In our current times, few things are as polarizing as higher education. One the one hand, it is immensely valuable and necessary to build and advance in a successful career. On the other hand, the cost of a bachelor’s or master’s degree can cripple your finances.
According to the Pew Research Center, almost half of all adults under the age of 30 have at least some student loan debt. Among 18 to 24 year-olds, that number rises to two thirds. While the average borrower owes about $17,000, a significant chunk actually has to pay back $43,000 or more.
Add the sometimes significant interest for the loan, and it’s easy to see why recent grads tend to struggle financially. And yet, you need that degree for your career. So what do you do?
The easy answer is ‘student loan forgiveness’. It sounds great, but can be more complicated than you think. How do you know whether you’re eligible? How can you detect scams, and what steps do you need to take to reduce your debt? Keep reading for everything you should know about student loan forgiveness.
The Basics of Student Loan Forgiveness
It sounds so easy: instead of paying back the balance plus interest over as many as 25 years, you submit an application for your loans to be forgiven. It’s as if they were never even there, and you’re on your way toward financial stability.
Is it really that simple? The short answer is yes. But that’s not the entire story. Only certain situations and employers provide eligibility for true forgiveness. Others can limit your payments and offer forgiveness over time. Yet others are scams that actually hurt, rather than help your finances.
Understanding which is which, and how your situation fits into the equation, is absolutely crucial. In fact, it’s the only way you can take care of the problem, and take full advantage of your college degree.
How do I Know Whether or Not I am Eligible?
To actually get some of your student loan debt erased, you need to fit a certain profile. The U.S. Department of Education has created 10 categories that can lead to true debt forgiveness:
- Closed School Discharge. If the school you attend closes while you attend or within 120 days after you withdraw from it, you might be entitled for full forgiveness. This discharge only comes into effect if you don’t actually earn your degree, but can actually result in the reimbursement of any payments you have already made.
- Public Service Loan Forgiveness. Full-time employees for certain public programs are also eligible for student loan forgiveness. These include government and non-profit organizations, along with certain volunteer work such as the Peace Corps. Forgiveness only kicks in once you’ve made 120 payments on your federal loans.
- Teacher Loan Forgiveness. If you teach full-time for five or more years in a low-income school, you are eligible for a loan forgiveness up to $17,500.
- Perkins Loan Forgiveness and Discharge. If you’ve taken out a Perkins loan, additional benefits can apply. For each year spent in one of a number of careers, a specific percentage of your loan will be forgiven. Eligible careers include teachers, members of the U.S. armed forces, nurses, law enforcement professionals, child workers, and other related professions.
- Total and Permanent Disability Discharge. If you can show that you are totally and permanently disabled, all of your federal loans may be forgiven. The documentation has to be thorough and typically includes a physician.
- Discharge due to Death. In the event that you pass away, your federal loans will be forgiven for your next of kin.
- Discharge in Bankruptcy. If and only if you can prove that because of bankruptcy you cannot repay your loans, you may be eligible for forgiveness. However, this is rarely approved, and generally not advisable. Bankruptcy has negative side effects that can be just as devastating as high student loan payments.
- False Certification of Student Eligibility or Unauthorized Payment Discharge. If your school falsely described its benefits of a degree, or if you are the victim of identity theft, your federal loans can be discharged and forgiven.
- Unpaid Refund Discharge. If you withdraw from a school before completing your studies but that school didn’t refund the outstanding tuition to the lender, it will be credited to your account. However, that discharge only applies to the amount of the refund, not your entire loan.
- Borrower Defense Discharge. If the school you attended misled you or violated state laws, you may be entitled to a refund of your student loans. Depending on the type of violation, either all or part of your federal loans will be reimbursed.
Importantly, all of the above only apply for federal, subsidized loans such as Perkins and the Federal Family Education Loan (FFED) program. When it comes to private loans, simple forgiveness is not possible. Instead, you have other options.
Most of these options revolve around the U.S. Department of Education’s Income-Driven Repayment Plans. Each of them limits your maximum loan payments by your discretionary income. For example, the REPAYE Plan limits payment to 10 percent of discretionary income. As USA Today explains,
Take, for example, a recent grad who makes $20,000. Because the federal income level within the contiguous United States is $11,490, that means he only makes $8,510 in discretionary income. Under the IBR, he would only have to make payments that were 15% of that $8,510, which equals about $106 a month.
In some cases, this can result in a payment as low as $0. After 25 years, the rest of the loan is automatically forgiven. You can use the Department of Education’s Repayment Calculator to determine your eligibility and estimate your potential payments for each plan option.
One note of caution: both the federal loan forgiveness criteria above and income-driven repayment plans could change drastically in the near future. The current administration has proposed a spending plan that would cut both. Keep an eye on these developments to make sure you remain eligible should the current policy change.
How to Detect Loan Forgiveness Scams
All of the above alternatives present legitimate options to minimize your student loan payments and receive at least partial debt forgiveness. Of course, they’re not the only ones you will find. The sheer number of graduates struggling with debt has resulted in a wide range of companies looking to take advantage by offering seemingly great solutions that actually hurt you.
Some of these scams are easy to detect. Others are more difficult to find. The government has shut down a number of scams it found to be illegitimate, but hundreds of others exist. NerdWallet offers 5 suggestions on how you can spot a scam to avoid getting into more financial trouble.
- Avoid companies who require you to pay upfront, or charge monthly fees. An adviser that charges you for help on the above scenarios is not necessarily illegal. But if they want their money upfront, you have reason to be wary.
- Stay away from companies that promise immediate student loan forgiveness. This is especially common for phone calls and online ads that refer to Obama’s or Trump’s Forgiveness Program. These programs don’t exist. As outlined above, you can limit your payments over time, but immediate forgiveness is not possible outside of extraordinary situations.
- End the conversation with sales people who pressure you to sign up. Student loan forgiveness should not be a sales job. As soon as the ‘expert’ on the other end of the line begins to pressure you, you have reason to stay away.
- Be wary of anyone who wants personal information or asks for power of attorney. Generally, applying for any of the above forgiveness programs does not require either. Giving anyone that information gives them access to your account, which can quickly become problematic.
- Suspect any companies that serve aggressive online ads. When the company tries to ‘get you’ through Google search or social media ads, they might not have your best interests in mind.
Generally speaking, student loan forgiveness is not easy. Anyone who promises you that it is should lead you to suspect a scam. Check their Better Business Bureau rating, and Google their name to learn about their legitimacy.
The Alternative: Refinancing and Consolidation
In the right situation, student loan forgiveness makes sense. You might even find a private employer that helps you repay your loans. While this is not necessarily ‘forgiveness’, it still accomplishes the same goal.
Unfortunately, you might not qualify for any of the above. In addition, some private loans (who typically have the highest interest rates) are simply not eligible for any of these forgiveness programs. In that case, what do you do?
Fortunately, you still have a way to get your finances in order and stop your hardship. Both consolidating your loans or refinancing them through a different lender might make sense for you. You can read more about each option on our resource page.
Student loan debt is a serious problem, and it will only get worse in the future. If you’re a recent graduate, chances are you are affected as well. But that doesn’t mean you have to give up and accept your financial fate.
If you qualify for student loan forgiveness, your troubles may soon be over. And even if you don’t, consolidation or refinancing your loans tends to be be a solid financial choice. Contact us to learn more about these options, and take charge of your finances.