Waking up to find student loans wiped out is a common fantasy for many borrowers. For a lucky few eligible for student loan forgiveness programs, this dream can become a reality.
You might love the idea of getting free money to repay student debt â€” until you see the fine print, that is. The process to have your student loans written off isnâ€™t likely to be quick, easy, or painless.
But is student loan forgiveness worth it?
For some people, student loan forgiveness and assistance programs can be a huge help in getting out of debt. Yet for other borrowers, pursuing forgiveness can be a bigger headache than theyâ€™re willing to deal with.
Here are five reasons student loan forgiveness might not be worth it.
Depending on the student loan forgiveness program you pursue, you might be waiting decades to have your student loans forgiven. The longest period for student loan forgiveness is 25 years, under certain income-driven repayment plans:
Other student loan forgiveness programs offer to write off student loans much sooner. The Teacher Student Loan Forgiveness program offers debt forgiveness after just five years of full-time teaching work. The Public Service Loan Forgiveness (PSLF) program requires just 120 qualifying monthly payments, which can be made in 10 years.
The sooner you can erase your student debt, the more likely it is that banking on student loan forgiveness will pay off. But if pursuing student loan forgiveness means waiting 20 or 25 years to qualify, consider all your other options before proceeding.
Under forgiveness programs, the amount of student loans written off is not what you initially owe, but rather any student loan balance remaining after the payments youâ€™ve made. If you get student loan forgiveness after 25 years, for example, this will only wipe out whatâ€™s left after youâ€™ve made 300 student loan payments.
This forgiven portion of your student loans might be smaller than youâ€™d hoped. Not only that, but repayment plans that make student loan forgiveness beneficial can actually set monthly payments that are less than your student loan interest charges. In this case, interest accrues and can be added to the principal, increasing your balance. As a result, the total principal and interest repaid over the life of the loan might also be higher.
Consider a borrower who has $40,000 in student debt and earns just $28,800 out of college, enrolled in the REPAYE income-driven repayment. According to the Consumer Financial Protection Bureau (CFPB), such a borrower would repay $48,370 on a standard 10-year repayment plan. Under REPAYE, however, the total principal and interest repaid would be nearly $20,000 more, at $68,156.
IDR forgiveness provides a nice guarantee that you wonâ€™t be repaying student loans for longer than 25 years. But projecting your costs with a student loan IBR calculator can help you figure out whether or not youâ€™re likely to come out ahead.
Some student loan forgiveness assistance provides relief and erases student debt, but only if youâ€™re willing to make a specific employment commitment. Here are some examples of student loan forgiveness programs with requirements tied to your work:
All of these programs can provide student loan forgiveness, but only if you meet the employment commitments â€” yet the employment offered isnâ€™t always the most advantageous. They often require relocation and can keep you from choosing or changing jobs as you wish, as well as limit career opportunities later on.
Additionally, jobs that qualify you for student loan forgiveness often pay far less than what you could earn elsewhere. Fulfilling the employment requirements could mean missing out on higher pay, and the amount of debt forgiven wonâ€™t always be enough to cover this discrepancy in earnings.
Seeking student loan forgiveness thatâ€™s tied to employment can make sense if these programs already align with your career goals. If not, you should take some time weighing the tradeoffs against the benefits.
Student loan forgiveness isnâ€™t always free, either. Many forms of student loan repayment assistance or forgiveness are considered a type of taxable income. This means that youâ€™ll be responsible for paying tax on the balance of your forgiven student loans.
Here are the types of student loan forgiveness that would likely come with a tax bill:
Other forms of student loan forgiveness are tax-exempt, however. Any student loans forgiven through PSLF are not taxable, for instance.
Additionally, IRS rules state that certain LRAPs can provide student loan forgiveness or assistance tax-free:
It might not always be obvious which loan forgiveness programs will shield you from tax liabilities later on. Make sure you investigate and understand the possible tax implications of a student loan forgiveness or assistance program before enrolling â€” so you wonâ€™t unexpectedly owe thousands on forgiven debt later.
Lastly, student loan forgiveness can be risky simply because life doesnâ€™t always turn out the way we plan or prefer. Even if youâ€™ve made all the right choices and followed a student loan forgiveness program to a T, there are no guarantees that youâ€™ll receive forgiveness.
Errors can mess up your student loan forgiveness. Some loan forgiveness programs and LRAPs are complicated to the point of being ridiculously confusing. This can make it tricky to get it right when qualifying and applying for these types of loan assistance. With PSLF, for example, you could jeopardize your eligibility if you fail to consolidate certain student loans, and you could delay forgiveness if you miss payments or defer debt.
Student loan servicers have also caused problems for borrowers, according to a recent report from the Consumer Financial Protection Bureau. Borrowers complained that servicers didnâ€™t clarify if the borrower qualified for PSLF, and that servicers did not process consolidations or changes to repayment plans in a timely fashion. Servicers even enrolled borrowers in payment plans that were ineligible for PSLF, despite the borrower expressing interest in the forgiveness program.
The future is foggy for many student loan forgiveness programs. PSLF, in particular, has had a rocky start. The first borrowers just barely received forgiveness through PSLF in early 2018, yet recent federal budget plans included proposals to end PSLF for borrowers taking out loans in upcoming years, for example.
The proposals were axed from the final budget, and PSLF seems safe (for now), but changes might still be made to this or other similar programs. Borrowers should be optimistically cautious about counting on student loan forgiveness and watch out for policy changes that could affect them.
Along with looking into your student loan forgiveness options, it can be worthwhile to compare them to other student loan strategies. Making extra payments on student debt can help you knock it out faster and pay less interest, for instance. Refinancing student loans can be another option to lower student loan rates and costs.
Only by exploring and comparing different student loan repayment paths can you find the best option for your current circumstances and future plans.
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