What Is Loan Forgiveness And How Do I Qualify?
For many Americans who are struggling with debt, student loans are a large part of that load. In the first quarter of 2019, the total amount of student loan debt in the country was $1.49 trillion, with the average amount per person being just over $31,000, according to Credit.com. That is a large amount of debt and many borrowers find themselves looking for help.
Loan forgiveness is one option to address student loan debt. It can help reduce your debt balance putting you closer to becoming debt-free. Let’s take a closer look at this option and see what you must do to qualify for it.
What Is Loan Forgiveness?
Loan forgiveness is a program available for federal student loans. Loan forgiveness eliminates all or some of your student loan debt if you meet specific criteria. Can you imagine having some of your student loans forgiven in an instance?
Main Requirements to Obtain Loan Forgiveness
According to the Department of Education, there are several types of loan forgiveness programs. Qualifying for loan forgiveness programs depends on the program you are applying for and the type of loan(s) you have. Some popular programs include:
- Public Service Loan Forgiveness — If you have a direct federal loan and are employed by a government or non-profit organization, you may qualify for loan forgiveness. This program is available once you have made 120 qualified monthly payments while being employed with a qualified organization.
- Teacher Loan Forgiveness — Teacher Loan Forgiveness is available to borrowers who serve five years in low-income schools or an educational service agency. An educational service agency is a multi-service office that is approved by state law to create, oversee, and offer assistance or projects to local education agencies like public schools such as government-funded school areas. A borrower can qualify for up to $17,500 in loan forgiveness through this program.
- Join the Military — According to USA Today, each military branch has a student loan forgiveness program, so a military career could qualify you to have your loans forgiven.
- Income-Based Repayment — While this is not loan forgiveness, it can turn into loan forgiveness. If you apply for an Income-Based Repayment Plan, you will never pay more than 10 to 15 percent of your discretionary income depending on when your student loans started, according to StudentAid.gov. After 20 to 25 years of making these payments, your remaining balance would be forgiven.
Differences With Debt Refinancing
Debt forgiveness is not the only option for dealing with student loan debt. Some students choose to focus on debt refinancing, which is not the same as loan forgiveness. Refinancing options are available for several types of loans. Review the most common below:
- Restructuring — For borrowers who are at risk of bankruptcy or defaulting on loans, lenders may offer debt restructuring. This process changes the terms of your loan to make it easier for you to repay it based on your current income. Debt restructuring can lower the interest rate, extend the repayment period to lower the monthly payments or forgive some of the overall loan balance.
- Consolidation — Debt consolidation takes multiple debts and rolls them into one new loan. Often the new loan has better terms and usually lowers the total monthly payments. It also makes it easier to manage the debt by requiring just one monthly payment instead of several.
- Settlement — Debt settlement companies allow borrowers to settle their debt for less than the total amount owed. This requires you to place money into a savings account specifically meant to build a sound settlement amount to negotiate with the settlement company; this may damage your credit score according to NerdWallet.
- Loan for a loan — Taking out a loan to pay off another loan is another option to address your debt. If you can get a loan with better terms, then this could help you regain control of your finances.
In each of these processes, except for debt settlement, you are not actually reducing your debt total. You are merely changing the terms to make it more workable within your monthly budget. If you need to change the overall amount of what you owe and cannot save enough for a settlement, then you may need to consider loan forgiveness.
Learn more about these alternatives in our How-to Super Guide to Pay Off Debt.
Common Mistakes to Avoid
If you have a student loan and are considering loan forgiveness or other types of settlement plans, be careful to avoid these common mistakes:
- Timing — If you opt to consolidate your loans in an attempt to repay them and then later look for a loan forgiveness program, make sure the timing is right. Loan forgiveness programs often require a period of qualified payments and the consolidation process restarts the clock on those payments, which may make you ineligible for the program.
- Amount — Paying down your debt ahead of schedule seems like a good plan, but if you are planning to apply for debt forgiveness, you could end up repaying money that would have been forgiven. Discuss your needs and goals with a financial professional or a credit counselor to understand what are the best options for you.
- Interest Rates — If you choose to consolidate or take out a different loan, make sure you understand the interest rate. The interest rate may only be lower for a period of time. And if this is the case then you want to make sure that the interest rate after the promotional period will be better than your current loan’s interest rate.
Loan Forgiveness Is Possible, But Only for Certain Situations
Loan forgiveness programs are an option to help address debt but is primarily only used for student loan debt. And keep in mind that it is only available to select individuals.
Other alternatives, like debt consolidation or settlements, can provide a way to address debt problems for borrowers who are not eligible for loan forgiveness, but these solutions may impact your credit ratings. These options should only be considered as a last resort if saving, debt management programs and/or traditional repayment methods are not working.