Student loan forgiveness has been a hot topic in the past few years. With the first round of borrowers qualifying for PSLF in 2018, more people are exploring if loan forgiveness makes sense. For some people, it absolutely does!
But others might be better off paying off loans through student loan refinancing. Let’s look at both options to see what makes the most sense for you.
What Is Student Loan Forgiveness?
If you have federal student loans, there are a couple of options to potentially have your student loan debt wiped away through loan forgiveness: Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR) loan forgiveness. Each program has its own guidelines and requirements. Here’s what you need to know.
Public Service Loan Forgiveness
PSLF is a federal program that forgives the remainder of your loan debt after 10 years of qualifying student loan payments. While participating in this program, you must work in the public sector as you’re fulfilling the 120 required student loan payments. “Public sector” refers to qualifying non-profit and government organizations, and generally, are located in areas of need around the country.
In order to qualify for PSLF, you must have federal Direct Loans or consolidate to Direct Loans.
You also need to move your payments to an IDR plan. There are four IDR plans available:
- Pay As You Earn Plan (PAYE)
- Revised Pay As You Earn Plan (REPAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
If you’re approved for PSLF, a nice program perk is that forgiven debt isn’t considered income and isn’t taxable.
Student Loan Forgiveness Through an IDR Plan
Another federal loan forgiveness program involves Income-Driven Repayment. For this program, you need to switch to one of the IDR plans mentioned above. Any outstanding student loan debt after 20-25 years of qualifying payments are completely forgiven.
The benefit of this option is that there are no job or employer requirements involved. And the number of your payment years depends on which IDR plan you choose. Each IDR plan works differently so spend time familiarizing yourself with each one before choosing a plan.
Unfortunately, loan forgiveness through IDR counts as taxable income, meaning you could end up with a large tax bill.
Other Loan Forgiveness Programs
Beyond the big two loan forgiveness programs, there are other options available to borrowers. Each program has its own guidelines so be sure to check eligibility requirements before applying. Here are some other loan forgiveness programs to consider:
- National Health Service Corps Loan Repayment Program
- Military student loan forgiveness for physicians
- State-based student loan forgiveness for physicians
- National Institute of Health Loan Repayment Programs
- Indian Health Service Loan Repayment Program
These state and federally based programs can help you manage the weight of your student loans, if you qualify.
→ Related reading: 9 Steps to Financial Independence
When Does Student Loan Forgiveness Make Sense?
There are a couple of specific scenarios when it makes sense for borrowers to look into loan forgiveness. In the case of PSLF, if you were already planning to work for the government or a non-profit organization anyway, pursuing loan forgiveness is a no-brainer. This program is tailor-made for you.
Another reason to pursue loan forgiveness is if you have a high debt-to-income (DTI) ratio. DTI weighs your monthly debt payments against your monthly income. If your loan debt is significantly more than your income, you might want to try for PSLF or IDR loan forgiveness to lower your monthly student loan payments now.
Freeing up student loan money goes a long way in reaching other life goals, like starting a family or buying a house.
What Is Student Loan Refinancing?
Student Loan Refinancing is done through private lenders. All of your loans (whether federal or private loans) are paid by the new lender and a new private loan is created with its own terms and interest rate. Generally, you’d refinance your student loans to save money by securing a lower interest rate. This strategy cuts a significant amount of interest off your overall loan debt.
Because student loans become private during refinancing, you’d lose access to federal loan protections, like deferment and forbearance. You’d also lose access to IDR plans and would be ineligible for loan forgiveness.
When Does Refinancing Student Loans Make Sense?
While loan forgiveness sounds great, it’s not always the best option, depending on your career and lifestyle preferences. You might be able to secure a higher-paying job in the private sector instead of committing to a non-profit or government organization for 10 or more years.
Similarly, if you have a higher paying salary, using an IDR plan won’t lower your payments. You might pay more interest than you would, compared to refinancing your student loans.
Refinancing your loans allows more freedom and control over your career and your loan terms. If you have excellent credit, for example, you could knock tens of thousands of dollars off your student loan debt just from the interest charges alone. According to Nate Matherson, a blogger working to repay over $50,000 in student loan debt, you can refinance student loans multiple times and with more than one student loan refinancing company. Nate said, “In my personal experience, I refinanced my student loans first with College Ave and then again with ELFI a year later. If your income increases and your credit score improves, applying to refinance a second time might be worth it. Most lenders typically conduct a soft credit pull before showing you your rate, so it is possible to get an estimate for your rate savings without hurting your credit with a hard pull.”
If you’re trying to figure out the right way to repay your student loans, spend time using Student Loan Planner’s free student loan calculator. Having the ability to account for every detail within the calculator gives you the confidence to choose the right repayment plan for your needs.
Your student loan repayment is one of the most important financial decisions you’ll make in your life. It has the ability to impact you and your family for decades so explore all of your options and seek out help if you need it.