Student loan forgiveness is a hot topic issue. As of March 2019, college students and graduates in the United States owed more than $1.5 trillion in student loans. That’s twice what they owed in 2009. Pew Research estimates that student loan debt impacts one-third of adults under the age of 30 and 22% of adults between the ages of 30 and 44.
According to Forbes, student loan debt is now the second-highest consumer debt category after mortgage debt. Approximately 44.7 million Americans have outstanding student loan debt. More than 5 million of them are in default and 2.6 million have loans in forbearance.
The average student loan debt is $37,192. Certified Financial Planner Dan Loose comments, “It’s not only handicapping young people’s ability to get homes but the risk they can take with certain jobs. Maybe they can’t afford to take their dream job because they are saddled with paying $700 or $800 dollars a month. That’s the saddest thing.”
Is there a solution? Bankruptcy does not alleviate student loan debt. For some, student loan forgiveness is the way out of crippling debt. Here’s what you need to know.
What is student loan forgiveness?
Student loan forgiveness is the process through which borrowers are released from their requirement to pay back their federal loan debt. Not everyone is eligible, and forgiveness does not apply to private loans.
Only limited situations allow for a borrower’s student loan debt to be forgiven. The Public Service Loan Forgiveness Program (PSLF) releases you from your remaining federal direct loan debt after you make 120 on-time monthly payments and sustain full-time employment for a government agency or non-profit. Meanwhile, the Temporary Expanded Public Service Loan Forgiveness (TEPSLF) is a good option for people who’ve been denied PSLF. Then there’s Teacher Loan Forgiveness, which is granted when a borrower teaches for five complete consecutive academic years at a low-income school.
In rare cases, a judge can award a form of student loan forgiveness. It’s called discharge. It can be applied to federal and private loans. Instances that justify student loan discharge include permanent disability, identity theft, an unauthorized signature of the loan and false certification.
Loan Forgiveness for Income-Based Repayment Plans is only granted after a borrower pays 20 or 25 years of on-time monthly payments during their income-based repayment plan. Furthermore, the Closed School Discharge allows students from now-dissolved colleges and universities to apply for total student loan forgiveness. The criteria are strict: borrowers are only eligible if they were enrolled when the school closed or were on an approved absence. You are also eligible if the school you attended closed 120 days after you withdrew from it.
Military service and AmeriCorps service can qualify borrowers for significant relief benefits for their student debt.
Student loan forgiveness alternatives
The Department of Education statistics reveal that fewer than 54,000 people submitted applications for public service loan forgiveness in 2018. Only 610 applications were approved. In other words, student loan forgiveness is tough to qualify for and even tougher to ultimately receive.
If you don’t qualify for forgiveness, you still have options.
Adversary Proceeding in Chapter 7 and Chapter 13 Bankruptcy
It’s important to note that bankruptcy doesn’t exonerate most people from their student loan debt. However, it may occur if the borrower files an adversary proceeding during Chapter 7 or Chapter 13 and indicates how the repayment of the student loan debt represents an undue burden to the borrower and their dependents.
In that case, the borrower needs to prove three things: They cannot maintain a minimal standard of living if they are forced to repay the loan, the current undue burden will continue for the majority of the loan’s term if the borrower has to pay the loan back and the borrower has made a good faith effort to repay the loan.
It’s highly unusual for borrowers to be able to prove undue hardship and be successfully granted relief from their student loan debt.
Income-Driven Repayment Plan
Income-driven repayment plans allow borrowers to pay an affordable amount every month based on their annual income. For many borrowers, this is the most financially realistic repayment option available.
The federal government offers four kinds of income-driven repayment plans: income-contingent repayment (ICR), income-based repayment (IBR), pay as you earn (PAYE), and revised pay as you earn (REPAYE).
You can only qualify for income-driven repayment plans if your outstanding student loan debt is more than or if it would represent the majority of your annual income. Once a borrower stays on an income-driven repayment plan for 20 or 25 years, they can qualify for student loan forgiveness.
Student loan forgiveness vs. student loan refinancing
Student loan forgiveness, the partial or complete release of student loan debt, is radically different from student loan refinancing, which consolidates your private and federal loans into one monthly payment at an attractive interest rate.
Interest rates vary greatly between refinancing lenders. Most lenders will typically offer a choice between a fixed and variable interest rate. Lenders also will offer a choice between long-term plans with low monthly payments and high interest rates or short-term plans with higher monthly payments and lower interest rates.
The goal with refinancing is to either pay off your student loans more quickly, or to roll multiple loans together into one payment and pay less per month. You cannot refinance if you plan to use an income-driven repayment or to apply for student loan forgiveness. You can, however, refinance as many times as you’d like. You need to be financially stable and to have a good credit score in order to qualify. There is no cost to refinance.
The bottom line
Student loan forgiveness is a difficult, complex path to navigate. Ultimately, most people cannot qualify for it unless they are employed as an educator, at a non-profit, or with the government.
For most borrowers, an income-driven repayment (IDR) plan is the best option. It allows borrowers to pay what they can reasonably afford each month. Over the course of a couple of decades, IDR borrowers can then apply for student loan forgiveness.
There are also many situations in which borrowers can apply for student loan discharge, which also provides relief from student loan debt. For borrowers who are motivated to pay back their student loans quickly, consolidation and refinancing their loans will cut their interest rates and offer attractive repayment terms.