WHY STUDENT LOAN FORGIVENESS BARELY COUNTS AS FORGIVENESS
Student loan forgiveness sounds like a great idea, right? Who wouldn’t want to receive a break from their student loan payments and have the remainder of their debt forgiven. While the idea of student loan forgiveness sounds great, it is not always a good idea. In fact, student loan forgiveness can actually cause you more financial stress than you expect it to.
Below, we will delve a bit deeper into the problems with student loan forgiveness and why it barely even counts as any type of forgiveness for you.
Low Rates of Enrollment in the Programs
Unfortunately, many student loan forgiveness programs have a low rate of enrollment. This is for a number of reasons, but the most common reason is because many students do not even know that they can apply for a forgiveness program. Unfortunately, these programs are not well marketed and they are not advertised to students, so the programs fly under the radar.
In addition, many students are scared of the program requirements and they often avoid the program altogether because they do not think they can meet the requirements.
Strict Criteria That You Must Meet
Above, we talked briefly about low enrollment rates due to some of the requirements to obtain forgiveness. There are some strict requirements and many of the student loan forgiveness programs require you to work in a specific career field or at a specific center. You also need to fulfill other obligations such as receive positive reviews, make all of your payments on time, and never default on your student loans.
The problem with many of these programs is that students will accidentally mail a payment late or run into financial difficulty and miss a payment. This resets the count on the number of minimum payments to be made, which means any of your previous payments no longer count toward your forgiveness.
Takes a Decade or More to Receive Forgiveness
Many of the forgiveness programs do not actually allow you to receive any type of forgiveness on your loans until you have made a decade worth of payments. For instance, the Public Service Loan Forgiveness program requires you to make 120 qualifying payments BEFORE you can have your loans forgiven. This equates to 10 years of consistent, on-time student loan payments.
Other programs, such as the income-based options require you to make payments for 20 or 25 years before you can receive student loan forgiveness.
A Huge Tax Bill Awaits You in the End
One of the biggest downsides to student loan forgiveness is the tax bill that you receive at the end of the year. In fact, any debt that is forgiven on your behalf will need to be claimed as income for that year. This also means that any tax that is due on that amount is payable at that time.
Let’s take a bit of a deeper look at what this means for you. Let’s say you make $45,000 per year and you have a total of $30,000 in student loans forgiven. You would need to claim that as income, which would make your income $75,000 for that year. While you may have received forgiveness on the $30,000, you may owe Uncle Sam some extra cash.
Your Balance Continues to Grow
Even when you are working towards student loan forgiveness, the balance on your student loans will continue to grow. In fact, even when you are on an income-based repayment plan where the monthly payment amount is $0, your balance continues to grow.
The problem with loan forgiveness really occurs when you qualify for part of your student loans to be forgiven, but not the entire amount. What this means is that you may have served time to earn some of the Public Service Loan Forgiveness, but you did not complete the entire required time. You may still receive some forgiveness, but this leaves a loan balance that continues to have interest charged on it.
You May Never Receive Any Forgiveness
Lastly, you may never actually see any forgiveness for your loans. While the programs sound nice, it can be very difficult to actually have a large portion of your student loans forgiven. There are scenarios where you will make all of the payments needed to qualify, but you end up paying your student loans off before you actually meet the requirements for forgiveness. This then means that you received no forgiveness at all.
Final Thoughts on Student Loan Forgiveness
Student loan forgiveness is a great idea, but it is not always a feasible method and you should not rely on it for your student loans. To put student loan forgiveness into perspective, no one has actually received it as of yet. The Public Service Loan Forgiveness program was started in 2007 and the income-based programs were implemented in 2014.
Therefore, students who have applied for the Public Service Loan Forgiveness program will not start to receive any type of forgiveness until 2017. Students on the income-based repayment plans will not be eligible for student loan forgiveness until 2034.
None of these programs have actually been around long enough for students to receive forgiveness under them. This leaves many people to wonder if they are actually effective at all and if they are even worth the time to try. It is important to keep an eye out in 2017 to see what happens with the loans that are eligible for forgiveness.
Remember, student loan forgiveness is not a quick fix for your financial situation and you should never rely on it to pay off your student loans. The best method to pay down your student loans is to apply for the appropriate programs to include refinancing, consolidation, and income-based options. You should create a budget and stick to it, so that you avoid default on your student loans.
If you do want to learn more about a specific loan forgiveness program, talk to your financial aid counselor.