Student loan forgiveness – everything you need to know

Being a student these days is extremely expensive. That is why many students are all but forced to take a student loan in order to be able to attend their studies. The current student loan in the U.S. is estimated at a staggering $1.75 trillion! It is no wonder, then, that many students are trying to find the best tax relief options each and every day. However, forgiveness is a delicate subject, and not everyone who applies for it gets it. There are income limitations to consider, Pell Grant plays a role, and there are other factors as well. In this article, we are going to provide you with all the information you might need to know about student loan forgiveness.

What is student loan forgiveness?

person counting money
Under the right circumstances, student loan forgiveness basically means “free money”.

To put it simply, student loan forgiveness is a process where students can get their federal student loans canceled, discharged, or forgiven. Most of the time, applying for (and getting) forgiveness means that you will not need to pay your student loan. Coupled with several tax breaks for higher education, this program has the potential to save you a lot of money. However, the extent of the program varies according to numerous factors such as background, profession, and similar.

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Who can get student loan forgiveness?

According to the latest program by the Biden administration, students will need to earn less than $250,000 per household or $125,000 on their own to be eligible for Biden administration forgiveness. If your income is below this limit, you will be eligible for up to $10,000 of student loan forgiveness. Receiving a Pell Grant during your education increases this amount up to $20,000. Nearly every type of federal student loan is eligible for this type of forgiveness. This includes any parent PLUS loans, unsubsidized/subsidized loans, as well as any loans that qualify for the federal student loan payment pause.

But there are many other programs that you may also apply for, all of which will completely eliminate your student loan if you qualify, such as:

  • Public service loan forgiveness
  • Income-driven repayment forgiveness
  • Teacher loan forgiveness
  • Student loan forgiveness for nurses
  • State-sponsored repayment assistance
  • Military student loan forgiveness
  • Additional student loan repayment assistance programs
  • Perkins loan cancellation
  • Closed school discharge
  • Borrower defense to repayment discharge
  • Total and permanent disability discharge

As you may notice, not all of these programs have the word “forgiveness” in them. When it comes to student loan forgiveness, there are three terms that we need to understand: Forgiveness, Discharge, and Cancellation.

Forgiveness, Discharge, or Cancellation – What is the difference?

playing markers
Discharge is quite different from forgiveness and cancellation.

There are subtle differences between forgiveness, discharge, and cancellation. Loan forgiveness and cancellation refer to the fact that you are not required to make any more loan payments due to your current occupation. A loan discharge is somewhat different, as it means that your student loan is forgiven due to extenuating circumstances such as disability, school closure, and similar. These programs are not to be mistaken for the IRS debt forgiveness program, as they only pertain to student loans. If your tax debt stems from another source, this forgiveness will not apply to you.

With that understood, let’s take a look at some of the more popular programs and what they entail.

Popular student loan forgiveness programs

Before we get into the popular programs, we would like to mention that these are not all the programs available to you. Similar to popular tax deductions, the programs differ from state to state and there are more than 100 of them. That being said, some programs are more popular than others. The most popular (and the most common) student loan forgiveness program is:

Public service loan forgiveness

If you work for the government, or in any of the qualifying nonprofit organizations, this program allows for the forgiveness of student loans after 120 qualifying loan payments have been made. All the payments on Perkins loans, late payments, FFEL payments, and any repayment plan payments will count, retroactively. Furthermore, after 120 payments have been made, all the remaining loan balances will be forgiven tax-free.

Teacher loan forgiveness

Teacher loan forgiveness allows anyone who is employed as a full-time teacher in low-income public schools (elementary and secondary) to have up to $17,500 of their debt forgiven. To qualify, teachers will need to work for five consecutive years. Furthermore, the loan itself needs to be taken out after Oct. 1, 1998.

State-sponsored repayment assistance programs

Another option for teachers, doctors, nurses, and lawyers, is to enroll in a state-sponsored repayment assistance program. Every state has its own program, with its own requirements. If you are counting on this program to boost your tax refund amount, the best thing to do is to contact your state’s higher education department. Some programs will pay up to $3,000 per year with a four-year maximum but they may require a specific license.

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Closed school discharge

As mentioned previously, loan discharges depend on circumstances. A prime example is the closed school discharge program. You qualify for this program if your school closes while you are enrolled in it, or have left within 120 days. You must not have gotten a degree from the school, as well.

we're closed sign
If your school closes, your student loan might be discharged.

If you happen to qualify for this discharge, do note that you will need to continue the loan payments until your application finishes processing. Once approved, you can safely stop the payments and you may even get refunds for some of the previous payments.

Total and permanent disability discharge

If you happen to be unable to work due to a permanent mental or physical disability, you are eligible for total and permanent disability discharge on your student loan. The thing to note about this program is that you will need to provide ample documentation that proves your disability and the government will keep a close eye on you for three years. During this time, it is possible to reinstate your loan if the government finds that you no longer meet the discharge requirements.

Perkins loan cancellation

Students that have taken federal Perkins loans have the option to have all of their student loans canceled. To make this happen, the former student needs to work in a public service job for a period of five years. The cancellation itself works as a percentage reduction, incrementally increasing each year.

Income-driven repayment forgiveness

almost empty wallet
Income-driven repayment forgiveness is an excellent choice for people with low-income potential.

If you happen to have a large disparity between your income and the amount of your debt, you may enroll in an income-driven repayment forgiveness plan. This plan stipulates that your remaining loan balance will be forgiven after 20 or 25 years. While this may sound great, the fact of the matter is that very few people benefit from this plan. In fact, according to the National Consumer Law Center, only 32 people have received forgiveness through this plan. The reason behind that is that 20 years is a lot of time to be “stuck” with low income and you must recertify your income as well as family size every year.

How to apply for student loan forgiveness?

Even if you qualify for student loan forgiveness, the process might be quite complicated at times. To start with, you will want to reach out to your loan servicer and talk with them about what levels of forgiveness may apply to you. If you happen to have Perkins loans, you will want to contact the university itself or the university’s loan servicer. You will need to wait for a review of your application and may or may not need to make payments during this period. It is very important to communicate with your loan servicer and make plans for the review period.

Once the application is accepted, you will get the benefits immediately. This may include full or partial coverage, and the loans will be stricken from your credit record. In some cases (discharge, for example), you may qualify for refunds. Do note that due to a large number of different types of taxes in the USA, you may have to pay a tax on some of the amount. And there’s the chance that your application might get rejected, as well.

If your application is rejected, you will need to continue making loan payments. You will still usually have the option of repayment plans, though. Talk to your loan servicer about your options. You may also want to see if you qualify for other student loan forgiveness programs.

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Student loan forgiveness taxes

taxes on student loan forgiveness
Depending on where you live, you may need to pay taxes on student loan forgiveness.

For the most part, loan forgiveness is tax-free. However, it does depend from state to state. Some states simply do not conform to the internal revenue code. These states include Arkansas, Idaho, New York, Minnesota, Mississippi, South Carolina, Wisconsin, and several others. If you are living in any of these states, you might want to check the exact tax rules. Most notable is Arkansas, as it happens to be one of the best states for property taxes. But the fact of the matter is that each state is “free” to create its own tax rules. And the rules change somewhat frequently. It is in your best interest to figure out the exact rules for your state before you even apply for student loan forgiveness.

You will need to report debt forgiveness on an IRS Form 1099-C unless you qualify for the Biden tax exemption.

Pros and cons of student loan forgiveness

Student loan forgiveness sounds wonderful in theory. And it mostly is, but there are some other factors to consider. On the one side, students get financial freedom, inequality gets reduced, and the economy gets a solid boost. However, someone has to pay for all these loans. While billionaires and corporations do pay a certain amount, most of the tax debt falls on the backs of federal taxpayers, many of which never took a student loan.

It is perfectly fair that corporations pay these additional taxes, as they are usually advantaged by the government in one way or another. But it is less than fair to have people who have never taken student loan payments for other people’s loans. The money has to come from somewhere, though. And it is more often than not that it comes from federal taxpayers.

Aside from the inherent unfairness, there are other considerations about loan forgiveness. You need to know how to protect yourself from common IRS tax scams, for example, as many fraudulent tax relief companies will charge high initial fees and leave you with the same amount of loan as you had in the first place. Also, you can’t get forgiveness for a defaulted loan.

Biden administration student debt loan forgiveness FAQ

  • What happens if my Pell Grant was for one year only?

As long as you have gotten a single Pell Grant at any point in your studies, you will be eligible for the full $20,000 of forgiveness.

  • Do I have to apply?

You will have to apply for this forgiveness if the Department of Education does not have your income data. Otherwise, it is automatic. You can apply via a simple online form and the forgiveness will be applied after four to six weeks.

  • Is this forgiveness legal?

It is not completely clear whether this type of student loan forgiveness is fully legal. We will have to see what the courts say in the coming months.

  • Will there be taxes on this forgiveness?

If this program goes through as proposed, there will be no taxation on forgiven student loans. This is due to a provision in the Biden administration’s COVID-19 relief bill that stipulates that all student loan forgiveness is exempt from taxes until 2025.

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Whether you are looking to qualify for student loan forgiveness, maximize your tax return or find the best tax relief companies in the country, you will find all the information you need right here at Consumer Opinion Guide. We are your go-to source of everything tax-related!

On the other hand, if you are looking to explore the option of getting a student loan at the best possible rates, this is also something that our team can help with. Check out our list of the best student loan companies and find the most convenient loan plans for your educational needs!

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