Student loans or education loans have hiked majorly in recent years. Globally, about 40 million students take a loan in an average span of 5 to 7 years. In some instances, the debts are either exempted or forgiven. A student loan forgiveness is how the student is released from his or her obligation to repay, either a part of the loan or the entire loan. Of course, the education loan evaporates seamlessly from a student's perspective, almost like a dream that has come true.
However, the process is gruesome in reality. Primarily, an eligibility criterion determines if a student loan forgiveness is possible for a particular case. The requirements of eligibility depend upon the type of loan taken or the type of occupation. For example, occupations of public service release a student from the loan. On the contrary, certain student loans have repayment plans that include forgiveness of some part of the debt. Read on to understand student loan forgiveness in detail.
Student Loan Forgiveness - Difference Between Cancellation Discharge And Forgiveness
Forgiveness, discharge, or cancellation of a loan
- Cases where an individual does not have to repay a part or all of the loan. Although cancellation, discharge, and forgiveness mean the same thing in their literary terms, however, used in different ways.
- If you are not entitled to make any payments on your loan due to your job, it is termed as cancellation or forgiveness.
- If you are not required to make payments on the loan due to other circumstances, for example, permanent disability or a school shut down the loan is usually withdrawn, termed as loan discharge.
- It is important to note that outside the circumstances eligible for forgiveness, cancellation, or discharge, you will have to repay the loan whether you complete the education or not. Loan repayment is also compulsory irrespective of a job.
- Public sector services are one of the exclusions. Even miners are bound to repay loans if signed a promissory note to receive the loan.
Types Of Student Loan Forgiveness
1. Teacher Loan Forgiveness
Suppose you have taken a student loan and are teaching full time for five complete and consecutive academic years in a low-income elementary school. In that case, you can be eligible for forgiveness. However, the terms of eligibility may differ from organisation to organisation. In some cases, teaching for five consecutive years in an educational service agency in a secondary school also qualifies for student loan forgiveness.
2. Public Service Loan Forgiveness
Suppose you are employed by a non-profit organisation or a government organisation or a government agency. In that case, you are eligible to receive loan forgiveness under a program for public service in your nation. All direct loans are taken by students who later become public service agents who qualify for student loans forgiveness.
Closed School Discharge
If while the term of the loan your school closes shuts down or cancels the course, you have enrolled eligible for discharge on your student loan
Eligibility For Parent Borrowers
Corresponding to loans offered to students, a parent loan can be discharged if you die or become partially or disabled, or you become bankrupt while repaying the loan. Additionally, if the student for whom you borrowed the loan dies, the education loan automatically gets discharged. Additional circumstances along the loan discharge of a student loan under the parent borrowing category may include:
- Cases where the student could not complete the course, because the school closed
- The eligibility for you to receive the loan was through identity theft.
- Your eligibility to receive the loan was faked by the school.
- The student was withdrawn from the school. However, the school did not pay the refund of the loan.
Circumstances beyond the borrowers control exclude:
- Dropout of college before graduation
- Incapability on the part of the student to find a job.
Besides student loan forgiveness, payment by the borrower through an income-contingent payment plan also leads to the student loan forgiveness. However, the conditions and limitations differ from organisation to organisation and from plan to plan. Neither of the routes is easy and quick. Each of them has an application process, its limitations as well as a withdrawal process. There is a step by step procedure to apply for loan forgiveness, meet the eligibility criteria, a set of documents mandatorily required, along with a waiting time.
Repayment Plans With Loan Forgiveness
Graduates get the benefit of having repayment plans that are income-driven, especially in the circumstances where they experience difficulty making payments within the 10-year time frame. In such cases, the loan provider allows forgiveness for borrowers who are not in the public sector, however after a considerable period.
It implies that part of the loan is forgiven and not the entire amount. However, repayment plans have a two-way appeal. It is either with low monthly payment or the chance of the withstanding balance being forgiven later. Repayment plans include the following:
1. Income Contingent Repayment
Under this plan, payments are calculated each year based on gross income, outstanding loan balance, and family size. Surprisingly, the forgiveness eligibility starts after 25 years of qualifying the payment.
2. Income-Based Repayment
15% of the discretionary income is the allowed maximum monthly payment. Similar to the contingent repayment, the forgiveness eligibility comes after 25 years of qualifying the payment.
3. Pay As You Earn
10% of the discretionary income is allowed as the maximum monthly payment. The eligibility for forgiveness comes after 20 years of qualifying the payment. There is a possibility where the government may interfere and pay a part of the loan’s interest.
4. Federal Agency
The federal agency is an exceptional case. If the student later works in a federal agency, the employer may pay the student loan up to $10000 per year with a maximum cap of $60,000. However, for a federal agency to repay a student loan, there has to be a repayment program.
Limitations Of Student Loan Forgiveness And Repayment Plans
On one hand, it seems to evade a large amount of repayment. However, all of it also comes with a downside.
- The primary drawback is additional interest adding on to the loan because the repayment is stretched over a long period. In some instances, loan repayment under “income-based repayment” and “pay as you earn” are negatively amortised.
- Under negative amortisation, the borrower may be stuck worse than expected. In case you expect an increase in your income status after a few years of the repayment starts, it is advisable to prefer a plan like “extended repayment” or “graduated repayment” where monthly payment will be calculated keeping in line with the new interest. An added advantage of an extended repayment plan does not increase the loan balance at all.
- Public sector jobs that make you eligible for loan forgiveness are significantly less than positions offered by private sectors. Private sector jobs have better earning potential and make you eligible to repay your loan quickly, despite no student loan forgiveness.
- There are also drawbacks to taxation. If you are lucky enough to have all the loan forgiven or a part of it forgiven, the loan amount is considered income and eligible for tax. If you want to participate in a loan forgiveness program, make sure to keep a return verification of the amount forgiven with a clear identity.
It takes considerable time to pay off student loans, despite additional help. If you are paying your student loan on time, building a positive credit history becomes an advantage. Once you pay your loan amount on time, check your credit score to ensure you are on the right track.
Under special circumstances, students can also switch the federal loans into a private lender where the interest rates are relatively lower. However, the challenge is to showcase a steady job and stellar credit. A federal loan transition into a private lender reduces interest expenses considerably and is considered a refinancing option opted by the student. However, private lenders do not offer the same repayment plans, forbearance, or deferment.
1) What is a business loan? How to apply for a business loan?
2) How To Get Small Business Loan From Government?
3) 7 Different Types of Loans for Your Small Business
4) Which Are the Different Types of Loans in India?