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Is Student Loan Forgiveness Right For You?

Student loan debt has nearly tripled in the last decade. It now stands around $1.3 trillion dollars.

Starting out in life is hard enough. Having to do it with a mountain of debt makes it feel practically impossible.

Luckily, there is hope. Student loan forgiveness is an option many people are considering.

And you can choose a few forgiveness options as well. But you need to know exactly what you’re getting into first.

Here’s how to tell if student loan forgiveness is for you.

Pay As You Earn Repayment Plan

The Pay As You Earn Repayment Plan (PAYE) has several benefits for students. First, you’ll never pay for more than 10% of your discretionary income.

Your loan repayment also will never exceed the payment of the 10-year standard repayment plan. Your loan is also forgiven after 20 years.

This loan program is also referred to as the Obama Student Loan Forgiveness.

If you’ve already taken out a loan, certain loans going back as far as 2007 still qualify for this plan.

Your discretionary income is determined by a formula based on family size and income tax returns. To determine your individual amount, visit Studentloans.gov to use their calculator.

Income-Based Repayment Plan (IBR)

Many students switch to this repayment plans if they’re facing a financial hardship. In fact, it’s one of the most common repayment plans available for that reason.

The Income-Based Repayment Plan (IBR) states that if you have loans from before July 1, 2014, your payment won’t exceed more than 15% of your discretionary income.

After making payments for 25 years, you’ll receive student loan forgiveness.

If you borrowed the loan after July 1, 2014, your loan won’t exceed more than 10% of your discretionary income. And you’ll receive student loan forgiveness after only 20 years.

When you’re on this plan your loan repayment can’t exceed the payment of the 10-year standard repayment loan. And your loan will be forgiven at the end of the term.

Revised Pay As You Earn Repayment Plan (RePAYE)

The Revised Pay as You Earn Repayment Plan (RePAYE) became available to borrowers after December 17, 2015. It’s a modified version of PAYE.

It’s also available to all direct loan borrowers, regardless of when the loan was taken out. However, this plan will still cap your payment at 10% of your discretionary income.

You’ll receive student loan forgiveness after 20 years. This plan also includes an interest subsidy.

The subsidy can help cover 50% of the interest in cases where your new payments can’t keep up with the accruing interest.

Income Contingent Repayment Plan (ICR)

The Income Contingent Repayment Plan (ICR) is slightly different from IBR or PAYE plans. That’s because there are no initial income requirements for this plan.

Any eligible buyer may make payments under this plan. And your payments will be the lesser of 20% of your discretionary income.

Your payments are also the lesser of what you’d pay on a repayment plan if you had a fixed income over a 12-year span. It’s adjusted according to your income.

This plan provides student loan forgiveness after 25 years.

However, not everyone benefits from this plan. Your payments could end up higher than the standard 10-year repayment plan.

You’ll also have to submit your income every year. Your payments adjust according to your income.

Public Service Loan Forgiveness (PSLF)

Public Service Loan Forgiveness (PSLF) is a popular way to achieve student loan forgiveness. But it has nothing to do with your repayment plan.

However, if you have an Income-Based Repayment (IBR), an Income Contingent Repayment Plan (ICR) or a Pay As You Earn (PAYE) loan, it makes a lot of sense to combine it with a PSLF for maximum benefits.

To get on this plan, you need to work in the public sector. You can qualify for student loan forgiveness after 10 years or 120 payments.

This is much sooner than the standard 20-25 year forgiveness plans.

Please be aware you must be in the Direct Loan Program and in one of the correct repayment plans in order to qualify.

Teacher & Disability Student Loan Forgiveness

Not all student loan forgiveness plans fall under the Obama Student Loan Forgiveness programs known as the Direct Loan program.

There are separate programs existing to specifically help teachers and/or the disabled. For teachers, it offers a principal reduction.

For the disabled, it offers a complete discharge from your federal student loans.

Tax Consequences

While many of these student loan forgiveness options are helpful to many borrowers, not everyone comes out ahead.

Do your homework thoroughly before you take out any loan. There may be unforeseen tax consequences.

Under current IRS rules, you may have to pay income tax on any forgiven amounts if there’s still a remaining balance at the end of your repayment period.

In other words, if you had $50,000 in forgiven student loans, the IRS considers this as income. Which means if you made $35,000 working, your total income for this would now be $85,000.

While this may scare some people off, there are some who will benefit. For some people, the tax bill is more manageable than the debt is.

On the repayment plan, you’ll owe $11,377 in additional federal income tax for that year. But if you compare it to the interest on the original $50,000, it’s less expensive.

Even if you are balking at owing the IRS $11,377, you don’t actually have to pay it all at once. The IRS offers several repayment options themselves. Talk to your accountant to see which option makes the most sense for your personal circumstances.

Check with your accountant or the IRS to see if you’re eligible to claim a deduction on your student loan interest.

Helpful Tips

It’s not easy deciding which loan to take out. It’s hard to see how your future will look when you’re in the beginning stages.

Before you make any decisions, read our helpful hints.

Private Loans Don’t Forgive

All of these student loan forgiveness programs are public, not private loans. Private loans don’t offer any types of forgiveness programs.

If you do have a private student loan and you’re struggling, consider refinancing them.

Consider Refinancing the Loan

If you’re an existing borrower, especially if you have graduate debt, there are banks that offer refinancing programs. They can help you restructure your payment plan.

Sometimes, you might be allowed to extend deferment of monthly, income-based payments. Doing so is beneficial if you’re in a profession where significant salary increases are expected.

Doctors are allowed to defer payments through residency and can then begin paying off the balance as their careers advance.

However, there are risks if you refinance to use the deferment program. As you defer payments, your loan principal, in most cases, will continue to rise along with interest.

If anything negative happens, it can dramatically affect your deferment plans. If you do choose to defer, consider taking out disability insurance which can help replace your income if you become disabled.

Consider Not Taking a Loan

Loan programs were created to help motivate students to get an education. Especially in fields of study where jobs are needed such as in teaching and medicine.

It’s incredibly difficult for a young borrower to fully comprehend the financial burden massive debt causes in the future. The burden of debt is stressful and often impairs one’s ability to make smart decisions.

It might seem that an income-based repayment plan seems reasonable. But payments often never even touch the surface of the principal balance.

If a situation arises such as a job loss or disability and the borrower needs to defer, the balance will still continue to rise with interest.

Before you take on a loan, weight the way that debt will affect your financial wellbeing for the next few decades. Assess the costs and benefits of the loan and the future of job prospects in your chosen profession.

Research to see if there are cheaper educational options that provide the same or similar job opportunities. And recognize that there’s not much career flexibility if paying down your loan is always a consideration.

Crunch the Numbers

Taking on a loan is a life-changing financial decision, even with the possibility of student loan forgiveness.

Before you make a decision, consider if your job prospects and monthly spending will allow you to pay down your loan balance without the help of a federal program.

Even if you’re on an income-based payment program, developing a monthly budget now will help you see where every dollar you make and spend goes.

Doing so will help you make necessary changes to your spending habits sooner rather than later.

Life Changes

Your life will change in ways that are impossible to even fathom at this point. Even if the math shoes you can take on this debt right now, something might happen to change that.

Account for the possibility of change in your income and cost of living. Doing so will help you know when you need to spend less and when you have a little bit extra to pay down your debt.

Repaying your loan on time is extremely important for your future. It will help you build up your credit making it easier to buy items like a home and a car.

Don’t wait until you have a mountain of debt to learn what you can about building up your credit score. Keep reading our articles to learn how to make savvy financial decisions.