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For borrowers with outstanding student debt, canceling a student loan can seem like a dream come true. Overnight, your debt and all the stress it causes simply disappears.
Sounds good, right?
Although student loan forgiveness can be extremely beneficial for some people, it is not always a realistic or worthwhile goal for everyone. We’ll help you understand the downsides of student loan forgiveness, so you can decide if it’s worth pursuing or if it would make more sense to pay off your debt sooner.
Should you rely on a student loan forgiveness program?
Currently, the only national student loan forgiveness programs are for federal borrowers. There are three main forgiveness programs:
- Civil Service Loan Waiver (PSLF): Civil service loan forgiveness is for employees of government agencies or non-profit organizations. After you have worked 10 years full-time for an eligible employer and made 120 eligible monthly payments, the federal government will forgive the remaining balance of the loan.
- Teacher loan forgiveness: Teachers who work full-time for five consecutive academic years at a low-income school or educational services agency may qualify for loan forgiveness of up to $17,500 through the Teacher Loan Forgiveness program.
- Income Contingent Reimbursement (IDR): If you cannot afford your monthly payments under a 10-year repayment plan, you may qualify for an income-based repayment plan. An IDR plan has a repayment term of 20 or 25 years and bases your payments on a percentage of your discretionary income. If you still have a balance at the end of your loan term, the government forgives the rest.
If you don’t have federal student loans — or if you don’t qualify for one of these three programs — you don’t qualify for federal loan forgiveness, and that’s not something. something you should rely on in the future.
5 Disadvantages of Student Loan Forgiveness
If you qualify for loan forgiveness, this could be very beneficial. However, there are a few downsides to consider.
1. It takes a long time
Even if you qualify for federal loan forgiveness, it can take a long time for your loans to be cleared. Depending on the program, you could be in debt and making payments for up to 25 years before your loans are forgiven.
Dealing with your debts for years, even decades, can be incredibly stressful. And your debt can affect your ability to pursue other goals. With a high loan balance, it can be difficult to qualify for other forms of credit, such as a mortgage or car loan, so you may need to postpone these goals until you eliminate your loans.
2. Forgiveness is not guaranteed
Only a tiny percentage of borrowers will succeed in getting their loan cancelled. For example, only 1.6% of PSLF applicants have actually qualified for loan forgiveness since November 2020. Due to the large number of people turned down, the government launched the Temporary Expanded PSLF (TEPSLF).
Under the TEPSLF, more borrowers qualified for loan forgiveness due to expanded payment and loan criteria. However, the percentage of borrowers whose loan has been canceled is still quite low. In February 2022, only 4.4% of PSLF applicants met the expanded TEPSLF requirements, which means that 95.6% of applicants were refused.
Loan forgiveness requirements are strict and only a few borrowers will be eligible. The vast majority will have to repay their loans on their own.
3. Your debt could increase while you wait
If you are enrolled in an IDR plan and expect loan forgiveness after 20 or 25 years, be aware that your debt could increase, forcing you to pay much more than you originally borrowed.
For example, let’s say you have $50,000 in grad PLUS loans at 5.3% interest and an income of $45,000. Under a standard 10-year repayment plan, your monthly payment would be $538 and you would repay a total of $64,523 over the life of your loan.
If the monthly payment was too high, you could apply for an IDR plan. If you qualified for an income-based refund, your payments would start at just $131 per month. Assuming your income increases by 5% each year, your final payment would be $485.
In 20 years, the government would forgive the remaining balance. Even though $34,019 would be discharged, you will repay a total of $66,930, a higher overall cost than if you had followed the standard repayment plan.
Estimate your payments: You can get an estimate of your payments, overall cost and loan cancellation projections with the Federal Office of Student Aid Loan Calculator.
4. You could lose higher wages
While forgiving public service loans may be worth it to some, you need to consider the opportunity cost. To qualify for the PSLF, you must work for a qualifying nonprofit or government organization for 10 years. Unfortunately, employers who meet PSLF criteria tend to pay significantly less than for-profit companies.
Most for-profits paid 4-8% more for certain roles than nonprofits, according to salary survey. Over time, this difference in salary could accumulate.
For example, let’s say you accept a position at a for-profit company at age 25. If your starting salary is $35,000 and your salary increases by 5% each year, your lifetime earnings will total $4.2 million by the time you turn 65.
If you worked for a non-profit organization instead, your salary could be 8% lower. With a starting salary of $32,200, your lifetime earnings would hit $3.9 million by the time you turn 65, about $300,000 less than if you worked for a for-profit company.
5. You could be taxed
Depending on the type of loan forgiveness you qualify for and when it is processed, you may have to pay taxes on the forgiven amount. Although the PSLF is never taxed, loans canceled through the IDR have always been taxable.
Under the American Rescue Plan Act which was passed last year, student loan forgiveness is exempt from federal income tax. However, this provision is temporary and only applies to loans canceled between 2021 and 2026.
Unless this provision is extended, borrowers who qualify for forgiveness in the future may have to pay taxes on the amount forgiven, resulting in a costly tax bill.
Alternatives to Student Loan Forgiveness
If you decide not to pursue loan forgiveness or if you are not eligible for federal debt forgiveness programs, you can use the following strategies to pay off your debt faster.
Take advantage of employer reimbursement assistance
There are a growing number of companies offering student loan repayment as a benefit to help their employees. According to a 2021 survey conducted by the Employee Benefits Research Institute48% of employers with 500 or more workers said they offer or plan to offer student loan repayment assistance benefits.
With employer assistance programs, your employer usually matches your monthly student loan payments up to a certain amount or percentage of your salary. For example, your employer can match up to $100 per month of your payments.
By taking advantage of these programs, you can pay off your debt faster and cover less of the total cost yourself.
Make additional payments
To get rid of debt quickly and save money on interest, find ways to pay more than the minimum. Increasing your monthly payments by $100, $50, or even $25 can make a big difference over time.
Here’s how the extra payments would affect someone with $30,000 debt at 5% interest and a loan term of 10 years:
Refinance your student loans
If you don’t qualify for loan forgiveness or have private student loans, another option to consider is student loan refinancing. Borrowers with stable incomes and strong credit histories could potentially benefit from lower interest rates.
A lower rate means more of your payment will go toward principal, so you’ll pay less interest and save money over the life of your loan. Keep in mind that refinancing federal loans will make you ineligible for loan forgiveness and you will no longer be able to take advantage of the federal student loan payment break.
Calculate your savings: Use our student loan refinance calculator to estimate how much you can save by refinancing your debt.
If you decide to refinance your loans, always compare the options of several lenders. To save time, check out our list of the best student loan refinance lenders.