Students across the United States owe a whopping $1.2 trillion in student loan debt. The student loans of nearly 40 million people make up that amount. In 2015, the average student graduated with more than $35,000 in student loan debt.
Those are some serious numbers, right? It’s even more serious that loan repayment can cut into the disposable income you also use for a down payment on a house, to buy a car or as savings to start a family. Twenty-five percent of people with student loans are in default on their payments.
Still, there are ways to manage your student loan debt effectively. One of the best is to go for forgiveness. Forgiveness means your student loan debt is canceled, wiped out, abolished. Sounds great, right? But myths and misconceptions about forgiveness abound, so the Q&A below will bust the most common ones.
1. Is forgiveness available for all loans?
No. Forgiveness programs aren’t available for all loans.
Forgiveness can be obtained for some federal student loans if you hold very specific jobs and work at them for a very specific number of years.
Forgiveness is extended for some types of federal student loan payment plans after a number of years.
Federal loans are not forgiven unless you hold one of these jobs for the specified number of years or get into one of the payment plans for the required number of years.
There are no forgiveness plans currently available if you have student loan debt from private lenders, like banks.
2. What jobs qualify me for student loan forgiveness?
First, under the Public Service Loan Forgiveness program, you can get your federal student loans forgiven if you work for a nonprofit or the government for at least 10 years. You must work at specified jobs. These include teachers, firefighters, nurses and military personnel, among others.
Ten years is a long commitment. Be sure one of these jobs is what you want to commit to because if you want to change a few years after beginning it, your student loans will not be eligible for forgiveness.
Second, under the Teacher Loan Forgiveness program, you can get your federal direct or Stafford loans forgiven for up to $17,500. There are other stipulations, too. To be eligible for the Teacher Loan Forgiveness program, you must teach in a lower-income elementary or secondary school for five years. Your student loans also can’t add up to more than $17,500.
Third, there is a Perkins loan cancellation program. A Perkins loan is a type of federal loan. It can be canceled if you work in a public service job, usually for five years. Teachers, school librarians, nurses, firefighters, police officers, military personnel and public defenders can all be eligible, among other positions.
Teachers must teach specific subjects, like math, science or special education, or work in a low-income school.
3. I’m a teacher. Can I combine the Public Service Loan Forgiveness program with the Teacher Loan Forgiveness program?
Yes, you can if you plan to teach for 15 or more years.
A prudent plan would be to wipe out $17,500 of Direct or Stafford federal loans in the first five years of your career. You can then apply to the Public Service Loan Forgiveness program.
4. I don’t work any of these jobs or in the public sector. How can I get forgiveness?
Fear not. There are four different payment plans that offer forgiveness after a period of time.
The first is known as income-based repayment, or IBR. To qualify, you need a student loan bill with the standard 10-year term that is 10 percent or more of your income and to have borrowed money after July 1, 2014. Your loans are forgiven after 20 years of consistent payment.
The second is called income-contingent repayment, or ICR. It depends on your household size and other factors. Under it, you pay as much as 20 percent of your discretionary income.
It extends the term of your student loan from 10 years to 25. After the 25 years, the remaining student loan balance is forgiven.
Both are designed to help student loan borrowers who are unemployed or have very low salaries. Federal loans can be forgiven after 20 and 25 years, depending on the loan.
5. Is there any penalty associated with forgiveness?
There aren’t any specific penalties, no. But borrowers should know they will have to pay income tax on any student loan debt amount remaining after forgiveness.
Say you paid $40,000 of a $50,000 student loan total. It was forgiven at that point. You wouldn’t still owe the $10,000 difference, as it would be wiped out. But you will have to pay taxes on the $10,000.
6. I know bankruptcy isn’t great for my credit score, but at least it would be a way to discharge my student loan?
No, bankruptcy wouldn’t discharge your student loan debt. While filing for bankruptcy does discharge many debts, such as those from credit card companies, auto loans, and mortgage loans, student loan debt isn’t one of them. Even if you do file for bankruptcy, which is an extreme step, you would still have to pay student loans.
Be sure to check thoroughly into these programs and payment plans.
Editor’s Note: While student loan forgiveness is a solid option for some people, for many borrowers it sounds too good to be true and they won’t qualify. Even if you do qualify for forgiveness, the balance amount that’s forgiven will be counted as taxable income and you’ll have to pay the IRS.
As an alternative to waiting for student loan forgiveness, you can try paying them off early or on time and use student loan debt relief options like refinancing/consolidation or even deferment or forbearance to help.
Related Reading: Creating a Student Loan Debt Plan of Attack
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