9 Pitfalls of Federal Student Loan Forgiveness Programs (SLFPs)

With student loan debt affecting more than 44 million Americans, it’s easy to see how loan forgiveness programs can pique students’ interest. But while federal Student Loan Forgiveness Programs (SLFPs) have helped erase millions of dollars in educational debt, there are some definite pitfalls to avoid.

Here are nine things to keep in mind — and steer clear of — if federal loan forgiveness is on your radar.

Tip: Thinking about refinancing your student loan? Check out Credible to easily compare rates online. You can read more about how Credible works in our review.

There’s a Limit to Your Forgiven Debt

When people talk about federal loan forgiveness, they are usually referring to the two primary programs available to borrowers: public service loan forgiveness and teacher loan forgiveness. Both of these programs offer students a way to forgive thousands in student loan debt, in exchange for serving their communities through their careers.

There are also many state-based loan forgiveness programs, as well as programs for those choosing careers in nursing, the military, law, and more.

One of the caveats for many of these programs, though, is that the amount of forgiven debt is limited. With the federal teacher loan forgiveness program, for example, you’ll be eligible to have up to $17,500 in educational debt forgiven. If you plan to practice law in Oregon (and meet certain income requirements), you could qualify for the Oregon State Bar Loan Repayment Assistance Program (LRAP). This would forgive up to $7,500 annually over a three year period, for a potential total of $22,500.

If you have a small student loan debt balance, these programs might be all you need. If you have a six-figure balance from earning a professional degree, though, these programs will be a drop in the bucket.

You’ll Need to Pay on the Debt for Years First

Almost all SLFPs will require you to pay on the loan for a period of time before you’re even eligible for forgiveness. So, be sure that you are accounting for that, even if you think you have a great chance at getting your loans cleared.

With Public Service Loan Forgiveness (PSLF), for instance, you will need to make at least 120 on-time payments — or 10 years’ worth — before you’re eligible for forgiveness. With Income-Driven Repayment (IDR) plans, your loan balance is only forgiven after you’ve been paying for either 20 or 25 years (depending on the plan you’re on).

Other programs will have their own requirements for eligibility, but just know that you won’t be getting your debt forgiven right out of college.

Your Career Options are Limited

If you’re banking on federal loan forgiveness, you’ll need to choose from a fairly slim list of career options.

No matter the program you’re eyeing, you’ll likely have one or more career requirements. These include:

  • Teaching in a school with a certain poverty or at-risk-student level
  • Holding specific teaching certifications or teaching specific subjects
  • Working with certain non-profit organizations
  • Earning below specific income thresholds
  • Working in specific areas of healthcare as a researcher

You won’t always be able to choose the exact job, area, or salary that you want if you’re hoping to get loans forgiven. At least, you’ll have to hold off for a few years.

They Can Require Lengthy Job Commitments

Want to work in a public service profession and take advantage of PSLF? Then prepare to stay in that job for a while… even if you decide it’s not for you.

That 120-payment requirement I mentioned above? You’ll need to meet that while remaining in your eligible career in order to qualify for loan forgiveness. That’s a 10-year commitment.

Decide after four years that you want to change jobs or go back to school? Want to stay home and raise babies after seven years? You’ll no longer qualify for that particular forgiveness program if you quit your job, even if you continue making on-time payments.

Annual Paperwork is a Burden

With many loan forgiveness programs, including the PSLF, you’ll need to submit qualifying paperwork annually in order to maintain your eligibility. Fail to submit this paperwork on-time one year (or at all), and you might find yourself eliminated from the program.

This added task probably isn’t enough to deter you from seeking out loan forgiveness, but it is something to keep in mind as you go.

You Might Owe Taxes on the Forgiven Debt

Some loan forgiveness options are free and clear. Once your debt is forgiven, you won’t have to worry about it ever again. Other options, however, will continue to haunt you long after forgiveness, in the form of a hefty tax bill.

While public service and teacher loan forgiveness are tax-free, the loan forgiveness that follows a 20- or 25-year income-driven repayment program is not. With IDR plans, Uncle Sam will count your forgiven balance as taxable income, and you’ll be responsible for the fat tax bill at the end of the year.

Sure, this is probably a worthy exchange. However, while your IDR plan was spaced out into manageable monthly payments according to your income, the IRS won’t be so kind. Be sure you that you’re able to cover that lump sum when it comes due.

We’re Only Talking About Federal Loans Here

There are plenty of federal student loan forgiveness options to consider. If you have private student loans, though? You’re going to have a tougher time.

Some state programs will offer forgiveness for private student loans, depending on your career. You may also be able to take advantage of programs like the one offered by the National Health Service Corps, which could forgive up to $50,000 of your debt.

Just as with interest rates, income-based repayment, and forbearance options, though, you’ll be much more limited with your private loans than your federal ones.

Programs Are Highly Competitive

Sure, federal student loan forgiveness sounds like a great deal, especially if you don’t mind the idea of a career in public service or working in at-risk communities. But when it comes time to actually see that debt forgiven, you might find yourself a bit miffed.

That’s because currently, less than 1% of PSLF applicants get approved. Sure, some of them are actually ineligible and others have incomplete or missing information. But those are some pretty small numbers, especially if you are counting on that loan forgiveness as part of your financial plan.

Who Knows What the Future Holds?

The Public Service Loan Forgiveness program began in 2007. Ten years and 120 on-time payments later, we saw the very first eligible borrowers in 2017. With a program this new — which hasn’t actually forgiven very many loans as of yet — it’s hard to tell what the future will hold.

There are many things that could change between now and when you might meet all eligibility requirements for your own loan forgiveness. New loan programs may be introduced while others could disappear. Requirements could change, too.

While there’s nothing wrong with planning for loan forgiveness, make sure that you don’t count your chickens before they hatch. Sign up for an income-driven repayment plan if needed, to ensure that you can always make full payments on time. Be sure to refinance private loans to secure lower rates and manageable payments. If you need forbearance or deferment, sign up before you get behind.

Related: How I Refinanced and Trimmed $41,000 Off My Student Loans

When you’re eligible for the forgiveness program(s) of your choosing, be sure to submit all documentation and keep up with any program requirements. Then, keep your fingers crossed! After all, every penny counts when it comes to getting out of debt… especially if someone else is willing to clear that debt on your behalf.

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