Student loan forgiveness — is it worth it?
Well, I know for some it would be a dream come true. There aren’t many who would turn down having some of their debt forgiven with no strings attached of course. Heck, no strings? I would raise my hand in a heartbeat.
But, if I’m so willing to have my loans forgiven, why am I not sitting around waiting until I’ve made 25 years worth of student loan payments under the Income-Based Repayment (IBR)?
You know, 25 years... the amount of time I would need to make payments before any remaining student debt is forgiven by good ole Uncle Sam?
Well, this deal comes with a few strings and they don’t sound appealing at all. That’s what I want to talk about today.
You may be asking, “How does this whole thing work?”
Well, there are a few different ways you can qualify for student loan forgiveness.
Let’s quickly run through some of the more popular ways that don’t involve 25 years of payments.
You can donate an insane amount of hours volunteering and get up to $5,730 in educational awards to be used towards your student loan repayment. The number of hours you’ll invest: 1700 hours! That’s three dollars and some odd change per hour.
2. Teacher Student Loan Forgiveness
If you teach full-time for five consecutive years at certain schools and have Federal Perkins Loans, you can get your debt forgiven based on certain requirements. For all other loans, you’ll qualify for up to $17,500. I’m sure the math isn’t pretty on this one either, but hey, at least you’re working full-time and you will get a portion (or all) of your loans forgiven after five years.
3. Public Service Loan Forgiveness
If you work for the federal, state, local government, or a non-profit, you may qualify for this type of forgiveness. Basically, for ten years you would make 120 qualifying (consecutive) payments on your student loans and then they will be forgiven.
But wait a minute. Don’t get too happy yet!
I’ll play devil’s advocate here. What if you make 119 consecutive qualifying payments, at the same job for all those years, and then all of a sudden you get laid off?
What if you weren’t employed by the government while making payments 1 through 100 and you land a new gig with the government or a non-profit agency? Will payments 1 through 100 count? Nope.
What if you want to be awesome and make some extra payments? Will those extra payments count towards your qualifying 120 consecutive payments?
Sorry, the answer is no. Sucks, right?
But What About The Income Based Repayment Plan?
The total amount of time you are in an Income Based Repayment plan is a maximum of 20 years for borrowers on or after July 1, 2014. I’m stuck with the 25 years because I borrowed before this this date.
Basically If your loans haven’t been paid in full by the 20th or 25th year, the government will forgive the remaining amount. Sounds good, but let’s talk about the strings.
Consider this: Let’s say you borrow $80,000 total and your annual interest rate is 6 percent. You have $30,000 in subsidized loans and $50,000 in unsubsidized loans.
You are married, filing jointly each tax season with a household of 4 people. Your gross income is $55,000.
Under the IBR plan, your first payment will be $232. You started out with $80,000, but after 282 payments under this plan, the total amount you will have paid is $171,099 and there is no anticipated forgiveness.
Like seriously, what is there to forgive when you’ve paid a hell of a lot more than you actually borrowed?
Instead of paying the original $80,000, you will pay that amount back and an additional $90,000 plus dollars. If I pay that much back all I’m going to be asking is, “Where’s the other degree at?”
Anyway, moving along…
Using these same numbers, if you qualify for one of the other income contingent plans like the Pay As You Earn (PAYE) plan or the Revised Pay As You Earn (REPAYE), your first payment would be $155 and after 280 payments you will have paid a total of $90,717.
That sounds much better, right?
Well, no — not really.
See what will happen with the PAYE plan is that you will pay around $90,000 over the course of almost 20 something years and the government will forgive over $85,000.
However, what you might want to consider now is that the $85,000 worth of debt that has been forgiven is now taxable income. Do you need the math on the taxes you would owe for this amount of forgiven debt?
I don’t think you do. You get the picture and the clearer the picture gets, the easier it is to see all of those strings attached.
It’s extremely important you ask yourself what you’re getting into when you consider all the requirements and stipulations for many of these plans. I know for me personally, it will be better if I side hustle and pay off my debt as quickly as possible under the IBR plan. I will save much more money on interest and I won’t owe the government another damn dime when I’m finished.
So, I’ll ask once again, is student loan forgiveness worth it?