Theoretically it is possible to have a portion of your loans forgiven. But the reality is that it's not likely and could actually cost you more. In order to qualify for forgiveness of federal student loans, you have to be enrolled in certain income based payment plans that extend your loan term from the...
Best answer: Theoretically it is possible to have a portion of your loans forgiven. But the reality is that it's not likely and could actually cost you more. In order to qualify for forgiveness of federal student loans, you have to be enrolled in certain income based payment plans that extend your loan term from the standard 10 years to 20-25 years. You have to make payments under that plan for the entire time, so you won't get the whole loan forgiven--only the portion that remains if it isn't paid off at the end of the term. The hook is that if you make all those payments, most (if not all) of the loan will be paid off by then. In the meantime, while you are making those reduced payments, interest is still accruing on the loan and your debt is actually increasing. So, it's likely that if anything gets forgiven, it will be just a portion of all that interest that you wouldn't have had in the first place if you had paid the loan off in the standard 10 year term. There are also some other issues to be considered. Since you only qualify for forgiveness if you are in an income driven repayment plan, you have to reapply every year based on your current income at that time. Most people's income increases over 20 years, and if it does, you might not qualify to continue in the program and have to go back into the standard 10 year payment plan.
As a result, you no longer qualify for forgiveness, and your debt is also larger because you have all that extra interest. If you do remain in the program for the full time and end up having some of your debt forgiven, the amount that you have forgiven is considered taxable income and you'll get socked with a huge tax bill in the year that the forgiveness occurs. It the amount forgiven is substantial, that tax bill can be thousands of dollars, and the IRS isn't going to give you 20 years to pay it off. If your income at that point is low enough to still be in the program, that tax bill can be a huge burden. Another problem: having this long term debt can affect your credit for the next 20 years and make it more difficult to use your credit to take steps that build wealth, such as purchasing a home or qualifying for lower interest credit cards and car loans. In the long run, that can cost you a lot more than the amount that would be forgiven. Keep in mind that the income driven repayment plans haven't been around very long, and the first cohort of students that would be eligible for forgiveness hasn't reached the 20 year mark yet, so there's no track record for what percentage of borrowers who are in these programs will actually have some of their debt forgiven. If the record for the Public Service Forgiveness Program is any indication, very few will qualify. That program has a 10 year term, and the first cohort of borrowers who might qualify for it just reached that point a year ago. As of Sept, 2018, about 99% of applications have been rejected and out of 28,000 applications, only 96 have been approved and have actually had loans forgiven. The biggest problem seems to be that the requirements for it are complicated and very few applicants understood them well enough to meet every requirement throughout the 10 year period, so in the end, they were disqualified. This does not bode well for the other loan forgiveness programs, but it's too soon to tell for sure. If you're in a profession where the wages are very low and you don't expect to make any progress over the next 20 years, then it might make sense to participate in the program, but for most people, you'll probably come out further ahead it you work to increase your income and just pay off the loans sooner. You can find general information about federal student loan forgiveness programs at https://studentaid.gov--but it don't expect to find information about the pitfalls of the programs there.
1 month ago