Is Student Loan Forgiveness Really Free?
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Is Student Loan Forgiveness Really Free?

EPF

 

US student debt stands over $1.5 trillion, with over 44 million total borrowers. Some people remain in debt even when they retire, while more and more people are unable to pay off their debt until halfway through their career.

And even though a bachelor’s degree is necessary for everyone who wants to have a decent life and a better job, the fact that college tuitions are higher than ever doesn’t help young Americans on their way to getting a quality higher education.

An increasing number of students has to take out student loans in order to pay for their college expenses. But their debt is waiting for them ‒ as soon as they graduate, they have to think of the best and fastest way to repay the debt. For this reason, some of them get jobs that offer loan forgiveness.

Some jobs, such as public service work or teaching, may offer forgiveness for a part of your loan debt or even the entire loan if you are lucky enough. However, there are some tricks that you need to know: these jobs have certain requirements that you need to meet, plus you have to complete the full term of work in order to get any forgiveness.

If you do have student loan debt, you are probably familiar with different ways to repay your debt like refinancing, consolidation, repayment and forgiveness.

When it comes to getting your student loan forgiven, there are a few ways to do this like Public Service Loan Forgiveness and Teacher Student Loan Forgiveness. However, if you do not work as a teacher or in public service, there are other ways to get loan forgiveness through income-driven student loan repayment plans.

This article explains how these plans work and what are the things you should be careful about. But for the start, let’s take a look at some student debt stats.

 

Statistics About Student Loan Debt

Americans have more than $1.52 trillion in student loan debt, which is 42% more than the total credit card debt. At the moment, there are 44.2 million people in the United States who are paying off their student debt.

Here are some additional statistics about student loan debt in the past few years:

  • The average debt of the students in the Class of 2017 is about $39,000
  • The average student loan payment is $351
  • The median student loan payment is $203
  • About 1.3 million (71%) students who graduated from four-year colleges and universities in 2012 had debt
  • In 2012, 75% of graduates from private non-profit colleges had debt averaging out at $32,300
  • In the same year, 66% of graduates from public colleges had debt averaging out at $25,550
  • In the same year, as many as 88% of the students who graduated from for-profit colleges had loans, the average debt standing at $39,950
  • Students who pursued professional and graduate degrees borrowed about 40% of the total $1 trillion in student loans taken out in 2012
  • Ten cities with most student debt in 2018 are Washington D.C., Atlanta (GA), Richmond (VA), Raleigh (NC), Akron (OH), Little Rock (AR), Birmingham (AL), Jackson (MS), Columbia (SC) and Charleston (SC)
  • Women hold almost $900 billion in student loan debt, which is almost two-thirds of the total student debt

These numbers are terrifying when you read them, let alone when you have debt on your back. If you want to get your loan debt forgiven, you may want to consider income-driven repayment plans.

college student girl

 

Repayment Plans

The standard federal government student loan repayment is ten years. However, some borrowers simply can’t make their payments on time or in full. In 2007, the U.S. Department of Education created repayment plans which are based on income to help all these people by making loan payments more affordable than the regular ten-year plan.

Approximately 7 million borrowers who collectively owe about $389 billion of student debt are in income-driven repayment plans. These are the different types of income-driven repayment plans:

  • Income-based Repayment Plan (IBR)

This is one of the most common repayment plans for borrowers facing financial crisis. In case you have loans before July 1, 2014, your payment is not going to be higher than 15% of your discretionary income. Once you make payments for 25 years, your loans will be forgiven.

However, if you have loans after July 1, 2014, the payment will not be higher than 10% of your discretionary income, while your loan will be forgiven after 20 years.

  • Pay as You Earn Repayment Plan (PAYE)

The PAYE plan, sometimes called Obama Student Loan Forgiveness, is similar to the IBR plan. With this plan, you pay maximum 10% of your discretionary income and the loan is forgiven after 20 years.

But the main difference between PAYE and IBR plans is that you may be eligible for PAYE even if you have loans that go back to 2007.

Both with IBR and with PAYE, your loan repayment will not exceed the payment of the standard 10-year plan, and the loan will be forgiven at the end of them.

  • Revised Pay as You Earn Repayment Plan (RePAYE)

As you have probably concluded, this is a modified version of PAYE. It has been around since December 2015 and it is open to all direct loan borrowers no matter when they took out the loan.

Similar to PAYE, this plan caps your payment at 10% of your discretionary income and the loan is forgiven after 20 years.

But RePAYE has an additional feature ‒ an interest subsidy what helps you cover 50% of the interest when your new payments can’t keep up with the accruing interest.

  • Income Contingent Repayment Plan (ICR)

This plan is slightly different than IBR or PAYE. All eligible buyers may make payments under this plan and it doesn’t require any initial income. With this plan, you will either pay 20% of your discretionary income or what you would pay on a plan with a fixed payment over the course of 12 years, adjusted according to your income.

With ICR, the loan is forgiven after 25 years. However, you should note that if you choose ICR, your payments could be higher than with the standard 10-year plan. If your income is increased, the payments will rise accordingly.

  • Public Service Loan Forgiveness (PSLF)

This is the most popular way to get loan forgiveness. Even though it has nothing to do with your repayment plan, it is best to combine it with IBR or PAYE to get the best of both worlds.

If you want to work in a public service or as a teacher, this might be the right choice for you.

 

Income-driven repayment plans have one huge benefit and one huge risk. The benefit is that you will save money upfront by lowering your monthly student loan payment or extending the repayment period.

On the other hand, the risk is definitely not to be underestimated. These plans will make you pay more interest over time because you will reduce less principal each month by lowering monthly payments. Also, you may have to pay regular income tax, which leads us to our next point.

 

Watch out for Taxes

Taxes are a great risk associated with student loan repayment plans. Under the student loan repayment plans which currently exist, if you have a remaining student loan balance at the end of your repayment period, you may have to pay regular income tax on any student loan amount that is forgiven.

So, after all, student loan debt forgiveness is not really free. What happens instead is that your student debt becomes tax debt. This could lead to a huge one-time tax bill for all those Americans whose education debt could turn into taxes on forgiven debt.

How much tax you will pay depends on your income tax rate and outstanding student loan balance at the time of forgiveness. If an average borrower enrolled in an income-driven student loan repayment plan has, for example, $40,000 forgiven, this means that they would owe more than $11,000 in federal income taxes if a hypothetical income tax rate was 30%.

But this is where you can use a trick ‒ if you are under the Public Service Loan Forgiveness plan, you will not be taxed on the forgiven student loan regardless of the amount.

 

Tips on Getting Public Loan Forgiveness

Since this type of loan forgiveness is the one chosen by an increasing number of Americans, we will list a few tips that could help you get Public Student Loan Forgiveness.

  • Ensure that you have the eligible loans.

Not all loans can be forgiven this way. Only ‘direct loans’ can be forgiven under this program. These include direct subsidized and unsubsidized loans, direct PLUS loans and direct consolidation loans.

To be eligible, try combining your non-qualifying loans into one direct consolidation loan. (Note that most federal loans are eligible, while the private ones are not.) However, in case you already have some direct loans you have started to repay under the forgiveness program, consolidating them into one new loan will restart the clock on forgiveness.

Also, make sure that you are enrolled in the right kind of repayment plan. Extended repayment plans don’t count toward forgiveness, while the income-based programs are eligible for Public Student Loan Forgiveness.

  • Have the right employer

If you want to get your loan forgiven, you need to work at a government organization (federal, state, local or tribal), a non-profit organization which is tax exempt under Section 501 (c)(3) or some of the non-profit organizations that provide public service. Also, AmeriCorps and Peace Corps volunteers are eligible for this program.

You have to work full time to be eligible, but it doesn’t have to be for one employer. You can work part time for two qualifying employers too for a total of over 30 hours a week. In addition, the mandatory time you work for an employer does not have to be consecutive. This means that you can work for some time at a qualifying organization and then work for a company in the private sector. When and if you start working at a qualifying organization again, you will continue your qualifying employment period where you left off.

  • Make sure you are on the right track

When you submit the Employment Certification Form each year, all of your loans are transferred to Fed Loan Servicing, which is the designated loan company for the Public Loan Service Program. This means that every year you will receive confirmation on how many payments you have completed.

But even if you do that, things could go wrong. That is why you should always keep track of your work history and communication you have with your student loan provider (on paper if needed).

 

Bottom Line

It is not easy to be a student, but it is much easier than being a grown-up. However, while you are a student, you should pay attention to what kind of loans you are taking so that you have more options and easier time paying them off later on.

Once you graduate, you need to consider all your options and weigh them out carefully. Not every repayment plan will work for you. Those of you who are not eligible for Public Student Loan Forgiveness should list all pros and cons of IBR, ICR, PAYE and RePAYE. Then, you will know what your best option is. Also, you want to be careful when it comes to taxes, since the amount forgiven may be eligible for income taxes.

But all of you who are eligible for Public Student Loan Forgiveness can combine it with other repayment plans. In addition, it is wise to follow our tips on public loan forgiveness if you want to be really sure that you will have your loan forgiven.

Elite Personal Finance

June 29, 2018

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