Why You Shouldn’t Depend on Student Loan Forgiveness
A lot of student loan borrowers are hoping they will be able to get their student loans forgiven,
especially since it has been made easier in the past few years by the government and lenders to do so.
While this may seem like an easy fix, this type of relief can backfire on you in unexpected ways.
Here’s why you shouldn’t rely on student loan forgiveness to solve your money problems.
The chances of success are slim
It is true that President Obama passed a law providing student loan forgiveness to borrowers who go into public service.
It’s called PSLF or Public Service Loan Forgiveness, and it has already helped hundreds of thousands of people.
But because so many people have taken advantage of it, there’s talk of repealing PSLF before President Obama leaves office in January.
If you depend on PSLF for your financial future, you could be out tens of thousands of dollars.
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You may be left with more debt
The program doesn’t just mean that you don’t have to pay back your loan. It also means that you don’t have to pay penalties.
This can lead some people to think, Sure, I won’t be paying back my debt for a few years but I still get out of paying it completely!
This line of thinking may be tempting, but it ignores something vital: interest accumulates over time and will eventually force you to pay off those loans.
If you’re enrolled in an income based repayment plan when your balance is forgiven, then you could end up with even more debt than if you had simply made monthly payments from day one.
Make sure that student loan forgiveness is really worth it before counting on it as part of your financial future.
Your credit score will take a hit
The two most popular forgiveness plans, Income Based Repayment (IBR) and Pay As You Earn (PAYE), deduct a portion of your income tax returns.
With an IBR plan, if your adjusted gross income is $70,000 or less, up to 15 percent of your discretionary income can be forgiven after you’ve made qualifying payments for 20 years.
A PAYE plan offers forgiveness after 10 years with no debt cap. In both cases, however, any remaining balance will be considered taxable income.
If you have other outstanding student loans or credit cards or hope to borrow in the future this could seriously hurt your credit score and make it more difficult to get approved for new loans.
A settlement may be worse than the original loans
One of the reasons that borrowers rely on student loan forgiveness is because they are desperate to avoid default.
Borrowers may assume that a settlement with their lenders would eliminate their obligation to pay back their debt, but in fact it will only defer payments.
Many borrowers end up paying more than they originally owed, or entering into an income driven repayment plan with interest rates as high as 25% for as long as 30 years.
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An income-driven plan makes your payments lower
Income-driven repayment (IDR) plans like Income Based Repayment (IBR), Pay as You Earn (PAYE), and Revised Pay As You Earn (REPAYE) are by far your best options if you’re struggling with student loans.
These plans all base your monthly payments off of a percentage of your income and provide a potential for student loan forgiveness after 20-25 years.
The only catch is that you have to reapply every year, but it’s totally worth it.
Here’s Why You Can’t Rely On Student Loan Forgiveness
If you don’t qualify, you’ll still owe the remaining balance
There’s a misconception that if you don’t qualify for student loan forgiveness, you won’t have to pay anything.
That’s not true even though your debt will still be forgiven, you still owe taxes on any canceled debt,
which means that you could be taxed thousands of dollars (if not more) for money that was once owed to your lender but is now forgiven by bankruptcy.
To avoid owing taxes on forgiven debt, consider an income-driven repayment plan or refinancing with a private lender instead.
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Trustworthy companies can provide assistance in repaying your loans
While student loan forgiveness is a great idea, you shouldn’t depend on it if you have other debt to pay off.
Trustworthy companies exist that can help you develop a solid plan to repay your student loans and get out of debt fast.
If you have any question about how these options could work for you, contact us today!
Our friendly representatives are available 24/7 to answer any questions you may have.
How Can I Get Out of Debt Fast?
Are you looking for a way to get out of debt fast?
The good news is that there are ways to do so without having to take drastic measures such as bankruptcy or selling everything in your home.