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Misconceptions about Student Loan Forgiveness

July 26, 2017

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.

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2020-02-07
This Week in Student Loans: February 7

Please note: Education Loan Finance does not endorse or take positions on any political matters that are mentioned. Our weekly summary is for informational purposes only and is solely intended to bring relevant news to our readers.

  This week in student loans:

The Dangers Of Using A 529 Plan For Student Loan Debt

The Setting Every Community Up for Retirement (SECURE) Act that was signed into law on December 20 allows families with a 529 college savings plan to use some of the savings to pay off student loan debt. Previously, you would have to pay a 10% penalty on 529 earnings (not contributions) in order to use the savings for non-qualified expenses, such as paying student loans. This Forbes article explains the limitations of using such plans to pay off student debt.  

Source: Forbes

 

How Each State is Shaping the Personal Finance IQ of its Student

According to CNBC, there's increasing research showing that students who are required to learn financial literacy or take personal finance courses in high school make better financial decisions in their early adult life. See how certain states are taking measures to ensure their students are more financially literate in this article.  

Source: CNBC

 

Student Loan Debt Statistics for 2019

Yahoo Finance has released a report on the state of student loan debt for the year of 2019, including information about the average student loan debt per borrower and student loan debt by state, age, race, and gender.  

Source: Yahoo Finance

 

Ohio Dad Got 55,000 Identical Letters About His Daughter's Student Loan

An Ohio father of a student loan borrower was shocked when he received 59 bins of mail containing 55,000 identical letters from the servicer of his daughter's student loans. The delivery was so large that the man had to pick up the delivery at the back door of the post office and had to make two trips. The servicer claimed it was due to a glitch in the outgoing mail process and that they would work to ensure the mistake would not happen again. When asked what he might do with the letters, the father said, "I just may start a fire, a bonfire, and burn it all," while laughing.  

Source: CNN

    That wraps things up for this week! Follow us on FacebookInstagramTwitter, or LinkedIn for more news about student loans, refinancing, and achieving financial freedom.  
 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2020-02-06
Private Student Loan Repayment Options Explained (Video)

So you’ve worked hard to get accepted to a great college, and you’ve taken out student loans to make this dream a reality. Now, it’s time to determine the best student loan repayment option before the academic year begins. This video explains the four common student loan repayment options, highlighting the pros and cons of each. These repayment options include:

  • Immediate Repayment
  • Partial Repayment
  • Interest-Only
  • Full Deferment
   

Immediate Repayment Plan

Let’s begin with the immediate repayment option. With this type of repayment plan, you’d begin to make both principal and interest payments as soon as the loan is fully disbursed. This allows you to save money on interest and speed up the repayment process since your loan will be paid off in less time. Keep in mind that immediate repayment is the only plan that does not provide you with a 6-month grace period.

 

Partial Repayment Plan

Next, there’s the partial payment plan. Here, you’d pay a low fixed monthly payment while you are in school, and then ramp up your payments after you graduate, or become a part-time student. This is more affordable on a month-to-month basis; however the interest you do not pay off will then be added to your loan balance after college, increasing your post-grad payments.

 

Interest-Only Repayment Plan

Another intriguing repayment plan option is interest-only, which means you’ll make payments only for the interest that accrues on your loan while you’re in school.  Once you graduate, you’d pay on the interest and principle of your loan. This helps you save money long-term since you’ll cover the interest while you’re in school. Some lenders may offer you lower interest rates if you agree to begin repaying your student loans while enrolled in college.

 

Full Deferment Plan

Finally, there’s the full deferment plan. This allows you to hold off on making any student loan payments while you’re a full-time student. It may sound great to delay payments while in school or during your grace period, but you’ll end up paying more for the loan overall since the interest continues to accrue during the deferment and grace periods. This then gets added to your total loan once you start making payments.

 

Of course, the best way to navigate the student loan repayment process is to consult a professional. Contact ELFI to connect with a Personal Loan Advisor who can walk you through your options.

 

Tips for Starting Your Student Loan Repayment Journey

 
2020-02-05
7 Tips for Parents Paying A Child’s Student Loans

$233,610. This is the amount of money today’s average American family can expect to spend raising one child. If this seems like a lot, get ready for more sticker shock since this doesn’t include the cost of college. The average tuition at a public in-state school for the 2019-2020 school year is $10,116. Multiply that by four years (plus student loan interest), and you’re adding another $50,000+ to the total cost of raising a child.    If you’re reading this blog, you’re likely well aware of the cost of college, and you might now be looking for ways to help your son or daughter pay their college debt. Your recent graduate likely has a student loan (and if they’re lucky, parents who offered to make payments toward that loan). Or you might have taken out a parent loan* to fully cover the cost of college for your child. Either way, those loans are staring you in the face, begging to be paid.   Luckily, there are no rules against helping your son or daughter pay off student loan debt. However, there are some tips to help you navigate this offer.    

Set Up Automatic Payments

The easiest way to help manage your child’s student loan debt is by setting up automatic payments from your checking or savings account. We all get busy and forget items on our to-do list. And while one or two missed payments might not make a difference, several can result in late fee charges and dings on your credit, especially if the loan is in your name or if you were a co-signer for the loan.   

Play By the Rules (Tax Rules)

If you help pay your child’s student loan debt, you might need to pay gift tax and file a gift tax return during tax season. A gift tax applies to the giver (that’s you) and to any contributions more than $15,000, as of 2020. Tuition is excluded from gift tax but, unfortunately,  loan payments are not. Double-check current IRS regulations around loan payments before making the decision to help pay your child’s student loan debt. Here is a current FAQ list around gift tax.  

Focus on Loans with High-Interest Rates

Look at all your loans—car loans, mortgage loans, credit card debt—and focus on those with the highest interest rate. If you have a credit card with an 18% interest rate, and the interest on your child’s student loan is just 8%, it would be wiser to focus on paying your card first. Even adding an extra $50 or $100 per paycheck to those higher rate loans can help in the long run.  

Prepay the Loan

If you receive a bonus or a cushy tax return, allocate those extra funds toward the student loan debt. By paying down your child’s student loan faster, you can reduce the total amount of interest paid over the life of the loan by paying less monthly interest.    You can also allocate extra funds toward paying your child’s student loans by rearranging other existing finances. For example, if you have multiple credit cards, consolidate the balances into one loan. A single loan with a fixed interest rate that’s lower than the APR on your credit card will help you simplify and save.   

Refinance Student Loans

Refinancing student loans is another way to simplify payments and readjust finances. Whether the loan is a parent loan or student loan, reducing the interest rate lowers monthly and total loan payments. You can also change the term of the loan to 5, 7, or 10 years to help lower monthly payments, allowing you to reallocate funds to other expenses or debts (refer back to our tip about paying off debts with high-interest rates first).   Related >> Should You Refinance Parent PLUS Loans?   ELFI offers student loan refinancing options for both parents and students. We also have no application fees, no loan origination fees, and no penalty of paying off your student loan early. See how much you could save with ELFI Student Loan Refinancing*.  

Set Up Biweekly vs. Monthly Payments

You might have noticed that some months, you get an extra paycheck. This is because the 52 weeks in a year don’t evenly divide into four weeks for every 12 months. You can take advantage of these extra four weeks by setting up biweekly loan payments. If your monthly payment is $300, and you readjust to paying $150 every other week, you pay the same amount each paycheck, but end up with an extra loan payment paid over the course of a year. This pays your student loan debt faster. Another bonus? This tip works for paying off any loans, not just student loans.   

Fully Understand Your Offer

Paying your child’s student loans, whether partially or in full, is a generous offer. It can help your new graduate get on his or her feet in the working world. It can also help free up money for dealing with other debts or life’s unexpected surprises. Since your offer also impacts your financial situation, be sure you fully understand the pros and cons. Consider how close you are to retirement, and if your 401k or other funds will suffer. Be aware of the balances and interest rates in your other debts.    Whether or not you chose to help your child pay their loan, student loan refinancing (or even refinancing your parent loan) can help avoid the hassle of multiple payments and get a more affordable rate and flexible terms. See if you qualify for student loan refinancing*.   
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.