The Pros and Cons of Federal Student Loan Forgiveness

Entering the working world strapped with thousands in student loan debt can be extremely overwhelming. Instead of working to establish a financial foundation and save for the future, you are working to pay for a life chapter you’ve long since closed.

While there are very few shortcuts to paying off student loan debt, there are legitimate forgiveness programs for federal loans that can help you wipe your debt slate clean and save thousands in the process.

However, it’s not entirely cut and dry. There are tight restrictions on who can qualify and what must be done before they can have their loans forgiven.

Here is what you need to know before deciding if this is something you should consider.

Types of federal student loan forgiveness

There are two types of federal student loan forgiveness: Teacher Loan Forgiveness and Public Service Loan Forgiveness.

Under the Teacher Loan Forgiveness Program, those who teach full-time for at least five consecutive years in specific schools that are deemed low-income can have up to $17,500 of their student loan debt forgiven. Qualifying loans are direct subsidized and unsubsidized loans and unsubsidized Federal Stafford Loans.

Additional information on Teacher Loan Forgiveness Program can be found here.

Under the Public Service Loan Forgiveness program, those who work full-time for a qualifying employer can have the remainder of their balance on a qualifying direct loan repaid after making 120 monthly payments (payments must have been made after October 1, 2007 and can not be made in under 10 years). Once the last payment is made, you must submit an application to officially receive loan forgiveness.

Additional information on Public Service Loan Forgiveness program can be found here.

The pros of federal student loan forgiveness

You can be relieved of a significant portion of your student loan debt.

While the Teacher Loan Forgiveness Program places a cap on the total amount of debt that can be forgiven, the Public Service Loan Forgiveness Program does not. As long as you have stayed current with your payments and paid 120 payments over a ten-year time span, the remaining balance can be forgiven. For some with a large debt burden, the savings can be significant.

Many jobs can qualify.

You don’t have to enter into a strictly public service field to qualify for forgiveness. Under the Public Service Loan Forgiveness Program, it’s about who you work for, not necessarily what you do. So you don’t have to give up your job of choice, you just have to do it for an employer that qualifies (i.e. a non profit or government agency).

You won’t be slammed with a tax bill afterwards.

Did you know some federal repayment plans will leave you with a tax bill after forgiveness because the IRS sees the forgiven amount as taxable income? Luckily this isn’t the case with the Teacher Loan Forgiveness Program or the Public Service Loan Forgiveness Program.

The cons of federal student loan forgiveness

There are tight restrictions to qualify and stay qualified.

If you are already in a qualified job or work for a qualified employer that’s a great first step, but there is a laundry list of other ways in which you must qualify. For instance, one stipulation in the Teacher Loan Forgiveness Program (among many), states that if your five years of teaching began before 2004, you may only qualify for $5,000 in loan forgiveness. For the Public Service Loan Forgiveness Program, if you don’t stay up to date on your required annual paperwork, you may end up disqualifying yourself.

The bottom line: you must be educated on program requirements and make sure you are doing all you can to stay eligible.

It could limit your job prospects.

If student loan forgiveness is at the front of your mind when selecting a job or an employer, you could be in for a long road ahead. Student loan forgiveness is a great benefit for those already interested in working in the public sector, but these positions aren’t for everyone.

You must be committed to staying put for 5-10 years before you can even qualify. If this wasn’t already your plan, you could end up limiting your job prospects.

What if you don’t qualify for either of these two programs?

While the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness Program are designated as the two federal forgiveness programs, there are federal income-driven repayment programs that you might be eligible for. These could lead to loan forgiveness on the balance remaining after a designated amount of time.

Find more information here.