Is Student Loan Forgiveness Worth It?

The question of whether or not student loan forgiveness is worth it might seem like an odd one. After all, who wouldn’t want the balance of their student debt forgiven?

While there are certain types of borrowers who may benefit from it, before you start relying on forgiveness as a way out, you should know not all borrowers are likely to benefit from forgiveness. In fact, the majority aren’t. And there may even be some significant downsides, including repaying higher balances and ending up with a sizable tax bill.

If you’re wondering if forgiveness is a good idea — or even a possibility — for managing your student loan debt, here is a list of times when forgiveness may or may not be of benefit to help you decide if it’s right for you.

When You Will Benefit From Student Loan Forgiveness

Although there are some borrowers who can benefit from federal student loan forgiveness programs, they are rare. Here are the relatively few scenarios when forgiveness can help you manage your student debt.

1. You Have High Debt Relative to Your Income

If you’ve borrowed a significant amount relative to your income, enrolling in a forgiveness-granting program, such as income-driven repayment (IDR), may help you manage your debt load. An IDR plan ties your monthly payments to your income, making them more manageable. And if your income remains low throughout your career, you’ll likely have a balance remaining to be forgiven after you’ve made the required number of payments.

For example, let’s say you’re a law student and borrow the average amount to attend law school, which was $140,616 in 2019. After graduation, you make only $58,220, which is on the lower end of the average lawyer salary.

In this case, you could end up with a starting monthly payment as low as $329 on an IDR plan, assuming the average graduate loan interest rate of 6.36% as of 2019. That’s dramatically lower than the $1,587 you’d pay on a standard 10-year plan. You might be paying on those loans as much as 15 years longer on an IDR plan. But after you’ve made the required 240 to 300 payments, you could have a remaining balance of more than $175,000 forgiven, depending on the IDR program, according to the Repayment Estimator at Federal Student Aid.

2. You Qualify for Public Service Loan Forgiveness

Potentially the most powerful form of student loan forgiveness is Public Service Loan Forgiveness (PSLF). If you’re a teacher who works in a public school, a doctor who works in a public hospital, a lawyer who works as a public defender, or you’re otherwise a full-time employee of a government agency or nonprofit, you may qualify to have your loans forgiven in as few as 10 years.

To qualify, you need only enroll in an IDR program and commit to 10 years of full-time work for a nonprofit or government agency. Although payments don’t need to be consecutive, you do need to make 120 (or 10 years’ worth of) monthly payments while working for a nonprofit or government agency to be eligible. Theoretically, as long as you meet those basic qualifications, the remaining balance on your loans can be forgiven.

Let’s take our lawyer example. If our hypothetical lawyer works full-time as a public defender for at least 10 years, at the end of the IDR repayment term, they may have more than $178,000 forgiven. Even better, if they qualify for PSLF, they’ll have only paid slightly more than $52,000, which is significantly less than what they borrowed.

Getting PSLF can be tricky, though. As of the end of 2018, only 96 of the 30,000 people qualified to receive it were approved for it, CNBC reports. Hopefully, the program will become more streamlined for future eligible borrowers.

In the meantime, be as proactive as possible and use the Employment Certification for Public Service Loan Forgiveness form available at Federal Student Aid to keep track of how many payments you’ve made and with whom you’ve been working over the years. Fill out this form for every qualifying employer you work for so you’ll have all your paperwork ready when it comes time to apply for PSLF.

3. You Qualify for a Forgiveness Program Based on Your Work Situation

Aside from enrolling in an IDR program, which qualifies you for the regular 20- to 25-year forgiveness clock as well as PSLF, there are a number of other forgiveness and repayment programs that may help you unload your student loans as quickly as possible. These include programs for teachers, health care workers, active military, lawyers, and volunteers.

Some of these programs have very specific requirements, may not be available in all areas, and may only forgive or repay a small portion of your total student loan debt. So it may not pay to go into one of these lines of work simply for the loan forgiveness or repayment benefit. But if you’re already interested in seeking out one of these careers, these programs are worth a look.

When You Won’t Benefit From Student Loan Forgiveness

While the idea of getting your loans forgiven may feel beyond amazing, there are a number of drawbacks to student loan forgiveness. Before pinning your hopes on having your debt wiped out, first consider whether you’ll actually benefit. In the following situations, you may not.

1. You Won’t Have a Balance Remaining to Be Forgiven

Most student loan borrowers aren’t likely to have a balance remaining after 20 to 25 years, the standard time frame for forgiveness. The average graduate in 2019 left school with a debt of $37,172 according to Nitro College. That may sound burdensome, especially when you’re first starting out in your career, but when you factor in making payments over two decades or more, it’s a more than adequate amount of time to pay back all of the average student loan debt. That’s especially true when you consider that IDR plans, the most common of the forgiveness programs, tie your monthly payment to your income.

CBS News reports that the average starting salary for 2019 graduates was $51,347. Plugging those numbers into any of the four IDR programs results in monthly payments between $272 and $530, with no repayment term longer than 149 months. That’s almost 12.5 years, only slightly longer than the standard 10-year repayment time frame. So, the average student, with an average debt balance and an average salary, won’t make it anywhere near the 240 to 300 payments necessary for their remaining balance to be forgiven.

Generally speaking, to really benefit from forgiveness, your debt would have to be double or more your projected annual salary, and this situation is rare. Only 7% of borrowers, according to the Pew Research Center, borrow more than $100,000 for school, and nearly all of these are graduate students.

2. You’ll End Up Paying Back Far More Overall

Although you may find it necessary to lower your monthly student loan payment by enrolling in an IDR plan so you can manage your day-to-day living expenses, don’t bet on forgiveness to help you save money over the long term. While you’re busy making your required 20 to 25 years of monthly payments, you’re highly likely to pay significantly more than you would have on the standard 10-year repayment schedule, even if you have a balance remaining to be forgiven.

That’s thanks to all the interest that accrues on your loan over an extra 10 to 15 years. Even though lowering your monthly payment may be an economic necessity for you if you’re struggling to afford basic necessities, IDR doesn’t stop interest from accruing on your loan. Even worse, though you may be banking on forgiveness to finally unsaddle you from your debt, by the time you get there, you will likely have already repaid your debt several times over, depending on how much you borrowed and which IDR plan you’re enrolled in.

For example, let’s say you borrow the average amount of $37,172, but you end up with a job that pays only $30,000 — considerably lower than average. You decide to enroll in IDR because you’re struggling to afford even basic necessities, much less your student loan payment, which would be $391 per month on the standard 10-year plan. An IDR plan could get your payment as low as $94 per month, which is much more manageable.

However, if your income stays relatively steady at around $30,000 throughout your career — which it could if you were, for example, a preschool teacher — you could end up paying back significantly more on an IDR plan than you would have on the standard 10-year plan — as much as $20,000 more. Even worse, depending on the plan, you could repay nearly double what you borrowed with nothing remaining to be forgiven after making the required number of repayments.

3. You’ll Miss Out on Other Opportunities While Waiting for Forgiveness

No matter what forgiveness program you opt for, you might have to make years or even decades of payments before your loans are forgiven. The Teacher Loan Forgiveness program has the shortest time frame, requiring only five years of teaching in an underserved area, but it only forgives up to $17,500 of your loans, depending on the subject you teach.

Even more problematic, you could miss out on other opportunities while you’re waiting for forgiveness. For example, you could make more money teaching in a better-served area. A higher-income school system could pay you $10,000 or more per year over a lower-income one.

Also, the longer debt repayment takes up a portion of your budget, the less money and time you have to put toward other things like a down payment on a house, starting a family, or saving for retirement.

For example, the Federal Reserve Board found that rising student loan debt has led to a corresponding decrease in homeownership. CNBC reports that 83% of those ages 22 to 35 who haven’t bought a house blame their student loan debt. And a 2019 study conducted by the MIT AgeLab found that 84% of American adults say student loans negatively impact their ability to save for retirement.

If you’re able to manage your student loan payments, even if it pinches a bit, you’re almost always better off paying them off as quickly as possible, so you can get back to your life and saving for what matters to you, whether that’s a home, a family, or a comfortable retirement.

4. You’ll End Up Working in a Job Outside Your Career Trajectory

If you opt for PSLF, you may have all your debt forgiven, but only after you’ve worked an entire decade in a qualifying nonprofit or public-sector job. That may be OK with you if it’s in line with your career goals, but if it isn’t, then taking a 10-year detour may not be worth the forgiveness you’d get.

Also, public-sector jobs may come with rich, non-monetary rewards, but they’re typically lower-paying than private-sector jobs. Depending on the amount of student debt you owe, you may be better off simply getting a job in a for-profit organization.

Similarly, there’s an extensive list of other forgiveness and repayment programs available for those in certain professions, including teachers, doctors, and lawyers. But, just as with PSLF, you typically have to work for a certain period of time in a public-sector job, which could be outside your career trajectory.

5. Your Payments Are Set So Low That Your Balance Grows

If you enter your loans into an IDR plan, your monthly payments are tied to your income. That means if your income is low enough and your debt high enough, you could end up making payments that are smaller than the amount of interest that accrues on them.

It can be scary and frustrating to watch your balance grow even as you’re making payments. I know this firsthand, as I’ve never earned enough as a teacher to account for the debt I acquired to get the Ph.D. necessary to teach at the college level.

You may deal with that fear and frustration, as I have, by reminding yourself that whatever you still owe after making the required number of payments will be forgiven in the end, so it doesn’t really matter. Except that it does, in three crucial ways.

First, over the course of 20 to 25 years, you could end up paying back more in interest than you borrowed in the first place.

Second, your income situation could change for the positive, and because your payments are tied to your income on an IDR plan, you could end up having to make significantly higher payments on a significantly higher balance. Your new, higher income might also nullify the forgiveness benefit (more on that below).

Third, the IRS considers the amount of your forgiven balance to be taxable income, so if you’re left with a high balance in the end — one that could be larger than the original amount you borrowed if your payments are small enough — you could end up owing tens of thousands of dollars in income tax (see No. 7 below).

6. Your Income Could Change

Because IDR payments are tied to your income, if your income grows, you could end up in a worse situation than when you started, especially if your balance has been growing rather than shrinking while enrolled in an IDR plans.

If you’ve been making payments under a Revised Pay As You Earn (REPAYE) or Income-Contingent Repayment (ICR) plan and your income grows significantly enough, you could be required to make payments higher than you would have on the standard 10-year repayment schedule. Although you could certainly decide to exit the program at that point, you’ll be stuck paying back a higher balance. Worse, when you exit an IDR plan, the interest that accrues while you were enrolled in IDR is capitalized, or added to your principal balance. That means you’ll start accruing even more interest on the new, higher balance.

If you’re enrolled in a Pay As You Earn (PAYE) or Income-Based Repayment (IBR) plan, your monthly payments will be capped at no more than you’d have to repay on a standard 10-year plan. Yet, even with these plans, you could end up worse off than when you started.

For example, let’s assume you’ve been making payments in an amount that’s less than the amount of interest accruing on your loans. Your income reaches the point where you’re now making the same size payments as you would be required to on a standard 10-year schedule. If you have more than 10 years left on your forgiveness clock, you’ll end up having to pay back the entire (significantly higher) new balance before you ever reach forgiveness. In other words, it will be worse than if you’d simply thrown all those years of payments down a hole.

It’s hard to predict how your career goals could change over the years, but if you think you’re headed for a much better income in the future, you may be better off passing on forgiveness and enrolling instead in a graduated repayment plan. Or, if you’ve landed a steady, well-paying job, you could be a good candidate for another strategy aimed at unloading those loans as quickly as possible: student loan refinancing through a company like Credible. Credible is offering up to a $750 bonus when you refinance your student loans.

7. You’ll End Up With a Hefty Tax Bill

Potentially the most significant drawback of student loan forgiveness is the taxes. With a few exceptions, including PSLF, the IRS considers the amount of your forgiven balance to be taxable income. Depending on how much is forgiven, that could amount to tens of thousands of dollars you owe in taxes.

Let’s consider again our law student example. In that scenario, the law student could potentially have a remaining balance of $175,000 forgiven. But if their balance is approved for forgiveness, their student loan servicer will send both them and the IRS a 1099-C stating the amount forgiven. They or their tax preparer is required to add that amount to their total taxable income for the year. A balance of that size could mean they owe a significant chunk of cash to the IRS.

Also, because of years of accrued interest, the forgiven balance will be larger than the amount originally borrowed ($140,616), in spite of making decades of monthly payments that already add up to more than what was borrowed on every one of the IDR plans.

Worst of all, if you can’t write a check to the IRS, you’ll have to set up a payment plan. As a result, you’ll be sending monthly payments to the IRS for several years instead of to your student loan servicer — just when you thought you were finally rid of student loan debt for good.

8. Your Forgiveness Hopes Are Pinned on PSLF

PSLF comes with a lot of perks that make forgiveness sound well worth it: You only have to wait 10 years for forgiveness instead of 20 or 25, and you don’t have to pay taxes on the amount forgiven.

However, the program is such a mess that when the first borrowers to apply for PSLF became eligible in 2017, the federal government granted only 96 out of 30,000 requests. The situation hasn’t improved much in the years since. In fact, the program has been accused of such gross mismanagement that the American Federation of Teachers is suing the Department of Education over public service loan forgiveness.

That doesn’t necessarily mean the program doesn’t work, and it’s hard to say what changes future administrations may make to student loan programs and policies. But it’s enough to give you pause for pinning all your hopes on PSLF. Even if you do stand a good chance of receiving PSLF forgiveness, it’s a wise idea to maintain a backup plan.

9. You Have a Significant Amount of Private Student Loans

The student loan forgiveness programs mentioned above apply only to federal student loans. If you have a significant amount of private student loan debt, these programs aren’t an option for you. Private loans have far fewer options in general for repayment.

However, if you’re in desperate need of private student loan forgiveness, you’re not entirely out of options. Some states offer partial student loan repayment in exchange for qualifying work. Better yet, these repayment programs often require only two or three years of service rather than the 10 years you need to qualify for PSLF. Typical careers that qualify for these repayment programs include nurses, doctors, lawyers, and teachers.

Alternatively, you can seek out an employer that offers partial loan repayment as a recruitment perk. As college graduates leave school with ever-increasing student loan debt loads and employers continue to seek highly qualified job candidates, this option may become more common.

Final Word

As with any financial strategy, there’s no one-size-fits-all route when it comes to managing your student loan debt. For some, student loan forgiveness may be a worthwhile option to help them get ahead financially. For others, forgiveness may not make financial sense in the long run.

When it comes to figuring out the right student loan repayment strategy for you, be sure to weigh all the pros and cons and run the numbers with your current and projected income and student loan debt. To find out exactly what you may have to repay — both in monthly payments and in total — as well as how much remaining debt could be forgiven, run your numbers through the Repayment Estimator at Federal Student Aid.

Are you thinking about forgiveness as an option for managing your student loans? Does it seem like it will be worth it for you or not?

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