How Legit is Student Loan Forgiveness?

Jen SmithDebt, Personal Finance11 Comments

Student Loan Forgiveness

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Everyone and their sister are on some kind of special payment plan for their student loans. But some people get so overwhelmed with the options they just don’t bother with them. With all the talk about student loans, debt, and wealth building I’d be remiss not answer the question:

How Legit is Student Loan Forgiveness?

Last week we made the final payment on my $51,000 federal student loan (Which balooned to almost $60K with interest.) Pressing that button (actually those three buttons) was a surreal experience. You can even see my bewildered face make that last payment to Navient on my Facebook page.

I’m not in a profession that qualifies me for forgiveness and we made the decision to not go with an income-based repayment option. It’s not because I think they’re bad programs but they have a lot of nuances, and unless you can meet the requirements to a T or don’t see your income increasing by much over 20 years, it may not be for you either.

There are a few options for federal loan forgiveness and The College Investor has some great info on forgiveness programsrepayment plans that forgive your loans as well as forgiveness programs by state. I’ll attempt to explain the two most talked about programs.

Public Service Student Loan Forgiveness

In 2017 the first people benefitting from Public Service Student Loan Forgiveness will get their reward for a job well done. After 120 payments, while employed full-time in qualifying professions, these lucky individuals will be free from their (Federal) student loans and tax-exempt of the forgiven portion.

This is a great program, albeit restricting, to get people doing jobs that are otherwise unattractive and under-rewarded. Unfortunately, most millennials won’t qualify for this program. And that makes sense, it’s meant to help the government drive quality workers to their industry (and not-for-profits) who could be making more money elsewhere.

Since we’re a nomadic and virtual generation with wavering commitment level, the government needs programs like this. If your goal is to work in the non-profit sector then your hopes of making the big bucks are already dashed, add to that a hefty loan payment accruing 6.55% interest and you’re the type of person who will genuinely benefit from this program.

Verdict: Legit

Income Based Repayment Plan

For the rest of us, there’s the Income Based Repayment Plan. Contrary to popular belief, IBR is not actually a student loan forgiveness program. It’s a repayment plan with a forgiveness option. The government looks at your loan amount, income, family size, etc to determine a payment that’s no more than 15% of your discretionary income.

You submit your tax return every year so when your income goes up your payment goes up. If you pay off the loan before 20-25 years then you don’t get forgiveness, and they don’t lower your payments without proof of income.

Here’s a great calculator from Student Loan Hero to determine if you would benefit from IBR. When I was playing around with it, out of the first 3 scenarios I put in one didn’t benefit and the next was ineligible.

Then there’s the tax argument. Whatever you do have forgiven, you pay taxes on like it’s income. So if that bumps you up to the next tax bracket (which in 99% of circumstances it would) you’re paying quite a bit more in taxes that year. And unless you’re prepared to pay it in a lump sum you’ll be hit with more fines and interest.

The one positive about IBR is that you can do it in conjunction with PSLF. Meaning over those 120 payments you will pay significantly less making PSLF even more beneficial.

Verdict: Not Legit

Why Should Millennials Reconsider Income Based Repayment?

Unless you’re in a PSLF qualifying job that you love and is guaranteed to you for at least 10 years, I beg you to reconsider IBR. After 4 years of telling myself I’d live under the weight of my student loans forever my epiphany came when I discovered I’m not the only one who doesn’t want to wait 20 years to be free of my loan debt. I want to be free to make as much or as little as I want and work in whatever field I please.

Also Read: Which Student Loan Should I Pay First?

Paying off your student loans early is really attainable. It’s hard but millennials are doing it. I know you can be one of them no matter what your income is. As millennials, the stuff we need to achieve this goal is in our generational DNA:

We Hustle Hard

The stereotype that we don’t work hard enough to get ahead is just not true. We’re jumping on opportunities like Uber and Fiverr to side hustle our way into more money. We are masters of technology and budding soloprenuers. We started from the bottom but we’re on our way to you Drake.

Millennials are starting business younger and at twice the rate of Boomers. According to a 2015 study from The Hartford millennials overwhelmingly desire to be leaders in their fields. Leadership skills are the #1 training millennials want from their employers.

We’ve Seen a Lot

2008 was a big year for us. We were starting college or going back when we realized there were no jobs out there for us. While most of us didn’t get any personal finance education in school, we saw firsthand the result of poor financial planning. That’s why millennials are putting off marriage and mortgages to break even on the bad financial hand we’ve been dealt.

Instead of being broke with a cool apartment and $24K financed car, some of us would rather crash with the ‘rents, drive a $4,000 car and have $20,000 in the bank.

We Have Squad Goals

You know how they say it takes a village to raise a child? It takes a whole Facebook friends list to crush a millennial’s student loans. We have the power of a 24/7 community to share our struggles with and motivate us to keep going. If you can ignore your uncle’s constant political tirades (there’s an unfollow button for that) you have a wealth support at your fingertips.

Also Read: How to Make $27K by Eating Out Less

Paying off our student loans is key to living an unrestricted life and investing in the future.

These characteristics may not be true for every millennial but neither are the negative ones. So if you’re surrounded by the type of friend who’s living paycheck-to-paycheck and fine with keeping their student loans around forever, don’t stress. We’re out there, hustling to beat the statistics.

This post contains affiliate links. Using these links helps me punch my student loan debt in the numbers. Cheers!

Student Loan Forgiveness

11 Comments on “How Legit is Student Loan Forgiveness?”

    1. Thanks Leighann! Yeah, IBR is useful when your income is low but it’s not a forgiveness program and most people will not benefit from it in the long run.

  1. Thank you so much for this, I have been doing research on student loan forgiveness, thinking that maybe they’re more fraudish.
    But you perfectly explain some of my worries!

  2. Hi Jen,

    I think it’s awesome that you are encouraging people to explore other options for student loan repayment. PSLF is an awesome program this is under-promoted in the personal finance community. But, I have to say that some of the information that you provided is not quite accurate.

    First, you don’t have to choose between PSLF and IBR. You can and should do both. IBR is what makes PSLF truly magical because it limits how much you pay back based on your income.

    Second, your don’t have to choose between PSLF and making some pretty sweet dough. My husband and I both make over 6 figures working for our PSLF-eligible employer. We are definitely not slumming it. Now it’s true that we make about 1/3 of what some attorneys make in private practice but it is certainly nothing to sneeze at–particularly when considering that we are both have only been out of school for about 6 years.

    We also both participate in IBR, which makes our payments about 25% of what they would have been under the standard repayment plan.

    Anyway, I’m glad that you are bringing some positive attention to these options. 🙂

    1. Hey Tasha! Thanks for commenting! Sorry for the confusion, let me clear up my thought process: You definitely don’t have to choose between the two I can see how I made it sound that way since so few occupations are eligible for it. But if you can do both you should! That would be the most likely scenario in which IBR would be beneficial.

      And I’d never say you can’t make 6 figures working for the government or a non-profit, etc. The fact that you make 1/3 of what you could make at another company is my reasoning for my thoughts on PSLF. I really like this program but it is restricting for some millennials who want to be location independent, switch careers, or advance in the workplace.

      I will fix my wording on some things for clarity. Thanks again!

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