What Is Student Loan Forgiveness?
The term student loan forgiveness refers to the release of having to repay part or all of a federal student loan. Borrowers who receive student loan forgiveness are those who use these funds to pay for their post-secondary education. Forgiveness is available for different types of loans, including direct and Perkins loans, and the types of loan forgiveness programs include public service and teacher loans. Individuals who want their loans forgiven must apply and may have to continue making payments until their application is approved.
- Student loan forgiveness releases you from the obligation to repay part or all of your federal student loan debt.
- Only federal direct loans qualify for loan forgiveness—you can't get it for private loans.
- Student loan forgiveness can be earned by working in public service or by making payments through an income-contingent payment plan for a (long) period of time.
- Federal loans may also be discharged under circumstances beyond the borrower's control, such as a disability or the closing of the school.
- Students who feel their educational institution defrauded or seriously misled them can apply to the Department of Education for loan forgiveness under the category of "borrower defense."
How Student Loan Forgiveness Works
In Q2 2021, student loan debt reached $1.73 trillion, with over $1.59 trillion making up the Federal Loan Portfolio. It's reported that as many as 43 million Americans owe an average of nearly $40,000. In some cases, borrowers may be able to get their loans forgiven or canceled. Student loan forgiveness releases a borrower from their obligation to repay part or all of their federal student loan debt.
The prospect of seeing that debt evaporate may seem like a dream come true. In reality, though, not that many people end up being eligible. Requirements vary depending on the type of loan, but most offer forgiveness only for those employed in certain public service occupations. These include teachers, government service, military service, and AmeriCorps.
As noted above, there are a number of different loan programs that qualify for student loan forgiveness, including the:
- Direct Loan program
- Federal Family Education Loan program
- Perkins Loan program
There are also repayment plans offered to student loan borrowers that include the discharge or forgiveness of some of their debt. There can be situations in which a loan is discharged because the educational institution defrauded the student in some way. Borrowers shouldn't confuse forgiveness with discharges. With discharges, borrowers are relieved of the requirement to pay their federal student loans if it's proven, for example, that the educational institution misled the student in any way.
The collapse of for-profit colleges and the 2020 economic crisis have intensified preexisting concerns about the mounting problem of student debt. The concept of broader loan forgiveness for all borrowers, not just those who work in public service, participate in a repayment plan, or are created by a for-profit college has been a popular talking point in political circles.
President Biden made several proposals, including more liberal income-driven repayment programs (dropping monthly payments down to 5% of income, granting relief for national or community service) and the outright cancellation of $10,000 in debt per borrower. Senators Chuck Schumer and Elizabeth Warren and Congresswoman Ayanna Pressley have led a Congressional group calling for canceling as much as $50,000 per loan—by executive order, if necessary.
Congress could also act to further loosen the borrower defense rules, returning them to their Obama administration standards, and enact student debt cancellation through legislation.
Federal Policy Changes Regarding Student Loans
The CARES Act of 2020 included some temporary changes to the rules on student loan repayment. The new rules provided for the suspension of loan payments, stopped collections on defaulted loans, and imposed a 0% interest rate on loan balances. Those rules are set to remain in effect until Jan. 31, 2022.
During the time that your monthly loan payments are suspended, those suspended payments will count toward PSLF, just as if you had continued to make them, as long as you meet the program's other requirements.
Though you are still allowed to make loan payments if you wish to, the Department of Education points out that doing so could be counterproductive. "If you make payments during the period of suspended payments, they won’t make you eligible for PSLF sooner," according to its official blog. "The suspended $0 payments already qualify toward your required 120 PSLF payments, so not making additional payments maximizes the amount to be forgiven."
Under the American Rescue Plan Act of 2021, student loan debt that is forgiven won't be included in taxable income for the tax years 2021 to 2025.
Types of Student Loan Forgiveness
Public Service Loan Forgiveness
The Public Service Loan Forgiveness Program (PSLF) is designed specifically for people who work in public service jobs, either for the government or for a nonprofit organization. You may also be able to get all or part of your loan forgiven through certain types of volunteer work, military service, or medical practice.
In order to have debt forgiven under the public service program, you must first make 120 qualifying payments (which means paying the minimum amount due on time). These payments must be made while you are working for a qualified employer—generally, a federal, state, or local government or a nonprofit organization with tax-exempt status. In effect, you qualify after 10 years on the job and 10 years of monthly payments.
Potentially eligible positions include those in nursing, government, police and fire departments, and social work. Only payments made after Oct. 1, 2007, qualify toward earning eligibility.
Only direct loans made by the federal government (currently known as the William D. Ford Federal Direct Loan Program) are eligible for student loan forgiveness. Non-federal loans (those issued by private lenders and loan companies) aren’t part of this program.
If you do not have a William D. Ford Direct Loan and, instead, borrowed through the Federal Family Education Loan Program or the now-defunct Perkins Loan Program, you are allowed to consolidate those debts into a direct consolidation loan. The new consolidated loan would then be eligible for public service loan forgiveness.
A 2021 Revamp for PSLF
Under the regular PSLF rules, only payments made on the combined loan counted toward the 120-payment minimum; earlier payments made on the old loans weren't considered. Also, you had to be enrolled in one of the government's four income-driven repayment plans (see below).
On Oct. 6, 2021, however, the Dept. of Education announced considerable loosening to the program rules. For a limited period of time—specifically, through Oct. 31, 2022—borrowers may receive credit for past payments made on loans that would otherwise not qualify for PSLF (like those Federal Family Education Loans or Perkins Loans) to hit that 120-payments mark. More payments will qualify even if they weren't in full or were tardy. Also, payments made under any repayment plan count now, not just income-contingent ones.
You do still have to have direct loans or apply to combine them into direct consolidation loans, though, by the Halloween 2022 deadline. The changes also apply to those already in the PSLF program, of course. Military service members and federal employees are automatically being given credit towards PSLF.
To apply for PSLF—whether for the first time or to take advantage of the waived restrictions—both you and your employer need to complete and file the program's Public Service Loan Forgiveness (PSLF) & Temporary Expanded PSLF (TEPSLF) Certification & Application (PSLF form). For guidance, the government offers a PSLF Help Tool.
Who Is Eligible?
This limited waiver is available to borrowers who currently have FFEL, Perkins, or other non-Direct Loans if they apply to consolidate into the Direct Loan program and submit a PSLF form by Oct. 31, 2022. The waiver applies to loans taken out by students. Parent PLUS loans are not eligible under the limited PSLF waiver.
The waiver allows active-duty service members to count deferments and forbearances toward PSLF. This solves a problem for service members who have paused payments while on active duty but were not getting credit toward PSLF, according to the Department of Education announcement.
“Teachers, nurses, first responders, servicemembers, and so many public service workers have had our back especially amid the challenges of the pandemic,” said U.S. Secretary of Education Miguel Cardona.
Find Out If You Qualify
The action you take will depend on the types of loans that you have outstanding. Find out what type of loans you have, then read the next steps for that type below.
Log into your account on the Department of Education Aid Summary site. This will show you what loans you have. Scroll down to the Loan Breakdown section to see a list of each loan you have taken out, even if you have paid the loan off or consolidated it into a new loan.
Under the View Loans section, click the View Loan Details arrow next to a loan for a more detailed name for that loan. Direct Loans begin with the word “Direct.” Federal Family Education Loan Program loans start with “FFEL,” and Perkins Loans include the word “Perkins” in the name.
How to Apply
First, consolidate your FFEL Program loans and Perkins Loans into a Direct Consolidation Loan by Oct. 31, 2022. If you consolidate loans after that date, you cannot receive credit for payments under this limited-time period. After the consolidation is complete, you must then submit a PSLF form to your loan servicer.
The next steps to take are:
- Verify your loan types in your Aid Summary.
- Verify eligible employment by completing Step 1 of the PSLF Help Tool.
- If an employer is eligible and you have at least one loan that is not a Direct Loan, request a Direct Consolidation Loan by Oct. 31, 2022.
- Submit a PSLF form with the PSLF Help Tool by Oct. 31, 2022.
Repayment Plans With Loan Forgiveness
If you aren’t working in a public service position, you may still be able to get a portion of your student debt forgiven—but it will take longer. Federal income-driven repayment plans (IDRs), which are designed to help graduates who would have trouble making payments within the standard 10-year time frame, also allow for some debt forgiveness after a certain period.
These plans include:
- Income-Based Repayment (IBR). Maximum monthly payments will be 10% to 15% of discretionary income. Forgiveness eligibility comes after 20 or 25 years of qualifying payments.
- Income-Contingent Repayment (ICR). Payments are recalculated each year based on gross income, family size, and outstanding federal loan balance; generally, they're 20% of discretionary income. Forgiveness eligibility is after 25 years of qualifying payments.
- Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). Maximum monthly payments will be 10% of discretionary income. Forgiveness eligibility is after 20 years of qualifying payments. The government may even pay part of the interest on the loan.
In addition, if you work for a federal agency, your employer may repay up to $10,000 of your loans per year, with a maximum of $60,000, through the Federal student loan repayment program.
Your student loan servicer handles the repayment of your federal student loans, so work with the servicer to enroll in a repayment plan or change your current plan. You can usually do this online at the servicer’s website.
If your school misled you or engaged in other misconduct in violation of certain state laws, you may be eligible for a loan discharge, officially known as "borrower defense to loan repayment forgiveness."
Applicable to any William D. Ford Direct Loan Program loan, "borrower defense" originally involved the cancellation of all of your current federal student loan debt if you could demonstrate you had been defrauded or substantially deceived by the college you attended. Implemented during the Obama administration, borrower defense applied mainly to private, for-profit schools that engaged in dubious practices.
In June 2015, for example, the U.S. Department of Education promised debt relief to students of the Corinthian Colleges chain, which abruptly closed campuses and declared bankruptcy in the wake of federal and state investigations into its operations.
During the Trump administration, however, then-Secretary of Education Betsy DeVos attempted to dismantle the program by delaying claims processing, denying claims without due process, increasing the burdens of proof, or offering only partial forgiveness, calculating relief via a complex methodology that awarded applicants $0.
Under the Biden administration, the Department of Education announced in March 2021 that it will rescind "the formula for calculating partial loan relief" and instead will forgive the student loans in borrower defense applications completely and promptly.
To have your loans discharged under the borrower defense program, you must file a claim by submitting an application on the Department of Education's website, along with evidence that the school broke the law, significantly misled you, or misrepresented itself.
Specialized Loan Forgiveness Programs
If you work or volunteer for certain organizations, you may be eligible for additional programs that will forgive or reduce your student debt. Here are some examples:
- AmeriCorps VISTA, AmeriCorps NCCC, or AmeriCorps State and National programs: Volunteers for these programs can receive up to the maximum Pell Grant award toward repaying qualified student loans (loans backed by the federal government) through the Segal AmeriCorps Education Award. For the 2021 to 2022 school year, this amounts to $6,495.
- Army National Guard: The Army National Guard's Student Loan Repayment Program can help you earn up to $50,000 toward loans. Covered loans include Federal Direct, Perkins, and Stafford Loans.
- Full-time teachers in low-income schools or educational service agencies: Through the Teacher Loan Forgiveness Program, teachers may be eligible for forgiveness of up to either $5,000 or $17,500 on their Federal Direct and Stafford Loans after five consecutive years of service. The higher amount is for certain math, science, and special ed teachers. The Education Department has further details on its website.
- Medical and nursing school graduates: Working in underserved areas can qualify doctors and nurses for student loan forgiveness under some state programs.
Student Loan Forgiveness vs. Student Loan Discharge
Although their end results are similar, student loan forgiveness is not quite the same as student loan discharge, which immediately stops the borrower's obligation to repay the debt. In some cases, a discharge may also entitle a borrower to receive a refund of payments previously made on a loan.
In general, federal education loans may be eligible for discharge under certain circumstances beyond the borrower’s control. Most loans can be discharged in the following situations:
- permanent disability or death of the borrower
- closure of the school during the time of study
- falsification of the loan qualifications by the school
- use of identity theft on someone else's part to secure the loan
- failure of the school to refund required loans to the lender
"Circumstances beyond the borrower's control" do not include things like having to drop out of college before graduating or being unable to find a job after graduation.
Such circumstances do include a school engaging in illegal recruiting tactics, such as guaranteeing the student a well-paid job upon graduation, or other sorts of misconduct as grounds for a loan discharge.
The approximate number of applicants the Department of Education anticipates its revisions to the borrower defense program will ultimately help to receive $1 billion worth of discharged loan money.
Drawbacks of Student Loan Forgiveness and Repayment Plans
The terms for student loan forgiveness are subject to change with the shifting political winds. So, Mark Kantrowitz, publisher and vice president of research at SavingForCollege.com, warns borrowers against betting their financial future on the hope of debt forgiveness, especially the kind that's tied to public service. For one thing, there's a rigid time limit: "Public service loan forgiveness occurs after 10 years of full-time service. It is an all-or-nothing benefit, so borrowers who stop working before reaching the 10-year mark will get no forgiveness," Kantrowitz says.
Income-based repayment can also have a downside. More interest will accrue on your loan because the repayment is stretched over a longer period of time. "Loan payments under IBR and PAYE can be negatively amortized, digging the borrower into a deeper hole," Kantrowitz notes. "Borrowers who expect to have a significant increase in their income a few years into repayment should perhaps prefer a repayment plan like extended repayment or graduated repayment, where the monthly payment will be at least as much as the new interest that accrues, and the loan balance will not increase."
"Remember, payments change annually based on income. When your income rises, your payment can, too," notes Reyna Gobel, author of CliffsNotes Graduation Debt: How to Manage Student Loans and Live Your Life.
Even if you succeed in lowering monthly payments, don't go on a spending spree with the newly available funds, she adds. “If you're currently racking up more debt because you expect these plans in the future: Stop! You never know what will or won't exist for graduates if the law changes in the future. Ask yourself, 'Could I afford to repay this on a regular Extended Repayment Plan?' If not, you could be getting yourself into very high debt and a difficult situation."
The Bottom Line
All is not perfect with forgiveness plans. The kinds of jobs that may make you eligible for student loan forgiveness often pay significantly less than private-sector positions. You might be able to repay your loans more quickly through a job with greater earning potential, even if it doesn't qualify you for loan forgiveness.
If you do have all or part of your student loans forgiven, be aware that the IRS may consider the forgiven debt to be income, so you could have to pay tax on that amount. Fortunately, this won't be true for the next few years: Section 9675 of the American Rescue Plan of 2021 makes student loan forgiveness received from 2021 to 2025 not included in your taxable income for those years.
If you choose to participate in any loan-forgiveness program, be sure to obtain written verification of the amount that will be forgiven and under what circumstances.