It's estimated that roughly 50% of student loan borrowers qualify for some type of student loan forgiveness program. But this statistic is misleading, because a lot of borrowers think this means qualifying for some type of student loan forgiveness program. That's wrong.
Actually, most borrowers qualify for student loan forgiveness through one of these "secret" ways. The secret is simple: sign up for a qualifying student loan repayment plan, and any remaining balance on your loan will be forgiven at the end of the plan.
It's that simple. What's even better is that your income could be low enough to qualify for zero or minimal repayment, at which your loan will be forgiven at the end. Yes, there may be tax consequences, but that shouldn't deter you from these programs. It is the best alternative if you can't afford your loans and you are looking for forgiveness options (and we discuss the taxes a bit at the end of the article).
If you're not quite sure where to start or what to do, check out LoanBuddy! It's a tool that can help you find the lowest repayment plan, see your forgiveness options, and a lot more! Check out LoanBuddy here >>
Here are the student loan repayment plans that qualify for student loan forgiveness:
1. Income Based Repayment Plan (IBR)
The Income Based Repayment Plan (IBR) is one of the most common repayment plans borrowers switch to if they are having financial hardship. If you have loans from before July 1, 2014, you payment will not be higher than 15% of your discretionary income. On this plan, you will make payments for 25 years, and at that point, your loans will be forgiven.
If you are a borrower with loans after July 1, 2014, your loan will not exceed 10% of your discretionary income, and the loan will be forgiven after just 20 years.
With IBR, you loan repayment will never exceed the payment of the 10 year standard repayment plan, and your loan will also be forgiven at the end of the term.
The actual amount of your "discretionary income" is determined by a formula based on your family size and income tax returns. Check out our Discretionary Income Calculator to find out what your discretionary income would be.
2. Pay As You Earn Repayment Plan (PAYE)
The Pay As You Earn Repayment Plan (PAYE) is very similar to the IBR Plan. With PAYE, you will not pay more than 10% of your discretionary income, and your loan will also be forgiven after 20 years. This program is also sometimes referred to as Obama Student Loan Forgiveness.
The key difference is that certain loans going back to 2007 qualify for this plan.
With PAYE, you loan repayment will never exceed the payment of the 10 year standard repayment plan, and your loan will also be forgiven at the end of the term.
For both IBR and PAYE, it might make sense to file your tax return married filing separately to qualify.
3. Revised Pay As You Earn Repayment Plan (RePAYE)
RePAYE is a modified version of PAYE that has become available to borrowers after December 17, 2015. Unlike PAYE, which was available for loans taken out after 2007, RePAYE is open to all Direct Loan Borrowers, regardless of when the loan was taken out. The repayment plan still caps your payment at 10% of your discretionary income, and the loan will be forgiven after 20 years.
The RePAYE plan also includes an interest subsidy that would help cover 50% of the interest in cases where the new payments cannot keep up with the accruing interest.
You can learn more about how RePAYE is helping borrowers here.
4. Income Contingent Repayment Plan (ICR)
The Income Contingent Repayment Plan (ICR) is a little different than IBR or PAYE. There are no initial income requirements for ICR, and any eligible buyer may make payments under this plan. Under this plan, your payments will be the lesser of the following:
- 20% of your discretionary income
- What you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income
With the ICR plan, your loans will be forgiven at the end of 25 years.
It's important to note that with this plan, your payments could end up being higher than the standard 10 year repayment plan. Since you have to submit your income every year, if your income rises high enough, your payment will adjust accordingly.
5. Public Service Loan Forgiveness (PSLF)
This isn't a secret, but this is one of the most popular ways to currently get loan forgiveness. It has nothing to do with your repayment plan, however, if you're smart, you'll combine IBR or PAYE with PSLF to get the maximum benefit.
A lot of people have been worried about what the future of Public Service Loan Forgiveness would be. We have a full break down of the Trump Student Loan Forgiveness Proposals that highlight the key changes. In general, loans issued before June 30, 2019 should be grandfathered in - so if you're a borrower right now, you shouldn't worry too much.
You can learn more about Public Service Loan Forgiveness here: Top Ways To Get Student Loan Forgiveness, or you can enroll in our 15 minute program to show you how to apply. Check out the Public Service Loan Forgiveness Training.
Finally, check out our ultimate guide here: The Ultimate Guide To Public Service Loan Forgiveness (PSLF).
Tax Consequences From Student Loan Forgiveness
It's important to note that while these "secret" student loan forgiveness options could be helpful to some borrowers, for others they may result in tax consequences (see taxes and student loan forgiveness). Under current IRS rules, you may be required to pay income tax on any amount that is forgiven if you still have a remaining balance at the end of your repayment period for any of these plans. The only exception to this is currently PSLF, which is tax free loan forgiveness.
What happens is the forgiven amount of the student loan is added to the borrowers taxable income for the year. So, if you had $50,000 in student loans forgiven under these repayment plans, it is considered income. If you made $35,000 working, your total income for the year would now be $85,000. The result? A higher tax bill.
However, for many borrowers, this tax bill is much more manageable than the original debt itself, so the plan makes sense. Using a very simple example, here is what the tax bill will look like in both scenarios:
As you can see, with these repayment plans, you'll owe an additional $11,377 in Federal Income Tax in the year you do it. However, that's cheaper than paying the original $50,000 plus interest. Furthermore, there are options to work out a repayment plan with the IRS if you need to, which may also be helpful in your situation.
Insolvency and Forgiveness
What if you're had a huge amount of student loan debt forgiven and your tax bill is enormous? This is a big concern of some people... That's where insolvency comes into play.
Insolvency happens when your total liabilities exceed the fair market value of your assets. You can also be partially insolvent if your student loan debt only partially exceeds your liabilities.
Assets are defined as: cash, stocks, and retirement plans, real estate and ownership interest in a business or partnership. The IRS also includes assets that are difficult to value such as clothing, household items, and tools.
Liabilities include current and past-due bills, student loans (including the loans being forgiven), and business loans.
So, let's say that you have $100,000 in assets (home equity, retirement plans, etc). Let's say you have $200,000 in debt, with $100,000 in student loans being forgiven.
So, $200,000 - $100,000 means you're $100,000 insolvent. Since the value of the student loans being forgiven is $100,000 - none of it will be included on your taxes and will not count towards your taxable income.
This can really help borrowers who are worried about large amounts of taxable income from having their student loans forgiven.
We have a full article on Insolvency and Student Loan Forgiveness here.
A Reminder About Private Student Loans
Remember, private student loans don't offer any type of forgiveness program - even "secret" ones like we mention above. If you're struggling with your private student loans, consider refinancing them to take advantage of a lower interest rate or payment structure.
We recommend using a service like Credible, which allows you to see what you qualify for in less than 2 minutes, and compares student loans at dozens of lenders. Check out Credible today to see if you can save money on your private student loans. As a bonus, College Investor readers will get a $200 bonus when they refinance with Credible!
You can also submit your info here: Credible Refinancing.
Continue The Conversation
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
Want to know more about PAYE or IBR? Continue the conversation with us in our new Student Loan Debt Forums.
Are you taking advantage of these "secret" student loan forgiveness strategies?