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Misconceptions about Student Loan Forgiveness

When students start college, they are probably more concerned about how they’re going to cover the cost of tuition and classes than how they’re going to pay off student loans down the line. One problem at a time, right?

Of course, there are also students that carefully consider the loans they take out, the schools they attend, and their intended profession, all in an effort to reduce the costs of their education as much as possible.

For some students, a major part of their plans for eliminating education debt includes qualifying for student loan forgiveness. The premise behind these programs often assumes that college graduates make payments on their loans for a specified amount of time until certain qualifications are met to erase the remainder of the debt. While these programs can be rewarding for the borrowers who are eligible, there are, however, many misconceptions and potential pitfalls associated with banking on student loan forgiveness that could end up costing graduates in the long run. Here are a few common misconceptions cleared up.

Misconception #1: Everyone is Eligible for Loan Forgiveness

Although there are several instances in which students may become eligible for student loan forgiveness programs, you should not automatically assume that this is a possibility for you. For starters, loan forgiveness programs (as well as loan discharge or cancellation) generally apply to specific loans, specific professions, and/or specific sets of circumstances, according to the Office of Federal Student Aid.

Direct Loans, FFEL (Federal Family Education Loan) Program Loans, and Perkins Loans may all qualify for forgiveness, discharge, or cancellation, but only in certain circumstances, such as:

  • Public service loan forgiveness
  • Teacher loan forgiveness
  • Perkins Loan cancellation and discharge
  • Total and permanent disability discharge
  • Discharge due to death
  • Closed school discharge
  • Unpaid refund discharge
  • False certification of student eligibility or unauthorized payment discharge
  • Borrower defense discharge
  • Discharge in bankruptcy

It’s important to understand that these reasons may not apply to every type of loan, and some of them apply to very specific sets of circumstances. For example, the borrower defense discharge specifically relates to students seeking loan forgiveness because a school they attended misled them or engaged in other misconduct or violation of applicable state laws. This clearly doesn’t apply to every student, every school, or every loan.

Furthermore, you have to fill out an application for loan forgiveness, discharge, or cancellation and receive approval. Until then, you must continue to make payments in good faith, unless you are able to defer payments or you are granted forbearance in the meantime, according to the Office of Federal Student Aid.

If you want to find out if you qualify for student loan forgiveness, you need to do some research. It’s a good idea to check with lenders, with your school, and with the U.S. Department of Education, or more specifically, the Office of Federal Student Aid.

Misconception #2: Public Service Professions Are Automatically Eligible

According to the Office of Federal Student Aid, “The Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.” In addition, the Teacher Loan Forgiveness Program allows for forgiveness of Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, and Unsubsidized Federal Stafford Loans and cancellation of Federal Perkins Loans.

However, there are several criteria attached to these forms of forgiveness. Simply becoming a teacher, a government employee, an employee of a non-profit organization, or a member of the Peace Corps doesn’t mean you automatically qualify for student loan forgiveness.

For example, in order to qualify for loan forgiveness under the Teacher Loan Forgiveness Program, teachers must work for five “complete and consecutive” years at a qualifying institution that serves low-income families, as well as meeting other criteria. Even so, teachers may only be eligible to receive forgiveness for a portion of loans, and this doesn’t include PLUS or private student loans.

Misconception #3: Once I’m Approved for Loan Forgiveness, It Can’t be Rescinded

Unfortunately, it’s not entirely uncommon for professionals that thought they were eligible for student loan forgiveness to find out they were wrong. According to a report issued by The New York Times, a legal filing by the U.S. Department of Education in March suggests that approvals issued by FedLoan, the administrator of the PSLF Program, may be subject to rescindment. This particular case has led to at least one lawsuit so far, but it’s not the only reason why graduates may find that forgiveness they were counting on is beyond reach.

As noted above, qualifying students must not only have the correct loan type to be eligible for forgiveness under the PSLF Program, but they must also meet criteria for qualifying employment and qualifying payments (and payment plans). After all that, borrowers still have to apply and continue to meet qualifications until such time as they’re approved. In other words, there are a lot of hoops to jump through, and a lot of ways to make mistakes that could make you ineligible for loan forgiveness.

Misconception #4: If I’m Not Eligible for Forgiveness, I’m Stuck Paying My Loans

This is partially true. If it turns out you’re not eligible for any form of forgiveness for your student loans, for whatever reason, you’re still responsible to repay the money you borrowed. Even filing for bankruptcy won’t automatically discharge student loan debt. Of course, when you’re in good shape financially and perfectly capable of paying loans, you will be required to do so. Unfortunately by the time that borrowers learn that they are no longer eligible for student loan forgiveness, they have often already accrued higher interest costs resulting from making smaller payments in the early stages of repayment.

The good news is that you have options to reduce your debt if loan forgiveness is not on the table. Once you have established a reliable income and credit history, you can, for example, explore the possibility of refinancing your student loans. This course of action gives you the opportunity to consolidate loans, reduce interest rates, and potentially reduce monthly and overall payments in the process. Whether you refinance your education debt or not, you can also cut down on the overall interest costs and time spent in repayment on your loans by making more than the minimum payments each month.

Even if you do everything you can to secure a path to loan forgiveness after a set number of years of faithful payments, you may at some point discover that forgiveness isn’t an option for you. Naturally, the earlier you can confirm your situation, the better. If you aren’t eligible for loan forgiveness, it’s best to explore other options early on so that you can save as much as possible through refinancing.

Top 10 Ways to Pay Off Student Loans Faster

Once you’ve graduated, found a great job, and started to pay off student loans, you might begin to wonder if there are ways to pay down your loans faster and perhaps save some money on interest payments.  Or you might start thinking about this while you’re still in college.  Here are several options to explore if you want to pay off student loans more quickly.

  1. Don’t take loans you don’t need. Loans could be a necessary part of the collegiate landscape, but you do have some choices to make when it comes to the amount of loans you take.  Some students attend less expensive colleges and work part-time jobs to avoid taking loans, while others skip work entirely and use student loans to pay for everything from tuition and books to living expenses.  If you want to reduce the amount of time you spend paying loans after graduation, one way to accomplish your goal is to limit the loans you take during your time in college.
  2. Read and understand all terms. Here’s an excellent lesson for adulthood: never sign anything you haven’t read.  Don’t agree to anything until you’ve take the time to read and understand what you’re getting into, and if you don’t understand it, ask parents, lenders, or college counselors to explain the terms.

Is a loan fixed or variable?  When does interest begin to accrue?  What are the terms for repayment (interest rate, monthly payments, length of loan, etc.)?  Knowing the fine points of your loans can help you later on when you’re trying to figure out ways to pay them off faster and potentially reduce overall costs.

  1. Set a budget. You’ve got a good job, you’re earning decent money, and you have disposable income, thanks to your college education.  This doesn’t give you carte blanche to spend like it’s going out of style.

You did the responsible thing and earned a college degree.  Continuing to make wise financial decisions will help you to pay off student loans faster.  Start by setting a budget and living frugally while you still owe money.  With a plan to repay loans and an appropriate budget in place, you have the best chance to whittle down your loan balance as quickly as possible.

  1. Start paying as soon as possible. If you’re lucky enough to enjoy some kind of grace period before loans begin to accrue interest, as with Subsidized Stafford Loans or Perkins Loans, for example, take advantage by paying as much as you can.  Even if your loans are unsubsidized and accruing interest without actually having payments due, anything you’re able to pay back while you’re in school or during your grace period will result in less interest building up over time.
  2. Pay more than the minimum. The minimum payment is merely a suggestion, insomuch as you can always pay more toward the principal (although not less).  What happens when you pay more than the minimum required monthly payment?  You not only pay down your loan more quickly, but the faster you pay the principal, the less overall interest you accrue, lowering your total cost.
  3. Avoid additional debt. The Credit Card Accountability Responsibility and Disclosure Act of 2009 established restrictions on how credit card companies could market to minors and students, ostensibly to stop young and naïve individuals from being lured by seductive marketing and ending up with potentially damaging long-term credit card debt.  This won’t protect you once you graduate and credit card offers start rolling in.

It’s all too easy to go wild with credit cards, never fully realizing that every transaction is like taking a loan.  Credit cards are not cash-in-hand – they’re debt, plain and simple.  Don’t make the mistake of digging yourself into a hole you can’t get out of.

When you handle your credit cards responsibly and use them sparingly, you can continue to build credit while paying off your student loans, as well as pay down loans faster with the money you’re not paying to credit card companies in interest.

  1. Take applicable deductions. Currently, the IRS offers students and graduates paying student loans the opportunity to take advantage of the American Opportunity Tax Credit (AOTC), which was made permanent in 2015 under the Protecting Americans Against Tax Hikes (PATH) Act.  Depending on your circumstances, you could receive a tax credit of up to $2,500.  For more information and to find out if you qualify, you can locate your local taxpayer assistance center through the IRS website here.
  2. Look into loan forgiveness. Loan forgiveness is a complex process, but there are a number of ways in which you could become eligible to receive forgiveness, discharge, or cancellation of student loans, as spelled out by the Office of Federal Student Aid.  Generally speaking, you have to meet criteria related to:
  • Loan type
  • Repayment plan
  • Payment schedule
  • Employment type (such as teaching or public service jobs)

Forgiveness, discharge, or cancellation of student loans could also be related to:

  • School closure
  • False certification of student eligibility
  • Unauthorized payment discharge
  • Identity theft
  • Borrower defense to repayment
  • Total and permanent disability
  • Death

Your ability to take advantage of opportunities for student loan forgiveness is entirely dependent on your circumstances, and you may need help navigating these tricky waters.  Borrowers expecting their loans to be forgiven often make lower payments early on, which could result in even larger interest payments if they later find that they are ineligible for the program.  It’s a good idea to speak with your lender, your school, your employer, or a representative of the Office of Federal Student aid to find out if you qualify and what steps you should take to seek loan forgiveness.

  1. Look for jobs that offer education reimbursement. Some employers offer opportunities for education reimbursement as part of a benefits package.  You should always ask if this is offered before selecting a job and find out exactly what the terms are and what criteria must be met in order to take advantage of such offers. Even if your previous student loans are not covered, you may be able to find jobs that offer reimbursement for future graduate school expenses.
  2. Refinance. Reducing your student loan debt is a great way to help you pay loans off faster, and refinancing could allow you to consolidate student loans, lock in low, fixed rates, reduce monthly minimum payments and/or the term (length) of your loan, and pay less overall. When you originally took out your student loans, you were likely given a standard interest rate assigned to all student borrowers regardless of their financial situation. However, qualifying for more favorable rates and terms through refinancing may depend on several criteria, including your income, credit score, loan amounts, and so on.  Be sure to research the pros and cons of refinancing with a private lender, but if you have a reliable income and solid credit history, you might discover that you’re eligible for terms that reward you for your responsible financial habits. You might as well find out if refinancing your student loans could help free up additional money that you could apply to other areas in your budget!

Are Student Loans Impacting Your Credit Score? What You Need to Know

Even if you only have a basic knowledge of how credit scores are calculated, you may be aware of the fact that taking on debt and then paying it off in a timely and consistent manner is generally considered one of the best ways to build good credit, while late and missed payments can show up as black marks on your credit history.  What you might not know is that different types of debt can have different ramifications where your credit is concerned.

For example, the balances carried on credit cards are considered to be a form of revolving credit, according to Investopedia.  Lines of credit also fall into this category.  This type of debt includes a maximum limit and accounts are considered “open-ended”, which is to say, you still have access to agreed-upon funds even after you’ve borrowed and paid back up to the maximum.

Then there are installment credit accounts, including loans for houses, cars, and college tuition, just for example, which Investopedia characterizes as separate from revolving credit in that there are terms attached which specify the duration for payments, the number and amount of payments, and an end date for the loan.  Further, once payments are made, the money cannot be borrowed again.

These types of debt affect your credit score in different ways.  Revolving debt is potentially more damaging, as carrying high balances on credit cards could have an enormous impact on your credit score.  Revolving credit determines 30% of your score, according to MyFICO, although there are certainly other factors involved, including:

  • What is owed on all accounts
  • What is owed on different types of accounts
  • The number of accounts with balances
  • The percentage of revolving credit in use (credit utilization ratio)
  • The amount still owed on installment loans

Of course, if you find that revolving credit is severely impacting your credit score, Investopedia suggests that paying it down also has the potential to deliver significant improvements, and some people even utilize installment credit (personal loans) to pay off revolving credit as a means of lowering interest rates and shifting to a less impactful form of debt.

Although revolving credit accounts for a major portion of your credit score, installment loans can also have an impact in both positive and negative ways, according to an article from Student Loan Hero.  Here’s what you need to know about how student loans can impact your credit score.

How Can Student Loans Help Credit?

Because installment loans aren’t weighted as heavily as revolving credit when determining credit score, they may have less potential to damage your rating.  In fact, FICO statistics show that approximately 38% of consumers with student loan debt totaling over $50,000 fall enjoy a FICO score of over 700, which is considered the average score for American consumers, according to a recent article by Fox Business.  Those in the 740-799 range are considered to have very good credit, while a score of 800 or higher is considered exceptional.  By comparison, about 28% of consumers with student loan debt over $50,000 have scores under 599, which is considered a poor credit rating.

What does this mean?  It’s difficult to say, because credit ratings are based on so many different factors aside from student loan debt.  However, when managed appropriately, student loans, like any type of installment loans, could certainly improve a credit rating.

While revolving credit accounts for 30% of a credit rating, payment history is actually more important, delivering a whopping 35% of your credit score.  If you pay your monthly student loan bills on time and in full, you should be able to steadily build good credit over time, especially when you take the same care with all your other financial obligations.  Of course, this can be a double-edged sword, as well.

How Can Student Loans Hurt Credit?

While student loans don’t necessarily have the same major detractors as revolving credit, they still have the potential to harm your score if you don’t manage them appropriately, and even a single slip could cost you.

Even if you’re a responsible adult and you’re diligently paying down debt, it can be hard to juggle the many student loan payments associated with years of schooling (and taking out new federal student loans each year).  Something could slip through the cracks.  When this happens, it could have a negative impact on your credit score.

Even worse, the better your credit score, the more a late or missed payment could impact you, according to MyFICO.  This is because a higher score reflects less risk.  While a consumer with a lower FICO score is known to have some credit issues and is therefore somewhat less impacted by future problems like late or missed payments, someone with a stellar credit rating may fall further for similar infractions because the risk was not anticipated.  It doesn’t seem fair, but when paying down student loan debt, it’s important to understand the potential impact.

Why Does the Impact of Student Loans Matter?

Your credit score is used to determine whether you are approved for future loans and to calculate the interest rate and terms you are eligible for, according to Student Loan Hero.  While a single late or missed payment isn’t going to tank your score, and you can always speak with lenders about removing black marks on your credit report once you’ve rectified a mistake, you naturally want to maintain a high score if at all possible so as to improve your odds for loan approval and the best terms down the road.

How Can I Improve My Credit Score While Paying Off Student Loans?

Even if you’ve had smooth sailing so far, you may be interested in the benefits to be gained when you refinance student loans.  If you currently juggle several student loans and you’re worried about the possibility of missing a payment somewhere along the line, you could refinance and consolidate student loans into one convenient payment.

In some cases, you might even save money when you refinance student loans by lowering interest rates or transferring variable interest loans to fixed interest options.  It depends on your situation, but it’s something to consider when it comes to controlling how student loans impact your credit score.

How to Spot and Steer Clear of Student Loan Consolidation Scams

With around 44 million Americans owing $1.3 trillion in student loan debt, it’s not surprising that many are struggling with repaying their student loans. In fact, around 8 million borrowers went into student loan default in 2016 alone. With so many people feeling overwhelmed by their student loans and desperate to find ways to reduce their debt, it’s not surprising that scammers are taking advantage of the situation.

 

You’ve likely heard from student loan scammers – either through email, via an online advertisement, or by phone. They often advertise as Obama Student Loan Consolidation or Forgiveness Programs and offer to do things like get rid of your federal student loans, consolidate them for you, and reduce or eliminate your payments.

 

The government has started to crack down on the scammers – who often take lump sums or monthly fees from desperate borrowers. Many scammers promise things that they can’t deliver like a guaranteed 50% to 70% loan reduction with consolidation. Then they never actually do anything or they take your credit card information and your Social Security number and defraud you even more or steal your identity.

 

3 Things to Watch Out For

It’s important to know that you don’t need a company to help you consolidate your federal student loans via the Direct Consolidation program – it’s something you can easily do for free. While there are legitimate companies who help you evaluate whether or not student loan consolidation is right for you, and help you do the paperwork – the process is not that complicated and you’re likely better off doing it yourself.

 

If you do want to have a company help you with the process, there are a few red flags that will help you spot scammers. For example, if a company says that you should stop making payments on your loans and that you should send your student loan payment to them instead of to your student loan servicer, they are likely a scammer.

 

Companies who contact you via a robocall or who claim to be working with the Department of Education or to be offering services as part of the Obama Student Loan Program are also likely to be scammers. Legitimate companies cannot claim to be working with the Department of Education and do not use robocalls to contact you.

 

Finally, companies that ask for monthly fees or payment upfront are likely not legitimate. Legitimate companies that help you consolidate your federal student loans will not accept payment until they perform a service – though some will take the money and put it in a holding account until they’re able to help you consolidate your student loans successfully.

 

What is the Direct Consolidation Loan Program?

The Direct Consolidation program doesn’t wipe out your federal loans or reduce the amount you owe – as some scammers claim. Instead, it combines your loans into one loan which might make it easier to repay depending on your particular circumstances. It doesn’t lower your interest rate, but rather takes all of your federal student loans and puts them together into one loan with a new interest rate that is the weighted average of your previous loans with up to an additional 0.125% tacked on.

 

Federal Direct Consolidation makes sense for many borrowers as it allows them the ease of repaying just one loan, can allow them to extend the term length on their loans in order to reduce their monthly payments, and is necessary for borrowers to qualify for the Public Service Loan Forgiveness program.

 

Another benefit of the student loan consolidation is that it allows you to more easily rehabilitate any loans that you have that are in default.

 

Private Student Loan Consolidation

Consolidating student loans is essentially paying off multiple student loans with one loan. The problem with the Direct Consolidation program is it only allows you to consolidate your federal loans and not your private student loans. Private student loan refinancing allows you to consolidate both federal and private student loans – although if you consolidate federal student loans you lose some of the alternative repayment options and benefits that federal loans offer.

 

There are many companies currently offering private student loan consolidation and refinance. Many of these companies are start-ups, but there are some like Education Loan Finance which have over three decades of experience in the student loan industry. Education Loan Finance is affiliated with SouthEast Bank and offers student loan consolidation options for borrowers who would like to lower their monthly payments, pay a lower interest rate, and get more flexible terms on their federal and private loans.

 

All borrowers who are struggling should look into private student loan consolidation as it can save borrowers a significant amount of money as they can reduce their interest rate or greatly reduce their monthly payments by extending the term length of their loans.

 

By Andy Rombach, LendEDU