Student loan forgiveness

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By Mark Kantrowitz

May 20, 2021

Borrowers who are struggling to make student loan payments may qualify for debt relief through a student loan forgiveness or discharge program. Learn about how student loan forgiveness works and which programs you may be eligible for.

Public Service Loan Forgiveness

Public Service Loan Forgiveness (PSLF) is a back-end student loan forgiveness program, where the borrower’s remaining federal debt is cancelled after a specified number of monthly payments. Back-end loan forgiveness programs are all or nothing, since borrowers must satisfy all of the service requirements before receiving any loan cancellation or forgiveness.

Eligibility

To be eligible for PSLF, a borrower must be working full-time at a public service job, such as working for the government or a 501(c)(3) tax-exempt charitable organization. The program only applies to federal direct loans, including Direct Subsidized Loans, Unsubsidized Loans, parent PLUS loans, grad PLUS loans and direct consolidation loans. Borrowers may consolidate a FFEL program loan or a federal Perkins loan into the Direct Loan program to qualify.

How it Works

The Public Service Loan Forgiveness Program forgives the remaining student loan debt after an eligible borrower makes 120 payments. Payments do not have to be consecutive, but the borrower must make at least 120 payments. That means you will have to make payments for at least 10 years until your loan balance is forgiven.

The PSLF program only works when the borrower switches to an income-driven repayment plan. Otherwise, there would be no benefit since the standard repayment term is 10 years.

The U.S. Department of Education recommends that borrowers complete and submit the PSLF certification and application form periodically as you make payments. This will help ensure you’re on track to have your debt forgiven.

Income-Driven Repayment

Income-driven repayment plans are another type of back-end student loan forgiveness program offered by the federal government. With these programs, eligible borrowers are able to adjust student loan payments based on their income. After you make payments for a specified amount of time, the program forgives any outstanding student loan balance. The Department of Education currently offers four different income-driven repayment plans:

  • Revised pay-as-you-earn (REPAYE) repayment plan
  • Pay-as-you-earn repayment (PAYE) repayment plan
  • Income-based repayment (IBR) plan
  • Income-contingent repayment (ICR) plan

Eligibility

Just about any borrower with an eligible federal student loan should qualify for at least one of the available income-driven repayment plans.

Eligible student loans for REPAYE and PAYE:

  • Direct Subsidized and Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents

Eligible student loans for IBR:

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans Loans
  • Direct or FFEL PLUS Loans made to students
  • Direct or FFEL Consolidation Loans that do not include PLUS loans made to parents

Eligible student loans for ICR:

  • Direct Subsidized and Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans

How it works

An income-driven repayment plan reduces your monthly student loan payment based on your discretionary income and size of your family. Each plan has its own method for calculating your payment amount, and the monthly payment is recalculated each year.

The government will forgive your remaining student loan debt after 25 years of repayment in income-contingent repayment (ICR) and income-based repayment (IBR), 20 years of repayment in pay-as-you-earn repayment (PAYE) and 20 years (undergraduate) or 25 years (graduate) of repayment in revised pay-as-you-earn repayment (REPAYE).

Borrowers can apply for an income-driven repayment plan at studentaid.gov, but they should first contact their loan servicer.

Teacher Loan Forgiveness

Under the Teacher Loan Forgiveness Program, the government forgives a portion of federal student loan debt for qualifying teachers.

Eligibility

The program is available to full-time teachers who are employed at a school serving low-income students. Eligible teachers must be considered “highly qualified” and have at least five consecutive years of teaching experience.

Teacher Loan Forgiveness applies to Direct Subsidized and Unsubsidized Loans and Subsidized and Unsubsidized Federal Stafford Loans.

How it Works

The amount of your forgiven student loans depends on the subject you teach. For example, mathematics teachers and special education teachers are eligible for the maximum $17,500 in forgiveness. Borrowers who teach other subjects are eligible to receive $5,000 in loan forgiveness.

Teachers can apply for student loan forgiveness by completing the Teacher Loan Forgiveness Application.

Other Student Loan Forgiveness Programs

Some loan forgiveness programs cancel all or part of the debt up front. For example, these loan forgiveness programs may cancel a specific percentage or dollar amount of the borrower‘s debt for each year of service. Up-front forgiveness provides partial forgiveness even if the borrower doesn’t complete service requirements in full.

Many student loan forgiveness programs are based on employment. Here are some examples of available programs:

Student Loan Discharge Programs

Although the terms “loan forgiveness” and “loan discharge” are often used interchangeably, there are important distinctions between the two types of loan cancellation.

  • Student loan forgiveness is usually based on the borrower working in a particular occupation for a period of time.
  • Student loan discharge is usually based on the borrower’s inability to repay the debt or the borrower not being responsible for the debt because of fraud.

The Department of Education offers student loan discharge programs, which are available to federal student loan borrowers. Options for borrowers who are unable to repay their debt include:

Student loans may also be discharged when the borrower is not responsible for the debt because of fraud or because of school closure. These programs include:

How to obtain loan discharge and forgiveness

To obtain student loan forgiveness or discharge, contact the loan servicer for the correct forms. You can also call 1-800-4-FED-AID (1-800-433-3243) or the FSA Ombudsman if you are unable to obtain the forms from the loan servicer.

Depending on the type of discharge, you may receive a refund of some or all of the payments made on the loan, in addition to cancellation of the outstanding student loan debt.

Do not pay a fee to obtain student loan discharge or forgiveness. If you are asked for a fee, it is probably an advance-fee loan scam.

Employer Student Loan Repayment Assistance

Employer student loan repayment assistance programs (LRAPs) are similar to student loan forgiveness. Employers use LRAPs to provide incentives for recruiting and retaining employees who have student loans.

Many employer LRAPs will repay federal loans or private student loans. Some programs are limited, and others will make payments until the employee’s student debt is paid in full. Under current law, employer-paid student loan repayment assistance is not considered taxable income.

Biden’s Plan for Student Loan Forgiveness

President Biden continues to face pressure from progressives to implement a plan for broad student loan forgiveness. Some policymakers have suggested forgiving up to $50,000 per borrower, but Biden currently only supports $10,000 per borrower.

However, student loan forgiveness was not included in Biden’s American Families Plan. Instead, the plan includes plans for free community college and a $1,400 increase in the maximum Pell Grant.

Is Student Loan Forgiveness Taxable Income?

In most situations, cancelled debt is considered taxable income to the borrower. However, the American Rescue Plan Act of 2021 made all student loan forgiveness tax-free through 2025. This will have the biggest impact on borrowers who are currently repaying student loans under an ICR plan.

What Happens If You Don’t Qualify for Loan Forgiveness?

Many student loan forgiveness programs only apply to borrowers who have a federal student loan. If you have a private student loan and do not qualify for forgiveness or discharge, there are other repayment options to tackle your student debt.  

Student Loan Refinancing

When you refinance student loans, you pay off an existing loan with a new loan that has a lower interest rate. Refinancing allows you to lower your monthly payments or adjust your repayment term. Currently, interest rates are very low, which means refinancing could save you thousands of dollars over the life of your loan.

Using a 529 Plan to Pay Down Student Loan Debt

Money invested in a 529 plan grows on a tax-deferred basis, and distributions are tax-free when used to pay for qualified higher education expenses. You may now take a qualified distribution to pay down a qualified student loan, which includes federal student loans and many private student loans. There is a lifetime limit of $10,000 in tax-free student loan withdrawals per beneficiary and each of their siblings.

A good place to start:

See the best 529 plans, personalized for you

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