5 Potential Disadvantages Of Student Loan Forgiveness – Forbes Advisor

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For borrowers with outstanding education debt, student loan forgiveness can sound like a dream come true. Overnight, your debt—and all the stress it causes—just disappears.

Sounds great, right?

While student loan forgiveness can be extremely beneficial for some people, it’s not always a realistic or valuable goal for everyone. We’ll help you understand the cons of student loan forgiveness, so you can decide if it’s worth pursuing—or if it would make more sense to pay off your debt early.

Should You Rely on a Student Loan Forgiveness Program?

Currently, the only national student loan forgiveness programs are solely for federal student loan borrowers. There are three main forgiveness programs:

  • Public Service Loan Forgiveness (PSLF): Public Service Loan Forgiveness is for employees of government agencies or nonprofit organizations. After working 10 years full-time for an eligible employer and making 120 qualifying monthly payments, the federal government will forgive the remaining loan balance.
  • Teacher Loan Forgiveness: Teachers that work full-time for five consecutive academic years in a low-income school or educational service agency can qualify for up to $17,500 in loan forgiveness through the Teacher Loan Forgiveness program.
  • Income-Driven Repayment (IDR): If you can’t afford your monthly payments under a 10-year repayment plan, you may be eligible for an income-driven repayment plan. An IDR plan has a repayment term of 20 or 25 years and bases your payments on a percentage of your discretionary income. If you still have a balance at the end of your loan term, the government forgives the remainder.

If you don’t have federal student loans—or don’t meet the requirements for one of these three programs—you aren’t eligible for federal loan forgiveness, and it isn’t something you should rely on in the future.

5 Cons of Student Loan Forgiveness

If you qualify for loan forgiveness, it could be very beneficial. However, there are some drawbacks to consider.

1. It Takes a Long Time

Even if you qualify for federal loan forgiveness, it can take a long time for your loans to be eliminated. Depending on the program, you could be in debt and making payments for up to 25 years before your loans are forgiven.

Dealing with your debt for years or even decades can be incredibly stressful. And your debt can affect your ability to pursue other goals. With a high loan balance, it can be difficult to qualify for other forms of credit, such as a mortgage or car loan, so you may have to put off those goals until you eliminate your loans.

2. Forgiveness Isn’t Guaranteed

Only a tiny percentage of borrowers will successfully have their loans forgiven. For example, just 1.6% of PSLF applicants have actually qualified for loan forgiveness since November 2020. Because of the huge number of people that were denied, the government launched the Temporary Expanded PSLF (TEPSLF).

Under TEPSLF, more borrowers qualified for loan forgiveness due to expanded payment and loan criteria. However, the percentage of borrowers that have had their loans forgiven is still quite small. As of February 2022, just 4.4% of PSLF applicants met the expanded requirements under TEPSLF, meaning 95.6% of applicants were denied.

Loan forgiveness requirements are stringent, and only a few borrowers will qualify. The vast majority will have to repay their loans on their own.

3. Your Debt Could Increase While You Wait

If you’re enrolled in an IDR plan and are hoping for loan forgiveness after 20 or 25 years, you should know that your debt could grow, causing you to pay significantly more than you initially borrowed.

For example, let’s say you have $50,000 in grad PLUS loans at 5.3% interest and an income of $45,000. Under a 10-year standard repayment plan, your monthly payment would be $538, and you’d repay a total of $64,523 over the life of your loan.

If the monthly payment was too high, you could apply for an IDR plan. If you qualified for income-based repayment, your payments would start at just $131 per month. Assuming your income increased by 5% every year, your final payment would be $485.

In 20 years, the government would forgive the remaining balance. Even though $34,019 would be discharged, you will repay a total of $66,930—a higher overall cost than if you had stuck to the standard repayment plan.

Estimate your payments: You can get an estimate of your payments, overall cost and loan forgiveness projections with the Office of Federal Student Aid’s Loan Simulator.

4. You Could Lose Out On Higher Salaries

While Public Service Loan Forgiveness can be worth it for some, you have to take into consideration the opportunity cost. To qualify for PSLF, you must work for a qualifying nonprofit or government agency for 10 years. Unfortunately, employers that meet PSLF’s criteria tend to pay significantly less than for-profit corporations.

Most for-profit companies paid 4% to 8% more for certain roles than nonprofit organizations, according to a Payscale survey. Over time, that pay difference could add up.

For example, let’s say you accept a role with a for-profit company at 25 years old. If your starting salary is $35,000 and your salary increases by 5% every year, your lifetime earnings will total $4.2 million by the time you turn 65.

If you instead worked for a nonprofit, your salary could be 8% less. With a starting salary of $32,200, your lifetime earnings would reach $3.9 million by the time you turn 65—approximately $300,000 less than if you worked for a for-profit company.

5. You Might Be Taxed

Depending on the type of loan forgiveness you qualify for, and when it’s processed, you might have to pay income taxes on the forgiven amount. Although PSLF is never taxed, loans forgiven through IDR have historically been taxable.

Under the American Rescue Plan Act that was passed last year, student loan forgiveness is exempt from federal income taxes. However, this provision is temporary and only applies to loans forgiven between 2021 and 2026.

Unless that provision is extended, borrowers that qualify for forgiveness in the future may have to pay income taxes on the forgiven amount—leading to an expensive tax bill.

Alternatives to Student Loan Forgiveness

If you decide against pursuing loan forgiveness—or are ineligible for federal forgiveness programs—you can use the following strategies to pay off your debt faster.

Take Advantage of Employer Repayment Assistance

There are a growing number of companies that offer student loan repayment as a benefit to help their employees. According to a 2021 survey conducted by the Employee Benefit Research Institute, 48% of employers with 500 or more workers said they offered or planned to offer student loan repayment assistance benefits.

With employer assistance programs, your employer typically matches your monthly student loan payments up to a certain amount or percentage of your salary. For example, your employer may match up to $100 per month of your payments.

By taking advantage of these programs, you can pay off your debt faster and cover less of the total cost yourself.

Make Extra Payments

To get rid of your debt quickly and save money on interest, find ways to pay more than the minimum. Increasing your monthly payments by $100, $50 or even $25 can make a big difference over time.

Here’s how extra payments would impact someone with $30,000 of debt at 5% interest and a 10-year loan term:

Refinance Your Student Loans

If you’re ineligible for loan forgiveness or have private student loans, another option to consider is student loan refinancing. Borrowers with stable income and solid credit history could potentially qualify for lower interest rates.

A lower rate means more of your payment will go toward the principal, so you’ll pay less in interest and save money over the life of your loan. Keep in mind that refinancing federal loans will make you ineligible for loan forgiveness and you’ll no longer be able to take advantage of the federal student loan payment pause.

Calculate your savings: Use our student loan refinance calculator to estimate how much you can save by refinancing your debt.

If you decide to refinance your loans, always compare options from multiple lenders. To save time, check out our list of the best student loan refinancing lenders.

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