Is Student Loan Forgiveness Really Free?

Last Update: September 13, 2021 Scholarship

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 cannot pay off their debt until halfway through their careers.

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 tuition is higher than ever doesn’t help young Americans on their way to getting a quality higher education.

An increasing number of students have to take out student loans 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 to get any forgiveness.

If you have student loan debt, you will probably be 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 you should be careful about. Let’s start with some student debt statistics.

Statistics about Student Loan Debt

According to our study:

  • The average debt of the students is about 35,205.
  • Student loan debt within the United States currently sits at 1,510.3 trillion and averages $35,205 per person. Continuing its meteoric rise – from 2007 to 2019 – student loan debt has increased by nearly 192% over the last 12 years, representing an average annual increase of nearly 16%.
  • In the 25-49 age, students make up nearly 71% of all outstanding loan debt. However, a high percentage is expected due to the increased cost of graduate programs within the age group.
  • Borrowers with outstanding debt that range from 20k-40k, 100K-200K, and > 200K represent the largest contributors to total outstanding student loan debt.
  • Public university debt (617.6 billion) makes the largest contribution to total outstanding student loan debt, while private institutions ($35,444) have the highest average outstanding student loan debt (institutions with borrowers > 1 million).

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.

Repayment Plans

The standard federal government student loan repayment is ten years. However, some borrowers can’t make their payments on time or in full. In 2007, the U.S. Department of Education created repayment plans based on income to help all these people make their 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)

IBR is one of the most common repayment plans for borrowers facing a financial crisis. If you have loans before July 1, 2014, your payment will not 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 a maximum of 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 take out the loan.

Like 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 that 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 your payments could be higher than the standard 10-year plan if you choose ICR. If your income is increased, the payments will rise accordingly.

  • Public Service Loan Forgiveness (PSLF)

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

If you want to work in 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. You may also have to pay regular income tax, which leads us to our next point.

Watch out for Taxes

Taxes are a great risk. Under the student loan repayment plans, 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. It could lead to a huge one-time tax bill for all Americans whose education debt could turn into taxes on the 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 were 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 an increasing number of Americans chooses this type of loan forgiveness, 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, if 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 that 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 more employers 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 private sector company. When 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, the Public Loan Service Program’s loan company. This means that you will receive a confirmation on how many payments you have completed every year.

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


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 to have more options and an easier time paying them off later.

Once you graduate, you need to consider all your options and weigh them out carefully. Not every repayment plan will work for you. Those who are not eligible for Public Student Loan Forgiveness should list all the 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. It is wise to follow our tips on public loan forgiveness to ensure that you will have your loan forgiven.