More than 45 million Americans hold a combined $1.56 trillion in student loans, and it’s likely that many are looking for a fast exit from their debt. Student loan forgiveness programs offer this light at the end of the tunnel, with the tantalizing possibility of discharging your student debt balance completely.
But the road to loan forgiveness isn’t always easy, and in some cases, you might find the downsides of student loan forgiveness actually outweigh the benefits. Before committing yourself to a student loan forgiveness program, consider these seven potential drawbacks:
1. It could take a really long time
The federal government offers a variety loan forgiveness options, but none of them wipe away your student loans overnight.
One of the best-known programs, Public Service Loan Forgiveness (PSLF), requires 10 years of service before canceling your loans. The Teacher Loan Forgiveness program asks for five years of employment.
You can also get student loan forgiveness from an income-driven repayment plan, such as Income-Based Repayment or Pay As You Earn. But these income-driven plans only offer student loan forgiveness after 20 years — or in some cases, 25 years — of on-time repayment. So you’ll be paying your student loans for two decades or more before getting relief.
2. The application process can be bewildering
When the first student loan borrowers became eligible for forgiveness under PSLF in 2017, many of them had their applications denied for not filing the right paperwork. To qualify for PSLF, you need to submit an Employment Certification Form every year.
Both you and an authorized official must sign this form, and you need to meet PSLF’s stringent requirements for 10 years straight. Since you must put your loans on income-driven repayment for PSLF, you’ll also need to recertify your repayment plan on an annual basis.
Keeping up with all these requirements can be tough. That’s one reason so many people found out the hard way that they didn’t actually qualify for PSLF after 10 years of service in a non-profit.
If you’re going after PSLF, make sure you’ve done your research on the detailed application process and are keeping up with required forms every year.
3. You might limit your earning potential
Programs such as PSLF, Teacher Loan Forgiveness and NURSE Corps Loan Forgiveness require years of service in a nonprofit or other qualifying organization.
Working in the public sector could be a fulfilling role, and you might work in a shortage area with a population who strongly needs your help. But working in the nonprofit world could also limit your earning potential. So even though you might get loan forgiveness in exchange for your service, this financial perk might not make up for the higher income you could potentially earn in the private sector.
What’s more, your career goals might change over time, which could leave you in a difficult spot. PSLF requires 10 years of service in the public sector, but what if you want to make a change before that decade is up?
If you find yourself wanting to switch careers before you’ve fulfilled the work requirements for loan forgiveness, you’ll have to decide if Public Service Loan Forgiveness is worth it or if you should move on to a job that better suits your goals.
4. Your student loans could keep growing while you wait
Some forgiveness programs, including PSLF, require that you put your student loans on an income-driven repayment plan while you work toward forgiveness. Even if it’s not required, you might choose an income-driven plan to lower your monthly payments.
But while an income-driven plan can make your student loan bills more affordable, it also has a downside: Your loans will accrue a lot more interest. Because an income-driven plan extends your term to 20 or 25 years, you’ll end up in debt for longer and pay more interest over time.
If you change your plans or have your forgiveness application denied, you could end up with a bigger balance than you would have if you’d stuck with the standard 10-year plan.
5. Your program could get eliminated
No federal government program is certain to live forever, and PSLF in particular has attracted some recent controversy.
Although 30,000 borrowers applied in 2017, only 96 had their applications approved as of September 2018, according to CNBC. A non-profit group’s investigation into the program found that loan servicers did a poor job of outlining the requirements of PSLF. Many borrowers who thought they were on track to getting it discovered too late that they didn’t meet the criteria or didn’t file the right forms on an annual basis.
Meanwhile, the program has come under fire from politicians. In 2018, two Republican members of Congress proposed eliminating the program completely with the PROSPER Act.
Although that act is unlikely to pass now that Democrats have taken a majority in the House of Representatives, the future of PSLF remains uncertain. There’s no guarantee that it won’t be changed or canceled in the future, which is important to keep in mind if you’re trying to decide whether Public Service Loan Forgiveness is worth it.
6. You could get hit with a big tax bill
While student loan forgiveness truly can get rid of your balance, you might need to make one last payment on your debt in the form of a tax bill. In some cases, student loan forgiveness is counted as taxable income.
You will have to pay taxes on student loan forgiveness you get from…
- An income-driven repayment plan, such as IBR, PAYE, REPAYE, or ICR
- Closed-school discharge
- Borrower defense to repayment
- Discharge for false certification, unauthorized payment or unpaid refund
However, you will not have to pay taxes on loan forgiveness from…
- Public Service Loan Forgiveness
- Teacher Loan Forgiveness
- NURSE Corps Loan Forgiveness
- Loan discharge due to total and permanent disability or death
If you’re counting on loan forgiveness, do your research on the tax implications of your program. If your forgiven amount is taxable, prepare for one last bill before you can say goodbye to your student loans for good.
7. Your private student loans might not qualify
Finally, remember that federal loan forgiveness programs only forgive federal student loans, such as Direct Loans. Any private student loans you borrowed won’t be eligible.
That said, you might qualify for student loan repayment assistance programs (LRAPs). Most states, along with a few universities, offer LRAPs to borrowers who work in certain fields or live in designated areas. You can search the Student Loan Hero database of LRAPs to see which ones you might qualify for. (Note: Both MagnifyMoney and Student Loan Hero are affiliates of LendingTree.)
Some employers also offer a student loan repayment assistance benefit to employees. If you’re searching for a new job, you might look for companies that offer this helpful perk.
In most cases, you can use student loan assistance to pay off your federal and private student loans — the choice is up to you. But when it comes to loan forgiveness from PSLF, an income-driven plan or another federal program, remember that only your federal loans will count.
Explore alternative strategies for conquering your student loans
If you get your student loans forgiven, you could feel like a huge weight is lifted off your shoulders. But forgiveness programs aren’t the best choice for everyone, especially if the downsides mentioned above outweigh the benefits for you.
Before committing to this path, explore your other options for paying off student loans. If you can afford extra payments, for instance, you could cut down on interest and get out of debt years ahead of schedule.
Refinancing your student loans can also be a savvy option. Refinancing lets you adjust your monthly payments, choose new repayment terms and possibly qualify for a lower interest rate. But remember that refinancing turns your federal loans into a private loan, meaning they would become ineligible for forgiveness programs — so don’t refinance federal loans if you’re counting on PSLF or any other federal program.
Although all these options can seem confusing at first, learning about them will help you make an educated decision with your student loans. Do some digging on student loan repayment so you can find the strategy that works best for you and your finances.