Student loans are such a burden for many Americans. Over 44 million people in the U.S. have student loans.
The debt can be so crushing for some, that the politicians in Washington are unvailing plans to forgive student loan debt.
Is student loan debt forgiveness an option for your debt? Read on to learn what student loan forgiveness is, and how you can possibly reduce or eliminate your student loan debt.
Two Types of Student Loans
Student loans come in a variety of forms. The two major categories of student loans are federal student loans and private student loans.
Federal student loans are loans given by the Department of Education. Private student loans are given through banks
Federal student loans can be subsidized or unsubsidized. Subsidized loans mean that interest on the loan doesn’t start to accumulate until you start to repay your loan.
Unsubsidized loans have the interest applied to the loan once the loan is disbursed. If you take out an unsubsidized loan in your freshmen year of college, the interest will accumulate through the life of the loan, even when you’re in school.
There are also graduate and undergraduate student loans. You’d assume that because fewer people go to graduate school, student loan debt wouldn’t be an issue.
Graduate student loans account for almost half of the total amount of student loan debt. Advanced degrees cost more, plus these programs can be longer than an undergraduate degree.
Student Loan Debt Forgiveness Programs
How can you reduce student loan debt or have it forgiven? The government does offer a few programs to lower your monthly payments or have your debt forgiven. These are the common student loan forgiveness programs.
Income-Driven Repayment
Income-Driven Repayment is designed to lower monthly payments over the life of your loan. The amount you repay every month depends on your income. You recertify your income every year, and at the end of 25 years, your student loans are forgiven.
Public Service Loan Forgiveness
Did you get a job in a non-profit or government agency? You may be able to qualify for student loan forgiveness.
You have to work full-time for the organization, be in an Income-Driven Repayment program, and make 120 payments towards your student loan.
If you’re doing the math on that, that means 10 years of repayment and working for a government agency or non-profit.
You can have the balance of the student loan forgiven.
Teacher Loan Forgiveness
If you teach for five years in a row in a low-income district, you may get up to $17,500 of your student loans forgiven.
You have to be a highly-qualified teacher and teach in certain subjects, such as math or science. If you aren’t highly-qualified or teach in other subjects, you may be able to get $5,000 of the loan forgiven.
The type of loan that you have is important to know because private loans generally aren’t eligible for student loan forgiveness.
If you want to lower your payments for private loans, refinancing may be your best option.
The Untold Gotcha of Student Loan Forgiveness
Is student loan forgiveness the right option for you? It can be a huge relief for you, but there are some unintended consequences of student loan forgiveness.
Let’s say that you go for years in the Income-Driven Repayment program paying little to nothing against your student loan debt.
During the course of those years, interest still accumulates on those loans. For example, you may start out with $30,000 in student loan debt. When interest is tacked on, your debt becomes $50,000 several years down the road.
You make it to the 25-year mark and your debt grew to $60,000 when interest is added up. You’re eligible to have that $60,000 loan forgiven.
There is one major consequence of student loan forgiveness. The IRS counts any settled debt over $600 as taxable income. That includes student loan debt.
What does that mean for you? If you made $45,000 the year your student loan is forgiven, your total income in the eyes of the IRS is $105,000. That puts you in a higher tax bracket and you have to pay income taxes on $105,000 instead of $45,000.
In other words, you’re in for a huge tax bill that can take you by surprise. Before you apply for any type of student loan forgiveness program, you have to know the tax consequences and plan to pay more in taxes that year.
Student Loan Forgiveness Proposals
In a presidential election year, candidates have released various versions of student loan forgiveness programs to reduce the debt.
Some, like Elizabeth Warren and Bernie Sanders, have called for student loan debt to be completely forgiven.
Presumptive Democratic nominee Joe Biden’s plan forgives student loan debt for those making under $125,000 a year. This only applies to undergraduate loans and to graduates of public universities.
This year has been turned on its head. While many of these proposals seem like good ideas, there are major obstacles to getting them to become law.
The first is that they have to get passed by Congress. In a Democratically-controlled House of Representatives, that seems likely. However, in a Republican-controlled Senate, any student loan forgiveness proposals will go nowhere.
One additional factor is the coronavirus pandemic. To prop up the economy, Congress has passed trillions of dollars in aid to individuals and businesses. These packages have made the already high national debt even higher.
The likelihood of broad student loan forgiveness isn’t high at the moment.
The Future of Student Loan Forgiveness
The world is changing moment by moment, which makes it difficult to predict the future of student loan debt forgiveness.
What we do know is that there are a few programs available, but they could come with expensive strings attached.
The best thing you can do for yourself in the meantime is to pay down your debt as much as possible while letting your legislators know where you stand on the issue.
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