Why You Should Count On Loan Forgiveness

If you’re a federal student loan borrower, one of the main perks is student loan forgiveness. Under certain programs like the Public Service Loan Forgiveness program (PSLF) and income-driven repayment, student loan borrowers can get their loans forgiven in full after a certain amount of time.

But late last year, the first round of eligible PSLF borrowers were hit with a harsh reality — only one percent of borrowers were approved for PSLF forgiveness. Despite this grim reality now, you shouldn’t give up on student loan forgiveness completely. Here’s why you should still count on this huge student loan forgiveness program.

The U.S. Government Is Working Out the Issues

What will happen to PSLF, and will student loan forgiveness be eliminated? These are legitimate concerns and the one-percent PSLF approval rate isn’t exactly inspiring hope.

But if you recall, a while back the public was worried that Social Security was going bankrupt. To counter these concerns, the government raised the retirement age. According to the Social Security Administration website, “Since the inception of the Social Security program in 1935, scheduled benefits have always been paid on a timely basis through a series of modifications in the law that will continue.”

In other words, Social Security isn’t going anywhere, and likely, the same can be said about PSLF. Fears of a “bait and switch” by future administrations is understandable seeing as the programs requires you to provide years of service and the threat of having all the time be for naught can be heartbreaking.

But any proposals like, the Democrat Aim Higher Act or Republican Prosper Act, seek to grandfather in current student loan borrowers. That means you’ll remain eligible for the forgiveness plan you were originally offered.

So current borrowers don’t need to lose sleep about what might happen with PSLF and student loan forgiveness. Any changes that occur down the line likely affects new student loan borrowers, not current ones.

Increased Access to Student Loan Forgiveness

Many of the issues we’re seeing with PSLF are due to the way student loans were set up 10 years ago. These programs are relatively new, which is why we only saw the first eligible cohort of PSLF reach the end of the program just this past year.

Also, student loan forgiveness is available under an income-driven repayment plan after 20-25 years, so there isn’t much data yet around how successful loan forgiveness is through that option. As the years go on there’ll be more examples and experience in dealing with student loan forgiveness at this level, but for now it’s an evolving process.

As time goes on, the population of borrowers eligible for student loan forgiveness under PSLF and income-driven repayment will increase. The U.S. government will work out the kinks and hopefully streamline the process for all participants. Lawmakers likely won’t want to anger this huge group of borrowers, many of whom feel student loan forgiveness is their only hope.

What to Know About Student Loan Forgiveness

So if you’re a federal student loan borrower looking to get your student loans forgiven, don’t lose hope just yet. If you are pursuing PSLF, talk to your loan servicer and submit your Employment Certification Form each year to track your progress.

After you have completed 10 years of service and made 120 payments, you can apply for student loan forgiveness through PSLF. The good news is that once your loans are forgiven through PSLF, you will not pay taxes on the forgiven balance.

While it can require follow-ups and tracking, being approved for student loan forgiveness is possible. The New York Times profiled a borrower who did get their loans forgiven under PSLF — a total of $170,000 in student loans.

Borrowers looking to get student loan forgiveness under an income-driven repayment plan have one main issue to combat — taxes.

Under current IRS laws, forgiven loans under this plan are taxable which could result in a big tax bill. To combat this, start saving for taxes now in a brokerage account so you’ll have money set aside when your loans are forgiven.

The last thing you want to do is get your student loans forgiven and then be caught off guard by owed taxes, countering any financial progress you made by having your loans forgiven.

During this time, consider growing your net worth by putting the money you’re saving on monthly student loan payments toward a savings or investment account. You can take advantage of the lower payments and prospect of student loan forgiveness, while building your wealth slowly over time.

Do Not Give Up on Loan Forgiveness Yet

Thinking about student loan forgiveness? Don’t give up on it just yet. Current student loan borrowers don’t need to actively worry about PSLF or income-driven repayment going away. While there may be changes in the future, it’s likely current borrowers won’t have to face new plan changes thanks to the grandfathered clauses being introduced.

However, you can still take an active role in your repayment and save for taxes. If going for PSLF, stay on top of your paperwork and your eligibility– doing so can mean all the difference.

Travis Hornsby founded Student Loan Planner after helping his physician wife navigate ridiculously complex student loan repayment decisions. To date, he’s consulted on over $400 million in student debt personally, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.

He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. He’s helped over
1,700 clients save over $80 million dollars on their student loans, and he’s been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, ChooseFi, Bigger Pockets Money, and more.

2 thoughts on “Why You Should Count On Loan Forgiveness

  1. Hi, how are you? I’m a little confused about the tax portion. it one sentence you say “The good news is that once your loans are forgiven through PSLF, you will not pay taxes on the forgiven balance. ”

    In the next paragraph you say “Borrowers looking to get student loan forgiveness under an income-driven repayment plan have one main issue to combat — taxes. Under current IRS laws, forgiven loans under this plan are taxable which could result in a big tax bill”

    So which is it and what is taxable and how much would you estimate a payment being? Also is Income based repayment the same thing as income-driven?

    Thank you!!

  2. Steve, I can see that’s it’s not obviously clear in the article, but the tax treatment is different depending on what type of plan you receive your loan forgiveness through. Loan forgiveness through PSLF (the first sentence you quoted) is not taxed, while loan forgiveness under an income-driven repayment plan (the second sentence you quote) is taxable. Income driven is the same as income based.

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