Student Loan Forgiveness: What Is It?
Borrowers who qualify for student loan forgiveness are released from some or all of their federal student loan obligations. To cover the cost of their post-secondary education, these borrowers have taken out loans.
Certain loan types are eligible for forgiveness, but only those borrowers who work in the public sector, in education, or in the armed forces are eligible.
Please take note that on June 30, 2023, President Biden announced a new income-driven repayment (IDR) plan in response to the Supreme Court ruling that day that put an end to his previous plan to forgive student loans.
It is known as SAVE and provides additional financial benefits to student loan borrowers. The full regulations go into effect on July 1, 2024, but three key features will be introduced in the summer of 2023. Continue reading to find out more.
ESSENTIAL NOTES:
- Student loan forgiveness allows for the full or partial forgiveness of a borrower’s federal student loan debt.
- Private loans are not eligible for loan forgiveness; only federal direct loans are.
- Working in public service can result in the forgiveness of your student loans.
- In certain situations that are outside the borrower’s control, federal loans may also be discharged.
- Under the borrower defense program, students who believe their school has defrauded them may apply to have their loans forgiven.
How Student Loan Forgiveness Works
Overall Context
In the language of finance, loan forgiveness refers to the elimination of a debt, or a portion of a debt, which releases the borrower from repayment obligations. While it is possible to forgive any student loan, this usually only applies to loans that are issued by or backed by the US government.
Stated differently, no privately issued loan, such as one from a commercial bank or lender like Sallie Mae, is eligible for the widely publicized forgiveness programs, even if the loan is designated for a student.
Forgiveness might be an option for borrowers who have qualified loans. To have their loans forgiven, borrowers must apply; if approved, they may also need to continue making their payments.
Longstanding worries about the growing burden of student debt were heightened by the widely reported failure of multiple for-profit colleges and the economic crisis that the pandemic brought about in 2020. It has become a hotly contested political issue to forgive student loans for all borrowers, not just those who serve in the public sector, follow a repayment plan, or were duped by their college.
Important
The Biden administration announced in August 2022 that qualified borrowers would have their student loans forgiven. Individuals had to earn less than $125,000 ($250,000 for married couples) in order to be eligible. You were qualified for debt cancellation up to $20,000 if your income met the requirements and you were a Pell Grant recipient. You were eligible for up to $10,000 if your income qualified and you are not a Pell Grant recipient.
On November 11, 2022, two federal courts issued orders to halt the plan. While it worked to overturn the ruling, the Department of Education halted accepting new applications and placed those that had already been submitted on hold.
The Biden administration was declared ineligible by the Supreme Court on June 30, 2023, to waive up to $20,000 in federal student loan debt for each borrower.
The three-year suspension of interest and payment on student loans has come to an end. September 1, 2023 saw the return of interest charges on student loans, while October saw the start of payments again.
Eligible Loans
Many borrowers want to be free of their student loan debt, but due to the strict eligibility requirements currently in place, very few are able to achieve this goal. Depending on the loan type, requirements might change, but generally speaking, loan forgiveness is limited to people working in specific public service positions. These comprise educators, government employees, some nonprofit employees, AmeriCorps members, and members of the armed forces.
Furthermore, not all federal loans qualify. Direct loans (also known as Stafford loans), Perkins loans, and Federal Family Education Loans (FFELs) for specific special groups such as teachers are the main types of student loans eligible for forgiveness. Borrowers of student loans can also choose repayment plans that include partial debt forgiveness or discharge.
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Types of Student Loan Forgiveness
Student loan forgiveness is only available for direct federal loans, formerly known as the William D. Ford Federal Direct Loan Program. This program does not apply to non-federal loans, such as those made by loan companies and private lenders.
You can combine your debts into a direct consolidation loan if you borrowed money through the FFEL Program or the now-defunct Perkins Loan Program and don’t have a William D. Ford direct loan. The previously mentioned PSLF is then applicable to the newly combined loan.
Remember that the servicer for your federal student loans is in charge of handling repayment; thus, collaborate with them to either enroll in or modify your current repayment plan. This is typically done online at the service provider’s website.
Additionally, under the federal student loan repayment program, your employer may repay a portion of your loans (up to $10,000 of your loans annually, with a maximum of $60,000) if you work for a federal agency.
1. Public Service Loan Forgiveness (PSLF)
For those employed by nonprofits or the government in public service positions, the Public Service Loan Forgiveness Program (PSLF) is exclusively intended. Also, if you fulfill certain requirements for volunteer work, military duty, or professional practice, you might be eligible to have all or part of your debt forgiven.
“Public Service Loan Forgiveness (PSLF)” is the ninth Federal Student Aid program.
When You Qualify:
You must first make 120 qualifying payments in order to have debt forgiven under the public service program (this entails paying the minimum amount due on time). These payments must be made while you are employed by an approved employer, which is typically a nonprofit organization that is exempt from federal, state, or local taxes or a federal, state, or local government.
After ten years of employment and ten years of monthly payments (a total of 120 payments), you effectively qualify.
Jobs in the government, social work, police, and fire departments, as well as nursing, may be eligible. Only payments made after October 1, 2007, are acceptable for determining eligibility.
Fast Fact
Over 2.2 million borrowers—many of whom were victims of for-profit college fraud—were eligible for $66 billion in student loan debt relief as of May 8, 2023, thanks to approvals made by the US Department of Education during the Biden administration.
Applying for PSLF
To apply for Public Service Loan Forgiveness (PSLF) & Temporary Expanded PSLF (TEPSLF) Certification & Application (PSLF form), both you and your employer must complete it. First, if applicable, combine your loans from the FFEL Program and Perkins loans into a direct consolidation loan. After the consolidation is complete, you must submit a PSLF form to your loan servicer.
2. Repayment Plans With Loan Forgiveness
- It will take longer to get a portion of your student debt forgiven if you are not employed in a public service capacity. Federal income-driven repayment plans allow for some debt forgiveness after a predetermined period. These plans are intended to assist graduates who would struggle to make payments within the standard 10-year time frame.
- These plans include:
- Income-Based Repayment (IBR): 10% to 15% of discretionary income is the maximum monthly payment amount. It takes 20 or 25 years of qualifying payments to be eligible for forgiveness.
- Income-Contingent Repayment (ICR): Generally 20% of discretionary income, payments are recalculated annually based on family size, gross income, and the outstanding balance of federal loans. To be eligible for forgiveness, one must make qualifying payments for 25 years.
- The maximum monthly payment under Pay As You Earn (PAYE) will be 10% of your discretionary income. Eligibility for forgiveness is based on 20 years of qualifying payments. Even a portion of the loan’s interest may be covered by the government.
- A borrower’s income that is exempt from payments will increase from 150% to 225% of the federal poverty guidelines. Therefore, there won’t be any payments made to a single borrower making less than $32,805 per year ($67,500 for a family of four). Those who hold loans but don’t meet this criterion will save at least $1,000 a year.
- To prevent unpaid interest from increasing the amount a borrower owes, interest charges that are not covered by their monthly payments will be stopped.
- When calculating loan amounts, couples who file separate taxes will not have to take their spouse’s income into account.
