With the aggregate national student loan debt now at more than $1 trillion, many people are increasingly finding themselves in difficult financial situations. The question of reducing or forgiving student loans is therefore becoming increasingly common. The average student loan debt for the class of 2014 is approximately $33,000 – the highest amount ever for any graduating class. For those that cannot fully pay back the debt, the balance grows and becomes higher and higher over time.
For people in financial distress as a result of student loans, the possibility to reduce or even eliminate the debt may be the only viable option to avoid financial ruin. Yet there is a common misconception that student loans cannot be forgiven. Many people would be surprised to learn that it may, in fact, be possible to reduce or even eliminate this debt.
Credit is granted via two main types of student loans: government and private. Depending on the nature of the loan, the ability for loan forgiveness greatly differs. In general, government loans are much easier to reduce; private loans, on the other hand, are difficult, but not impossible, to eliminate.
Government loans can be reduced or forgiven in a variety of situations. It is important to keep in mind that there are several types of government loans and not all loans will qualify for every situation. The following is a summary of the most common situations under which a debtor may qualify for reduction or forgiveness.
This option is best for those whose incomes are relatively low compared to their debts. The income-based repayment plan allows one to make monthly payments, which are a function of income and the federal poverty line. The amount paid each month is 15% of the difference between adjusted gross income and 150% of the federal poverty line. For example, if a borrower earns $40,000 per year and has $60,000 in debt, then using the 2014 national poverty level for $11,670 for a single-person household, his annual payment would be: 15% * (($40,000)-(150% * $11,670)) = $3,374.25; the monthly payment would therefore be $218.19.
After successful payments for 25 years, the remainder of the loan will be forgiven. Only federal student loans, such as Stafford, Direction and Consolidation, are eligible for this plan.
It is extremely important to note that while this is one of the most common loan forgiveness plans, it also usually falls under the category of taxable income. In other words, the amount of debt that is forgiven counts as income and requires the borrower to pay income tax on it. For example, someone who has had $30,000 of debt forgiven and is in the 35% income tax bracket would have to claim this amount as income and pay $10,500 of taxes.
Public Service Forgiveness
Borrowers may have their loans forgiven by working in certain eligible public service jobs. Only Direct loans are eligible. Not all jobs qualify but amongst the most common ones that do include public school teachers, police officers and firefighters. In general, employment with government agencies or non-for-profit organizations that are designated as tax-exempt by the IRS qualifies. To qualify for loan forgiveness, borrowers must work in a qualifying job for ten years and make 120 monthly on-time payments, after which the remainder of the loan will be forgiven.
Teacher Loan Forgiveness
Teachers who have been teaching full-time in low-income schools for at least five years may apply to have up to $17,500 of loan debt forgiven. PLUS loans are excluded from this option. To determine if a school qualifies as low-income, one can check the U.S. Department of Education database, which is published every year.
Borrowers of Stafford Loans may be eligible for attractive debt forgiveness programs if they work certain jobs in the public sector. The purpose such programs is to encourage people to work in jobs that benefit the public and pay salaries that are relatively low compared to the costs of education. There are various eligible occupations, including teachers at low-income schools, public lawyers, law enforcement, social workers and more.
While government loans offer various reduction or forgiveness options, the same cannot be said for private loans. Such private loans are amongst the hardest to eliminate and many times cannot be discharged even in bankruptcy. Nevertheless, there is a perception that private student loans will always be with the borrower for life no matter what. This is not true and although they can be difficult to reduce or eliminate, this is not impossible.
There have been many situations where at least part of a student loan has been eliminated in bankruptcy. It is impossible to provide a strict guideline for situations that may allow one to have these types of loans reduced. However, in general, those who are in bankruptcy and can prove the financial inability to repay at least part of their student loans may be able to have at least some of the debt discharged. In general, certain types of private loans are typically easier than others to discharge. They include:
- Loans to attend a school that is not on the Department of Education’s list of “eligible educational institutions.”
- Loans provided by large-scale lenders such as big banks or financial institutions.
- Loans for education programs that are not offered at traditional four year colleges (generally this includes vocational and job-specific training such as truck driving or beauty schools).
The process of attempting to reduce or discharge any private student loan debt is usually not easy and does require a good lawyer, but good news is that it can be done. The assumption that such debt can never be reduced is not correct.
Although student debt is a huge problem in the United States right now, it does not have to be a lifetime financial burden for all borrowers. In many cases, such debt can be reduced, forgiven or discharged. Due to the various laws and available options, students should generally always attempt to take out government loans first and turn to private loans only when necessary. Public loans have set guidelines for the reduction or forgiveness of debt and private loans can only sometimes be reduced or discharged in bankruptcy. Of course, more than anything, prospective students should do their homework and determine their total future debt and realistic salary expectations so that they do not get stuck with unexpected debt that they cannot realistically pay off.
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