8 student loan forgiveness plan myths
By Roxanne Hawn
March 2, 2015
Almost a quarter of millennials think their student loans will be forgiven, according to a 2014 report from Junior Achievement USA called “Millennials and College Planning.” Sounds nice, but the reality is much more complicated and probably less common than people think.
“I think we can reasonably infer that some millennials believe that some stroke of a pen will erase their student debt,” says Stephanie Bell, spokeswoman for Junior Achievement. “Some of them may plan perhaps to work for the federal government or participate in other programs that would allow them, at some future point, to have their debt partially or completely written off. Some of them may just have unrealistic expectations about what forgiveness is and how it can be achieved.”
Are you one of those who are hopeful student loans will be magically forgiven? It's time to look at the myths — and facts — about this kind of debt. Here are eight common misconceptions:
1. Myth: All student loan forgiveness programs make debt disappear.
Some programs do provide true loan forgiveness. Others provide ways to earn extra money to pay down or pay off your loans. When looking for help with your student loans, you have two options:
A loan forgiveness program, where a portion of your loan balance truly is “forgiven,” means it does not have to be repaid in exchange for a work commitment on your part. The Public Service Loan Forgiveness Program (PSLF) is an example of a forgiveness option for student loans. It is overseen by the U.S. Department of Education's Federal Student Aid Program.
A loan repayment program like those offered by national or international service organizations allows you to earn additional money that must be paid toward your student loans. Military programs that help people repay student loans, on the other hand, make payments directly to the loan holder.
2. Myth: Student loans can be forgiven 100 percent.
Each forgiveness program features its own rules, requirements and maximums. In most cases, don't expect to wipe out your total loan balance.
Elizabeth Turner had amassed $350,000 in student debt, coming out of dental school. As part of the National Health Service Corps, Turner can earn $50,000 — in addition to her salary — for two years of full-time work at a community health center. She is required to put that extra money toward her student loans. If she stays six years, she would receive the maximum of $150,000 to use toward her loans. That still leaves her $200,000 in debt.
“I have a unique situation in the community health center I found, and it took me eight months to find a fit that was right for me,” Turner says. “I wasn't willing to go into something that was poorly run and didn't provide the patient care that I believed in, just for the finances.”
3. Myth: All student loan forgiveness programs are tax-free.
“If I were to leave or get fired, it's like a 35 percent interest rate that I have to pay that $50,000 back at. Quitting is not an option.”
–Elizabeth Turner, former medical student
Not necessarily. In Turner's case, the extra money she earns is indeed free of federal income tax. The same is true for the Public Service Loan Forgiveness Program, which began in 2007. However, money earned to repay loans by working for AmeriCorps, a network of public and private entities that provide community service, is taxable the year it's paid to loan holders. At the conclusion of your term of service, you receive your educational award in full. You then have seven years to apply that money toward your existing student loans or to pay tuition if you pursue additional education.
4. Myth: Student loan forgiveness programs work for all types of loans.
According to U.S. Department of Education Federal Student Aid Program documents, loan forgiveness programs apply only to qualified loans, usually government loans. Any private educational loans or other accumulated student debt, such as credit cards, don't qualify.
5. Myth: Student loan forgiveness is available to everyone.
Forget it if your loans are in default. Though you can regain eligibility if you rehabilitate your loan first, in most cases, you must consistently make qualified student loan payments.
For example, in the Public Service Loan Forgiveness Program, you must follow all the rules for 120 qualified payments over 10 years. Only payments made after 2007 count, and there is no way to speed up that process by making extra payments or skipping the usual loan repayment grace period. After your 10-year commitment, whatever loan balance remains would be eligible for forgiveness.
6. Myth: Student loan forgiveness programs are guaranteed once you start the work or service commitment for your loan forgiveness or repayment program.
According to the official Public Service Loan Forgiveness Program Q&A, “The U.S. Department of Education cannot make any guarantees regarding the future availability of PSLF. The PSLF Program was created by Congress, and while not likely, Congress could change or end the PSLF program.”
The first PSLF participants won't be eligible to apply for forgiveness until 2017. In fact, the form requesting forgiveness doesn't even exist yet, according to the U.S. Department of Education's Federal Student Aid Program. In theory, some of the applications might be denied, but at this point the reasons for possible rejection are unknown.
7. Myth: Students can work for a shorter time in exchange for less student loan help.
These all-or-nothing agreements include strict standards for performance and completion. You cannot complete just one year of a two-year deal for half the promised forgiveness amount. In addition to total loss of any loan forgiveness, some programs include penalties for breach of contract.
“If I were to leave or get fired,” says Turner, “it's like a 35 percent interest rate that I have to pay that $50,000 back at. Quitting is not an option.”
8. Myth: Student loan forgiveness is based on income.
Not directly, according to the U.S. Department of Education's Federal Student Aid Program. There are income-based repayment plans that can lower the required monthly payments, thus greatly extending the repayment timeline from the standard 10 years. In these cases, a higher loan balance would remain and be eligible for forgiveness after the 10 years and 120 qualified payments in PSLF program.
Unless you understand the intricate requirements for student loan forgiveness programs and are committed to the long-term effort required to earn that forgiveness, it's probably best not to see student loan forgiveness as a magic solution for student loan debt repayment.
To help students better anticipate and understand their educational return on investment, Junior Achievement USA created an app and online tool called “Build Your Future.” It lets you choose an academic major and anticipated career field. Add in a few details about your anticipated student loan needs, and the tool gives you a return-on-investment score between 1 and 5, based on your future earning potential. It's designed to provide insights into how much student debt makes sense and how much puts your financial future at risk.