Back in June 2019, Senator Bernie Sanders proposed to cancel $1.6 trillion outstanding debts for student loans. On the other hand, Senator Elizabeth Warren also proposed to cancel $640 billion outstanding student loans. Both senators have tabled a bill to make education in colleges and public universities free.
Covid relief bill passed in March 2021 includes a provision that makes student loan forgiveness passed between December 31, 2020, and January 1, 2026, tax-free. This means student loan borrowers could save $10,000 or more. Previously, student loan debt canceled was taxable at the borrower’s normal income tax rate. In the same month, Biden canceled $1 billion of student loans. On the contrary, President Donald Trump had proposed to bring to an end the loan forgiveness program.
Statistics show that in 2020, the amount of student loan debt outstanding stood at $1.57 trillion and 54% of college students take on student loans to pay for their education. The average amount of student loan debt per borrower is $37,584 while the amount of student debt that is at least 90 days past due or in default stood at 6.5%.
How to Get Student Loan Forgiveness
You can repay your federal loan based on your income, family size and the state you reside in. However, even when you are using this option, the interest rates on the student loan balance remains constant. Your loan will continue to grow with time. The exciting part is that, when you continuously pay on-time payments, the federal government will forgive you after 20 years for undergraduates and 25 years for graduates for loans disbursed before 1st July 2014.
Who Benefits From Loan Forgiveness?
The beneficiary of the loan forgiveness plan is to help borrowers struggling in repaying their loans. However, the truth is, not all borrows will benefit, only those ones from graduate schools and professional schools. For instance, graduate schools will receive $167.1 billion of loan forgiveness compared to $40.1 billion for undergraduate schools. This shows that graduate schools are receiving four times of loan forgiveness compared to undergraduates. This is so because graduate school is expensive and the government does not have a cap on how much graduates can borrow, unlike their undergraduate counterparts. Graduates can borrow to cater for the entire cost of tuition like books and living expenses, allowing graduates to borrow more.
There has been a concern that most employers went to a school at a time when 20-60 hours of average weekly work was enough to pay for a college education. Unfortunately, it is not the case nowadays. Salaries and wages are not increasing at the same rate as the cost of living. The other concern is that students are paying loans at an interest rate of 7%, which is high compared to a 1-2% interest one would receive by saving money in a bank. Eliminating the interest rates on student loans would be a win-win situation for both borrowers and the federal government. For instance, a significant proportion of these loans end up unpaid. Eliminating interest rates would reduce the number of outstanding loans.
Loan Forgiveness Criticism
Not everyone is a proponent of loan forgiveness in the US. Those opposed to student loan forgiveness argue that the economy will suffer because high income graduates will put their money into savings instead of spending. Moreover, it is an unfair proposition as it disadvantages those who have paid off their loans.
Loan Repayment Plans
Repaying a student loan is becoming hectic for undergraduates and graduates. The Federal Government has a standard repayment plan for students, whereby they have to pay an equal amount for ten years. This is a good plan for those who get substantial income immediately after graduating. Those who do not get a job immediately have to look for other options that can balance their income, family size and the cost of living. Other options for borrowers struggling with student loans include loan consolidations, deferment, loan forgiveness and forbearance.
Income-Driven Repayment Plans
If your federal student loan payments are high compared to your income, you may want to repay your loans under an income-driven repayment plan.
The other payment plan is the Income-Based Repayment plans that consider income and family size. When you use one of the plan, at least you won’t get overwhelmed considering your income and you can raise a family while repaying your loan.
The advantage of the Income-Driven Repayment plans is that you can evaluate your repayment after every year, depending on your income. This is unlike the standard repayment plan where if you opted to pay for ten years, you can’t change it when or salary increases or reduces. You are also eligible for loan forgiveness if you make on-time repayments, although it depends on when you received the loan. The Income-Driven Repayment plans are available for both undergraduate and graduates.
The disadvantage of the Income-Based Repayment plans is that in case your income is too low, you may not pay the interest rates for your loan. This leads to a negative amortization for the loan. Consequently, your loan will increase instead or reducing with time.
Income-Based Repayment plans you can apply for are:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan). 10 percent of your discretionary income.
- Pay As You Earn Repayment Plan (PAYE Plan). 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount
- Income-Based Repayment Plan (IBR Plan). 10 percent of your discretionary income if you’re a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount and 15 percent of your discretionary income if you’re not a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount
- Income-Contingent Repayment Plan (ICR Plan). The lesser of the following: 20 percent of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income
Defaulted loans are not eligible for repayment under any of the income-driven repayment plans
Public Service Loan Forgiveness Program (PSLF)
Public Service Loan Forgiveness program for new borrowers was signed into law by President George W. Bush in 2007. It gives teachers, nurses, social workers and other public sector workers incentives to stay in lower-paying public sector jobs while they pay down their student debt. The program cancels their remaining federal student loans for borrowers with federal direct loans who pay 120 monthly payments while working full-time for federal, state, local and tribal government as well as not-for-profit organizations.