fbpx
skip to Main Content
Student Loan Forgiveness

How Legit is Student Loan Forgiveness?

This post may contain affiliate links. Please read my disclosure for more information.

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?

When we made the final payment on my $51,000 federal student loan (Which ballooned to almost $60K with interest.) Pressing that button (actually those three buttons) was a surreal experience.

In full disclosure, we paid off almost $78K of car and student loan debt on our own in 23 months with average salaries.

We made the decision to not go with a government-led program even before the snafu with less than 1% of the first Public Service Student Loan Forgiveness Applicants actually receiving forgiveness.

It’s not because I think they’re bad programs. Loan forgiveness programs serve an important purpose and should be in place, but they’re there for a small minority of people, not the general masses.

And unless you can meet the requirements to a T, report and organize diligently for over 10 years, and don’t care about your early income as it relates to retirement, student loan forgiveness may not be for you either.

Here’s my verdict on the two most popular student loan forgiveness programs.

Public Service Loan Forgiveness

Anyone employed by a government or non-profit organization is eligible to apply for Public Service Loan Forgiveness, PSLF. More specifically, you must make 120 payments under an income-driven plan, while employed full-time in qualifying profession for your PSLF application to be approved.

If approved, the remainder of any unpaid federal student loans are forgiven and you aren’t required to pay income tax on the forgiven amount.

This is a great program, albeit restricting, to get people doing jobs that are otherwise unattractive and under-rewarded.

Most millennials won’t qualify for this program, they shouldn’t. It’s meant to help subsidize people who are passionate about low-paying non-profit and government work and helps those industries attract quality workers who could be making more money elsewhere.

The rest of us should be trying to get the most money out of our chosen career paths, not looking for ways to get stuck in low-paying jobs.

Having a program like this also increases commitment to jobs that otherwise have a high turnover rate.

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 4-6.55% interest and you’re the type of person who will genuinely benefit from this program.

But don’t be deceived, this isn’t a “relief” program, it’s a government program designed to help the government first and you second.

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’re required to submit your tax return every year so if your income goes up your payment goes up.

If you pay off the loan before 20-25 years — depending on when you entered the program — then you don’t get any forgiveness.

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 had my IBR payments at a level where I pay off my loans in 18 years and the next told me I was ineligible (based on income.)

Then there’s the tax argument. Whatever you do have forgiven, you pay taxes on like it’s income. That’ll most likely have you paying at least 22% tax on the entire forgiven amount. And you’ll need to be prepared to pay it in a lump sum or you’ll be hit with more fines and interest.

Verdict: Not Legit

These are just the two most popular methods. For up to date programs by state and profession, check out The College Investor’ resources on forgiveness programs.

Why Should Millennials Reconsider Forgiveness Through Income-Based Repayment?

I spent five years doing a job I loved just to find a different job I loved that paid more. I was able to take it without a second-thought because nothing was holding me back.

Alternatively, the organization or public program you work for could shut down at any time. Government jobs used to be the safest place to be employed, not anymore.

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.

When I was living on a single-income with over $50K of unbankruptable student loans, I thought 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’re Resourceful

We will go to great lengths to spend less where we can and save money on the necessities. I mean, just look at all the options we have!

  • Groupon and LivingSocial for deals on activities.
  • Shopping through Ebates when making any purchases online will get you cash-back from virtually any retailer. (I never get a Groupon without getting Ebates cash back!)
  • Use Blink to save on prescriptions.
  • EyeBuyDirect to save on prescription eyewear.
  • Energy saving methods like low-flow showerheads to reduce our utility bill.
  • Sites like Restaurant.com for dining deals.
  • ThredUp for nice secondhand clothing at steep discounts from retail.
  • Free trials at gyms.
  • Apps like ibotta and Checkout51 to save at grocery stores and other big box retailers.
  • Use healthcare sharing to save big time on health insurance.

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 of 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.

Why student loan forgiveness from income based repayment or pslf might not be all it's cracked up to be.

This Post Has 15 Comments

  1. Interesting! I definitely have some student loans. I didn’t know that income based repayment was not legit, nor do I do much research!

    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.

  2. 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!

  3. 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!

  4. What do you think about the ethics of student loan forgiveness? If “the government” repays your loans, it means that your fellow taxpayers are picking up the tab. I can understand this if there is just no way you could repay the loan and you lived minimally during college, but what if you went to an expensive college for a degree you could have gotten at a state school, and lived large in a nice apartment and hit the bars every weekend. Is it right to take on loans, saying that you would pay the money, and then drop them on the taxpayer?

    1. I tend to agree with you on having an ethical obligation to pay back loans you signed for. I think it’s equally unethical how easy it is for 18-22 year olds to take out six figures of debt but yeah I think there’s no such thing as a free lunch, or education.

  5. I love reading what people think of PSLF, so thank you for sharing. I do take issue with this statement tho: “…don’t care about your early income as it relates to retirement.” My wife is on PSLF and it takes both our incomes into consideration. It actually motivates us to save MORE for retirement because each dollar we put in a tax advantaged retirement account shields that dollar from being considered in our income-driven repayment calc. Depending on our income, we can potentially max out my 401k, her 403b, our HSA, and each of our standard IRAs. That’s a lot of retirement savings each year and obviously compounds over time. Worst case scenario we pay off her loans because our income increases too much and we run out of places to shield it from our AGI calc, best case scenario we get a big windfall after ten years.

    1. I’m sure it does. My basis for that came from the statistics that show starting with an annual income in your 20’s of $55K vs. $50K can add about $1 million to your total income over the course of your working years. A vast majority of people cannot, and will not, max out their retirement accounts. I’m hoping to encourage people to take higher paying jobs early on to pay off their debt and have more to invest as early as possible, even if it means missing out on loan forgiveness.

Comments are closed.

Back To Top