Americans have racked up approximately $1.5 trillion in student loan debt, with the average borrower carrying $32,731. If you’re struggling to meet your monthly payment, you aren’t alone. According to a 2019 Quarterly Report on Household Debt and Credit, 10.9% of student loan debt is more than 90 days delinquent or in default. Fortunately, you may be able to take advantage of student loan forgiveness or other financial relief programs.
What is federal student loan forgiveness?
Federal student loan forgiveness programs give borrowers the ability to have part or all of their federal loans forgiven, meaning you will no longer be required to pay that amount. Examples of federal forgiveness programs include:
Public Service Loan Forgiveness (PSLF): Borrowers who work for a public or nonprofit employer may have their federal direct loan balance forgiven after making 120 qualifying payments.
Teacher Loan Forgiveness: Borrowers who teach for five years in a low-income school or education agency may have up to $17,500 of their federal direct loans forgiven.
Loan forgiveness based on profession: Many professions have programs that offer loan forgiveness in exchange for working in a critical shortage area.
Be aware there may be tax implications for any forgiven amount. PSLF and Teacher Loan Forgiveness programs are considered exempt, but other loan forgiveness programs may be deemed as taxable income. This means you could get hit with an unexpected tax liability for the year your loans are forgiven.
Alternatives to federal student loan forgiveness
If student loan forgiveness isn’t an option, you still have other options to help reduce your financial burden.
1. Choose an income-driven repayment plan
You can significantly reduce your monthly payment by choosing one of four income-driven repayment (IDR) plans. The Revised Pay As You Earn (REPAYE) plan and Pay As You Earn (PAYE) plan help those with Direct Loans to reduce their payment amount to 10% of their discretionary income per year.
The Income-Based Repayment (IBR) plan helps those with FFEL Program and Direct Loans set payments to 15% of their discretionary income per year or 10% for new borrowers.
Lastly, the Income-Contingent Repayment (ICR) plan helps borrowers with Direct Consolidation Loans set their payments at the lesser of 20% of their discretionary income divided by 12 or what would be paid on a repayment plan with a fixed payment amount and a 12-year term.
These plans adjust for your income level each year to determine your monthly payment. As an added benefit, if you have a balance left over after the 20-25 year repayment period, it may be forgiven depending on the plan you choose. Keep in mind that only your federal student loan balance will qualify.
2. Refinance your student loans
You can refinance your federal and private student loans to get a lower interest rate, decrease your monthly payment, or change your loan term. If you choose to refinance, you’ll pay off your existing debt with a new loan that has better terms. This can help you pay off your debt faster and reduce the interest you pay over the life of your loan.
Be aware that you may lose certain protections and benefits if you refinance your federal student loans with a private lender. You’ll likely lose access to loan forgiveness programs and flexible repayment plans. So, make sure this trade-off is worth it.
Consider only refinancing your high-interest loans. By keeping your lower-interest federal loans intact, you can have a safety net in place if your financial situation takes a turn for the worst.
While refinancing won’t erase your debt, it can give you more control by giving you a chance to compare top student loan lenders and negotiate a better deal.
3. Consider deferment or forbearance if necessary
If you’re concerned about your federal loans going into default, you may need to consider putting your loans on deferment or forbearance depending on your situation. You won’t have to worry about a monthly payment for a short period of time, but you may be responsible for the interest that accrues.
While in deferment, the federal government will take care of your subsidized loan interest, but you’ll still be on the hook for your unsubsidized loan interest. With forbearance, on the other hand, you’ll be responsible for all accrued interest.
Most private lenders don’t offer deferment, but they may offer a form of forbearance or an alternative solution. Speak with your lender directly to discuss your options.
4. Do volunteer work that pays
If you’re willing to spend time volunteering, you may qualify for further loan assistance programs. AmeriCorps, Peace Corps and Volunteers in Service to America (VISTA) all have established programs that can help make a dent in your student loan debt while giving back and building your resume.
For example, by joining the Peace Corps, you can access its loan deferment program and qualify to have up to 70% of your Perkins loans canceled. Plus, your time spent volunteering will be considered qualifying employment to be used for the PSLF program.
Federal student loan forgiveness versus private student loan forgiveness
One of the primary benefits of having federal student loans is the potential to qualify for forgiveness and other loan discharge programs. However, private loans don’t usually come with these protections.
Depending on your lender, you may be able to get part or all of your loans discharged due to disability or death. Other than that, your chances of not being required to pay your private student loans back are pretty slim.
“Even though both federal and private lenders want their money back, the government is more responsive to pressure from constituents. Since the government wants people to go into public service and teaching, they offer student loan forgiveness programs for those occupations,” explains Robert Farrington, America’s Millennial Money Expert.
He adds, “Private lenders don’t care what you do with your schooling, as long as they get paid back. There are so few options for dismissal of private student loans, that private lenders don’t feel the need to provide forgiveness opportunities.”
Speak with your private lender to determine your options. It may be willing to reduce your monthly payment or work out a different payment option that works better for your situation.
The bottom line
Student loans don’t have to be debilitating. Don’t ignore them and blindly make your payment each month. Instead, tackle your debt head-on by reviewing each of your student loans and ensuring you understand your loan forgiveness and repayment options.
Look at how much you’re paying each month for your student loan debt versus your remaining financial obligations. You may be able to decrease your monthly payment by refinancing your student loans at a lower interest rate or choosing an income-driven repayment plan.
If you work in an underserved field or have a financial circumstance that makes you eligible for a federal forgiveness program, begin collecting relevant records and working with your lender to ensure all of your paperwork is accurate and sufficient to have your loan forgiveness application approved when it’s time.
Note: The methods described here are specific to federal student loan forgiveness. To see your options regarding private student loans, consult our Student Loan Consolidation Guide or contact your lender.