Student Loan Forgiveness 101April 9, 2016
Student loan forgiveness (also known as cancellation and discharge of student loans) is the act of releasing a borrower from their obligation to repay all (or a portion) of their federal student loan(s), including the principal and interest. It is only provided under certain circumstances, to those with federal loans, and to borrowers who meet certain eligibility requirements. While it may seem hard to qualify for student loan forgiveness, there are a variety of options available, all of which intend to significantly reduce or eliminate student loan debt.
This introductory guide to student loan forgiveness aims to help readers familiarize themselves with the options and eligibility requirements surrounding federal student loan forgiveness and includes: student loan forgiveness categories, income-driven repayment plans, state, and city-sponsored forgiveness options, and what happens once a student loan forgiveness application is approved or denied.
Student Loan Forgiveness Categories
There are a variety of circumstances that may lead to federal student loan forgiveness. However, none are guaranteed and each circumstance may or may not apply to the borrower’s particular type of federal loan. Furthermore, certain categories of loan forgiveness mandate that applicants meet certain eligibility requirements, including items such as qualified monthly payments and qualifying employment. The following list highlights the different federal loan forgiveness categories, but borrowers should also review this chart, from the Federal Student Aid Office, to ensure their circumstance applies to their particular federal loan type (Direct Loans, FFEL Program Loans, and Perkins Loans):
- Closed School Discharge
- Total and Permanent Disability (TPD) Discharge
- Death Discharge
- Discharge in Bankruptcy (rare)
- False Certification of Student Eligibility or Unauthorized Payment Discharge
- Unpaid Refund Discharge
- Teacher Loan Forgiveness
- Public Service Loan Forgiveness
- Perkins Loan Cancellation and Discharge
- Borrower Defense Discharge
Borrowers who believe they may qualify for student loan forgiveness are encouraged to read more about the possibilities related to federal student loan forgiveness and cancellation. These borrowers should also contact their loan servicer (the company handling billing and services related to the student loan) to further discuss their options. Finally, if a student loan forgiveness application is placed under review, borrowers should continue to make payments on their loan — to prevent it from going into default or accumulating additional interest — until all final decisions are made.
Income-Driven Repayment Plans & Student Loan Forgiveness
The Federal Government’s four income-driven student loan repayment plans forgive a student’s remaining loan balance after either 20 or 25 years. These payment plans work by creating a set, monthly payment amounts that are based on what is affordable for the borrower’s income and family size. After making qualified payments for the entirety of the repayment period, the loan’s remaining balance is forgiven. Applying for an income-driven repayment plan is free with the Federal Government, and per Federal Student Aid (an office of the Department of Education), “most federal student loans are eligible for at least one income-driven repayment plan.” The repayment plans — and a few of their details —include:
Income-Based Repayment (IBR Plan):
The IBR Plan requires that a borrower meets certain eligibility requirements. Depending on when the loan was issued, monthly payments are generally 10 percent or 15 percent of the borrower’s discretionary income, and the repayment period is either 20 or 25 years.
Income-Contingent Repayment (ICR Plan):
The ICR Plan is open to all borrowers with eligible federal loans. Payment amounts are the lesser of the two options: either 20 percent of the borrower’s discretionary income or what the borrower would pay on a repayment plan with a fixed payment over the course of 12 years (adjusted according to income). The repayment period is 25 years.
Pay As You Earn (PAYE Plan):
The PAYE Plan requires that a borrower meets certain eligibility requirements. Payments are generally 10 percent of the borrower’s discretionary income, but it is never more than the 10-year Standard Repayment Plan amount. The repayment period is 20 years.
Revised Pay As You Earn (REPAYE Plan):
The REPAYE Plan is open to all borrowers with eligible federal loans, and payments are generally 10 percent of the borrower’s discretionary income. The repayment period is 20 years for loans solely dedicated to undergraduate study and 25 years when the loans have been used for graduate or professional study.
Borrowers using an income-based repayment plan may also be eligible for Public Service Loan Forgiveness. Qualifying for this plan means borrowers with a remaining Direct Loan balance will have loans forgiven after 10 years of qualifying payments, rather than 20 years. Learn more about the program and its qualifications here.
State and City-Sponsored Loan Forgiveness Programs
Student loan forgiveness programs may also be offered by particular states and cities. These local-level loan forgiveness programs are often directed at particular professions (for example physicians, health care providers, and teachers) when the city or state faces an employment shortage in a critical profession. Loan forgiveness for those with careers in science, technology, engineering, mathematics, and law are also frequently offered. To find state and city-based loan forgiveness programs, try searching one of the following databases:
- Teachers seeking loan forgiveness programs and funding opportunities may search the American Federation of Teachers database and Teach.org.
- Physicians looking to find states offering loan repayment and forgiveness, as well as scholarship opportunities, will find the Association of American Medical College’s (AAMC) searchable database most useful.
- All other professions may find state-by-state options on College Investor’s database.
Approval or Denial of Student Loan Forgiveness
Approved: Borrowers who are approved for student loan forgiveness are no longer obligated to make student loan payments unless only a certain amount is forgiven. Additional benefits may also include a refund of past payments, the removal of any negative credit records related to default payments, and a renewed eligibility to apply for federal student aid (as long as there are no other defaulted loans). However, there are cases in which the borrower may be responsible for refunding a portion of the loan to the U.S. Department of Education, so it is important to understand and verify every detail throughout the process.
Denied: Borrowers who are denied student loan forgiveness remain responsible for repaying the remaining balance of the loan. It is unlikely that a final decision can be appealed (with the exception of false certification and forged signature discharges).
Borrowers who are ineligible for student loan forgiveness and income-driven repayment plans — as well as borrowers with private loans — will find that additional money-saving options still exist in the form of student loan refinancing and consolidation. No matter the situation, we recommend that borrowers talk to a student loan expert to find the plan and benefits that best suit their short and long-term financial goals. For questions about refinancing and consolidating student loans — both private and federal — contact the specialists at Education Loan Finance.