Please pardon college students and working adults that took out student loans for being skeptical of the three words, student loan forgiveness. From Santa Claus sneaking down the chimney to the tooth fairy leaving cash under a pillow while we slept undisturbed, tall tales have followed us throughout our lives.
Now, as we struggle to make ends meet in a volatile economy, we find out another seemingly tall tale has surfaced, and this one comes directly from the federal government.
Student debt forgiveness has such a nice ring to it, but as with Santa Claus, tooth fairy, and Easter bunny, is college debt actually forgivable? In this guide we are looking to answer the question of whether student loan forgiveness is actually real.
The Reality of Getting Student Debt Removed
What is the reality of college debt forgiveness for the average person? President Obama made it a reality in late 2009, by pushing for educational debt forgiveness as part of the Health Care and Education Reconciliation Act of 2010. With the official name of the William D. Ford Direct Loan program, educational loan forgiveness emerged as one of the hallmarks of the landmark health care legislation. The program only involves federal student loans, not the loans issued by private lenders that finance college educations.
Highlights of the legislation include the following:
- Funds poor and minority college student education
- New borrowers become eligible for federal financial aid debt forgiveness after 20 years
- Private lenders no longer receive subsidies for federal government backed loans
- New borrowers make loan payments derived from 10 percent of discretionary income
Benefits of the Real Restructured Debt Forgiveness Program
Under the hallmark health care legislation passed in 2010, part of the student loan forgiveness program allows borrowers to combine all student loans into a new loan that offers five different income-driven repayment plans. Although not considered true student loan forgiveness, the new consolidated loan charges less interest and reduces some of the loan principal.
Let’s review the five repayment options:
- Standard-Borrower pays the same amount each month during the term of the loan. The amount of payment depends on the borrower’s borrowed principal, interest rate, and length of the loan.
- Graduated-Federal government allows borrowers to make lower monthly payments than the monthly payments made under the standard plan. However, the payments slowly increase every two years.
- Income Contingent-Borrower pays on ability to pay based on income loan balance, interest rate, and family size. Some income contingent borrowers can have monthly loan payments of zero.
- Income Based-Federal government determines loan repayments strictly on income and family size. The amount of the loan and interest rate does not play a role in determining loan repayment amounts.
- Pay as You Earn-Typically the plan that requires the lowest monthly payment, Pay as You Earn limits monthly loan payments to 10 percent of borrower discretionary income. Qualifying for this plan requires more documentation than the documentation required for the other four college student loan payment options.
The Truth Behind Forgiveness
Skepticism over the question is student loan forgiveness a reality often centers around the bank account draining words “interest rate.” After all, lenders make profits off the interest rates charged for a wide variety of loans, including the loans offered to college students. Under the Obama Student Loan Forgiveness program, the federal government does not charge interest on the subsidized part of student direct loans. Although the interest free part of subsidized student loans save college students thousands of dollars, interest forgiveness only happens during the first three years of college student loan payments.
End of Term Educational Debt Discharge
Former college students that either enroll in the Income Based, Income Contingent, or Pay as You Earn student loan payment plans may qualify for complete student loan removal at the end of the loan term. To qualify, you must have a student loan balance on a loan term of at least 20 years. End of term forgiveness also hinges on when you took out the federally backed student loan and the vacillation of your income during the term of the student loan.
Is Public Service Loan Forgiveness Legit?
Public service loan forgiveness asks borrowers to provide public service in exchange for the elimination of part or all of a student loan balance. Under this student loan forgiveness option, you qualify for student loan forgiveness after 10 years or at least 120 payments, as opposed to the standard 20-year student loan payment minimum. Many former college students do not realize the public service option comprises part of the answer to the question. The PSLF program made forgiveness a reality for many Americans starting in 2017.
Facts About Teacher and Disability Debt Discharge
Although not part of the landmark Obama Student Loan Forgiveness program, the Teacher and Disability Forgiveness plan represents an important student loan forgiveness option. This distinct college debt retirement plan helps teachers avoid costly monthly loan payments by dramatically reducing loan principals. In turn, lower loan principals decrease the amount of interest teachers pay on college student loans.
How to Take Advantage of Student Loan Forgiveness
Is student loan forgiveness real? The answer is yes, but only if college students take action. Taking action involves researching the various student loan forgiveness options and asking questions to clarify part of the somewhat convoluted language of the original legislation. College students can learn more about educational debt forgiveness programs by reading the materials available in the student financial aid office and conferring with a student financial aid advisor.
Like most things in life, the answer to the question is college debt forgivable does not have absolute meaning. The answer lies somewhere in the middle, as the options for college student loan forgiveness require former students to pay some, but not all of their original federally backed loans. Yet, even partial student debt forgiveness is better than no Santa Claus, Easter bunny, and tooth fairy.
Can You Get Private Student Debt Forgiven?
Unfortunately, private student loan forgiveness is not reality for most borrowers. Private student loans come in many sizes, with many unique benefits. However, since private student loans are issued by private lenders, they are not eligible for federal student loan forgiveness programs.
Individual lenders may have programs in place to support borrowers in unique situations. Some lenders offer private student debt discharge with death, others offer forgiveness if you are permanently disabled. In short, don’t expect any of your private loans to be forgiven easily. Default and bankruptcy are long and financially difficult paths. Before pursing these options you should consult with proper counsel.
Avoid Student Loan Discharge Scams
With all the media hype surrounding student debt discharge, a number of scams have opened up looking to take advantage of student loan borrowers.
For a small fee, sometimes as much as $2,000, these scammers promise borrowers debt forgiveness and other potential savings opportunities. Remember, not everyone is qualified for federal financial aid forgiveness. If you are called by one of these companies, or see their late night television ads, remember than if it sounds too good to be true, it probably is. These scammers also offer services such as federal student loan consolidation. All federal student loan consolidation does is merge your individual federal loans into one, new federal student loan. You interest rate will be a weighted average of the individual loans. If these scammers promise a lower interest rate, don’t believe them. You can file the paperwork for federal student loan forgiveness and consolidation for free online. Do not pay thousand of dollars for a couple hours’ worth of work.
Author: Jeff Gitlen
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