Debt forgiveness: escape your student loans

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With student loan numbers skyrocketing, debt-laden undergraduate and graduate students are desperate for a strategy that can help them escape their burden. The latest wrinkle is the possibility that federal loans could be forgiven because the school used illegal recruiting tactics, for example, promising the student a well-paying career.

According to the wall street journal, more than 7,500 borrowers (with $164 million in debt) have sought debt forgiveness under a 1994 regulation, including a violation of applicable state law by an act or omission the school as a defense to repayment. In june 2015, the U.S. Department of education promised debt forgiveness to students at bankrupt nonprofit schools corinthian colleges (click here for more information on how to apply). The department has already agreed to cancel nearly $28 million in corinthian student debt, according to the journal .

For many, the prospect of debt relief may seem like a dream come true. In reality, only some borrowers may be eligible for forgiveness – and new rules have been discussed that could tighten what can be forgiven. (see student loan forgiveness: how it works?)

Earn debt forgiveness

Student loans can be forgiven in two ways: by working in public service or by making payments over income-based ) periods of time. Each has its own conditions, requirements and restrictions. No route is quick or easy.

Still, borrowers rushed to get on board. According to august 2015 department of education data, nearly 3.9 million americans were enrolled in income-driven repayment plans that offer a chance at forgiveness, a 56% increase since june 2014. These debtors contribute a total of more than $108 billion in debt.

The increase in enrollment can likely be attributed to the two-pronged appeal: the opportunity to make lower monthly payments now, and the possibility that balances will be forgiven later.

Potential pitfalls

Experts and lawmakers worry there may now be an unintended consequence of these plans, as borrowers take forgiveness for granted and intentionally take on more debt than they can afford. At the same time, there is concern that colleges will exploit this mindset and charge students more or force them to take on debt by promoting these forgiveness programs.

In an apparent attempt to limit the potential financial consequences, the president proposed a cap of $57.500 for the total forgiveness per borrower before.

How public service forgiveness works

To obtain some debt under the public service, you must first make 120 qualifying payments (i.E., required payments on time).These payments must be made while you are working for a qualified employer – generally a government organization or a nonprofit organization with tax-exempt status. Only payments made after 1. October 2007 qualify for eligibility, so borrowers will not reach the 120-milestone by the end of 2017.

Other debt forgiveness programs

If you don't work a public service position, you can still get some of your student debt forgiven – but it will take longer. Federal income-based repayment plans allow debt forgiveness after at least 20 years (terms vary by program).

Which loans are eligible?

Only direct loans from the federal government are eligible for funding. If you have other federal loans, you may be able to consolidate them all into one direct consolidation loan that would make you eligible. Non-federal loans (those handled by private lenders and loan companies) are not part of this program.

Find a plan

All federal redemption plans allow for public service forgiveness. Income-based repayment plans also include forgiveness for debtors who do not work in the public sector after a certain period of time. These plans include:

• Income-based repayment (IBR): maximum monthly payments are 15% of discretionary income. Forgiving eligibility after 25 years of qualifying payments.
• Income-based repayment: payments are recalculated each year based on gross income, family size and federal loan balance. Forgiving eligibility after 25 years of qualifying payments.
• Pay as you earn (PAYE) student loan repayment: maximum monthly payments are 10% of discretionary income. Ability to forgive after 20 years of qualifying payment.

How to enroll

Your student loan servicer handles repayment for your federal student loans, so work with the servicer to sign up for a repayment plan or change your current plan. You can usually do this online through the company's website. To apply for the public service forgiveness program, both you and your employer must complete and submit a specific form.

The future of forgiveness

As with anything having to do with the federal government, the terms of student loans can change.

Mark kantrowitz, senior vice president and publisher of edvisors. Com and author of "filing the FAFSA," says changes are possible – and it's not known how they will affect borrowers currently in repayment. "It's unclear if and how existing borrowers will be retired," he says. "It's not clear whether borrowers can do anything to maintain eligibility for the current version of public service loan forgiveness. "

Regardless of potential changes, kantrowitz warns borrowers not to stake their financial futures on hopes of debt relief, especially the kind associated with public service. For one thing, there is a rigid time limit: "public service debt relief occurs after 10 years of full-time employment.It's an all-or-nothing benefit, so borrowers who stop working before reaching the 10-year mark won't receive forgiveness. "

Other considerations

Income-based plans may also have another disadvantage – more interest will accrue because repayment is stretched out over a longer period of time. "Loan payments under IBR and PAYER can have negative amortization and dig the borrower into a deeper hole," kantrowitz notes. "Borrowers who expect a significant increase in their income a few years until repayment may prefer a repayment plan such as extended repayment or graduated repayment, where the monthly payment is at least as much as the new interest accrues and does not increase the loan balance. "

Reyna gobel, author of" cliffsnotes graduation debt: how to manage student loans and live your life, 2. Condition ", puts it more bluntly:" if you are just taking on more debt because you expect these plans in the future: stop! You never know what will or won't pass for graduates if the law changes in the future. Ask yourself, "could I afford to pay this back with a regular extended repayment schedule? "If not, you could end up in very large debt and a difficult situation. Also keep in mind that payments change annually based on earnings. As your income increases, so can your payment. "

The bottom line

Student loan forgiveness could be a welcome option, offering some relief to borrowers toward the end of their loan term, but their future is uncertain. Students should be cautious about borrowing beyond their means because they assume a large portion will be forgiven.