consider the forgiven debt as income, so you may have to pay tax on that amount. Fortunately, that won’t be the case for the next few years: According to Section 9675 of the American Rescue Plan of 2021, student loans received from 2021 through 2025 may not be included in your taxable income for those years.
If you choose to participate in a loan origination program, be sure to receive written confirmation of the amount to be forgiven and under what circumstances.
Specialized lending programs
If you work for certain organizations or volunteer, you may be eligible for additional programs that forgive or reduce your student debt. Here are some examples:
- AmeriCorps VISTA, AmeriCorps NCCC, or AmeriCorps State and National Programs – Volunteers for these programs may receive up to the maximum Pell grant award for repayment of qualifying student loans (loans supported by the federal government) through the Segal AmeriCorps Education Award. For the 2021-2022 school year, this totals $6,495.
- Army National Guard – The Army National Guard Student Loan Repayment Program can help you earn up to $50,000 on loans.8 Covered loans include loans from Federal Direct, Perkins, and Stafford.
- Full-time teachers in low-income schools or educational institutions – By the informed on its website.
- Medical and Nursing School Graduates – Working in underserved areas may qualify physicians and nurses for a student loan under some state programs.
Changes in federal policy regarding student loans
The 2020 Coronavirus Relief, Aid, and Economic Security (CARES) Act included some temporary changes to student loan repayment rules.
Specifically, the new rules suspended loan payments, halted collections on defaulted loans, and set a 0% interest rate on loan balances. These rules are currently intended to remain in effect until at least September 30, 2021.
During the period that your monthly loan payments are suspended, those suspended payments will count towards the issuance of government loans as if you had continued to make them as long as you meet the other requirements of the program.
While you can continue to make loan payments, the Department of Education advises that doing so could be counterproductive. “If you make payments during the suspended payment period, you will not be eligible for PSLF sooner,” reads its official blog suspended $0 payments are already qualifying for your required 120 PSLF payments.
