With an average eclipsing $30,000 per graduate, student loans have even surpassed the exorbitant credit card debt US citizens have accumulated. Dealing with trillions of dollars’ worth of educational debt is the driving force behind student loan forgiveness programs such as PSLF and federal grants. While these programs seem like a golden opportunity to many people who are anxious to get rid of their debt, forgiveness is not always the right solution.
What is student loan forgiveness? Is it the best option for you? Are there other solutions such as debt consolidation that could be more financially sensible out there? Find out the answers to these questions to decide what your next step should be.
What is Student Loan Forgiveness?
Many students can apply for a federal student loan forgiveness program. If you qualify, the government will absolve you of a portion of your loan debt after you have met the requirements. In order to qualify for a student forgiveness program, you need to meet 2 criteria:
Be Enrolled in a Program
Being enrolled in a program requires you to be working for one of the qualifying employers, including non-profit or government agencies. At times, certain medical practices and military services can also be eligible.
Make 120 Payments (10 Years) Off Your Student Loans
The 10 years of qualifying payments must be made through one of several types of repayment plans, including:
- Standard Repayment Plan. Repay your debt consistently, and after 120 payments, you will be eligible for forgiveness.
- IBR (income-based repayment plan). Your monthly payments are at most 10%-15% of your salary. This can take you longer to be forgiven than other programs (sometimes 20-25 years).
- ICR (income-contingent repayment plan). Pay 20% of your monthly income, or the monthly payment amount, if you had a 12-year repayment plan in place (whichever is less). This can take up to 25 years to qualify for forgiveness.
- PAYE (pay as you earn repayment plan). Payments are capped at 10% of your salary and need to be made for 20 years before forgiveness.
- REPAYE (revised pay as you earn repayment plan). Pretty much the same thing, but tweaked for anyone with a federal student loan and no income eligibility requirements.
All payments need to be made in the full monthly amount and on time in order to qualify as one of your 120, and only payments made on or after October 2007 count. By utilizing any of the income-related plans, you can minimize the amount you have to pay each month, based on your income, and gain the most from student loan forgiveness. One important caveat to note is that the majority of your loans need to be paid in order to qualify.
Additionally, your loan must be a direct loan made by the federal government as part of the William D. Ford Federal Direct Loan Program. Private lenders or lending agency loans do not qualify for such loan forgiveness.
If you don't work for a federal or non-profit organization, you can still qualify for a PSLF, but the length of time is usually 20 years or more, making it irrelevant for most borrowers since you’ll have paid off your student loans by the time you qualify.
What is Student Loan Consolidation?
Another option for alleviating the weight of hefty student loans is consolidation. This doesn’t absolve you of your debt, but it is a lot easier to work with and can save you on interest payments as well. With this option, the government consolidates all of your loans into a single monthly payment. This is preferable to having several debts to pay simultaneously, and it also allows you to retain only a single interest rate to worry about. Additionally, some borrowers who don’t qualify for PSLF because of the strict criteria (i.e., where the loan came from, how you are repaying it, etc.) can use consolidation to change their loan’s status and thus become eligible for forgiveness.
Consolidating debt can get tricky when you are attempting to qualify for PSLF. Since eligibility for such loan forgiveness requires a set amount of time in which payments are made, altering this plan would reset the clock, pushing back the time when you would be able to receive PPLF. For example, if you were making eligible payments for 5 years into your IDR (income-dependent repayment plan) and then consolidated, those 60 payments would be canceled out, and you'd have to start counting your 120 payments anew. This can be a major setback if you have already been counting towards the 10-year deadline for several years. If this is your situation, you should calculate the amount you would save by consolidating versus the amount of total debt you would have left at the end of the 10 years, to determine whether or not the consolidation is worthwhile for you.
While your payments don’t count toward your PSLF total, you don’t actually lose the payment. Whatever money you put toward paying off your debt still counts toward your overall debt repayment. The only thing that starts over is the countdown of 10 years that is required to qualify for PSLF.
Main Differences Between Consolidation & Forgiveness
While 2 solutions to the same problem, debt consolidation and loan forgiveness are totally different options and each one comes with its own advantages and drawbacks. Student loan forgiveness programs come with a lot of strings attached. There are legal requirements you need to fill, contracts to sign, and terms to uphold. Borrowers should also understand that some loan forgiveness can be taxed, so look into the details before signing up. In short, this is not just free money you are receiving; you actually have to work for it. This may be in the form of working in a job you don’t enjoy for a few years, for example. Generally, though, many people find that what they gain from these student loan forgiveness programs far outweighs what they need to give. That being said, many people don’t actually qualify for the loan forgiveness they are aiming for, making consolidation a more feasible solution for the majority of debtors.
Debt consolidation comes with no strings attached. Your various loans are consolidated into a single monthly payment, your interest rate is recalculated, and you pay off your debt slowly but surely. There's no magic formula, and you aren't lowering your debt, though if you get a lower APR, you can save yourself a lot on interest payments, but it is a sure thing. You’ll also be able to lower your monthly payments, switch to a fixed or variable interest rate, and get certain benefits like discounts on auto payments. The other obvious difference between debt consolidation and loan forgiveness is that while qualifying for forgiveness is a complex process that not many people can pass, pretty much anyone can consolidate their student loans.
Student Loan Forgiveness is Best For…
Now that you have a good understanding of each of these options, the bottom line question is which one is right for you. Student loan forgiveness is good for you if you work in any of the fields that are eligible for student loan forgiveness. Some of these include:
- Public services, such as child services employees, correctional officers, public defenders, and law enforcement agents
- Any federal agency employee
- SEMA employees (automotive industry)
- Doctors and nurses
- Non-profit volunteers
Also, loan forgiveness is good for you if you have high loan balances (payments) alongside little to no monthly income.
Debt Consolidation is Best For…
On the other hand, if you aren’t in those categories, loan consolidation can save you not just a lot of money, but a tremendous amount of headache and hassle as well. Debt consolidation is a good choice for you if:
You are Early on in Your Payment Plan
Since you haven't invested a significant amount of time towards your 10-year qualifying term, losing the initial qualified payments won't matter.
You Haven’t Started Paying Off Your Debt
This is even more so than the previous example because, in this scenario, you don't lose any time at all. If you have the foresight, this can save you significantly in all areas.
Your Monthly Payments are too High
When you consolidate your debts, you can choose new repayment terms that are more flexible for your budget. Select up to 30-year repayment plans in order to spread out your debt over a longer period of time and reduce your monthly payments. You should calculate the overall interest you are paying to see how much you will have to pay in the long run to work out if this is a worthwhile option. If you cannot afford your currently monthly payments though, this is a good idea regardless of the fact that you may end up paying more in interest over time.
You Have Multiple Debts to Pay Off with Various Interest Rates That Apply
If the headache of balancing multiple monthly payments with varying interest rates and terms is too much for you to handle, debt consolidation is a good idea. Instead of having to keep track of so many payments and terms, you’ll only need to make one payment each month for a more consistent and manageable repayment plan.
You are Considering an IDR That Doesn’t Accept Your Loan Type
There are several types of federal loans that won’t qualify for an IDR. If you would like to pursue this type of repayment plan, consolidating your debt into a single Direct Consolidation Loan will not only make repayment easier and more convenient, but it will also open you up to IDR eligibility.
Your Monthly Salary is Too High to Qualify for Reduced Payments or Forgiveness
If you are earning a high salary, you may not be eligible for these discounts. In such a case, debt consolidation is your only option.
To sum up, student loan forgiveness is a good option if you took out a federal loan, are currently (and have been) working for a government agency or non-profit organization, and have been making payments for several years already. Alternatively, loan consolidation is a good idea if you don’t qualify for loan forgiveness or if you simply want to have a more organized, lower interest, lower monthly payment option.
Calculate the amount you’ll have left to pay after 10 years of repayment to decide if student loan forgiveness is worthwhile for you. Remember, you’ll need to make 120 payments before you can qualify, and many people will have already finished their loan repayments before that time elapses. Weigh both options, and find the best solution toward financial independence at last.