Student Loan forgiveness news continue to make waves, with new information affecting its borrowers coming out every day. Thought the news are overwhelmingly positive while the Biden Administration works tirelessly to ensure his campaign promise is delivered. Still, the blow millions of Americans suffered when the Supreme Court struck down the first plan that would’ve erased up to $20,000 per borrower is fresh in our minds and hope is hard to get back.
But this is not the only existing plan that helps borrowers alleviate the burden. The Department of Education has analyzed that existing federal student loan forgiveness programs have already erased $143.6 billion in student debt for 3.96 million borrowers as of March 21, and the numbers keep growing.
But president Biden is not stopping there. The Administration is now pushing through a ‘Plan B’ version of the plan by segmenting the forgiveness. Some of the programs are income-driven repayment (IDR) plans and others are only applicable to borrowers with certain loan types, jobs or school circumstances, making it more diverse and personalized.
Student Loan forgiveness process
So, how would you go about applying for loan forgiveness and what is key for borrowers to know before starting the journey?
First and foremost you need to check your eligibility. Only federal student loans qualify, private student loans do not. If you loans are federal, the type of loan is also important as with commercially held FFELP or Perkins loans you will need to take extra steps like consolidating them before applying for forgiveness.
Secondly, what type of Loan forgiveness do you qualify for?
- Income-driven repayment plan (IDR). It caps your repayment bills at a percentage of your income and forgive your remaining balance after 10 to 25 years. Also known as Saving on a Valuable Education (SAVE) is available for all borrowers to enroll in.
- Public Service Loan Forgiveness. Working for the government or a nonprofit will work in your favor this time. You bey be eligible for Public Service Loan Forgiveness (PSLF), which erases your remaining balance after a decade of repayment.
- Teacher Loan Forgiveness. Accessible to those that work in a qualifying low-income school.
- Borrower defense to repayment. If your school lost its accreditation after your degree and it is now worthless.
- Closed school discharge. Same as before but your school also shut down.
- Perkins loan cancellation. You must also work in public service to get full forgiveness for those.
- State-based student loan payment assistance. Some states are now offering help with loan repayment of you work in certain healthcare areas and are willing to relocate there
Thirdly, figure out which option will be best for you and prepare for eventualities like having to apay more in your taxes for a few years because of the forgiveness.
The Education Department’s loan simulator should give you a better understanding of all your options, because as Tisa Silver Canady, founder of the Maryland Center for Collegiate Financial Wellness says. “It really is a case-by-case kind of thing, but generally speaking, for people whose income is relatively high compared to their student debt loads, the income-driven repayment plans can be pretty unattractive. It might behoove them to just stay on a balance-driven plan and pay extra when they feel it makes sense.”
The math will need to work for the borrower, as the IDR student loan forgiveness is only exempt from federal taxes until 2025. Some states also offer tax forgiveness on the loans, but not all of them do. So, it is important to plan ahead if your timeline is longer and start to save now so you are not caught off-guard. The loan simulator will also help with this, your taxable income will increase by the amount forgiven plus your income, so it may even put you in another tax bracket with higher obligations. This means that if the amount you are getting forgiven is lower than your taxes will be, the tradeoff may not be worth it.
Others will have better luck, PSLF, Teacher Loan Forgiveness, borrower defense to repayment, closed school discharge and Perkins loan cancellation are all tax exempt from federal taxes, leaving you with only state taxes to figure out.
