Student Loan Forgiveness has been in the news a lot recently, and with the endless speculation around whether or not loans will be forgiven comes endless questions: “Will the government get rid of student debt permanently?" What will happen to my loans if they’re forgiven? If they’re not forgiven, can I get rid of them in bankruptcy? Will 0% interest last forever? What should I do about my debt now?”
We debunk 5 common rumors and myths about student loans, student loan forgiveness, and student loan repayments to help you figure out what to do next about your loans. These include:
Read on for more.
President Biden has acknowledged that he’s weighing additional debt forgiveness measures but it’s extremely unlikely that anything he does put in place will completely eliminate the $1.8T of outstanding student debt.
Here are some quick reasons why:
While we wait to see what Biden actually decides, don’t expect student debt to disappear completely.
This one is partially true.
Did you know that if your student loans are forgiven, you may still end up owing taxes on the forgiven amount? At least, you used to... and you might have to again. Like so many things related to Student Loans, it’s actually quite complicated.
Thanks to a provision in the $1.9T Covid relief bill, in March 2022, Student Loan Forgiveness became tax-free until 2025. Prior to the enactment of this new law, borrowers who had loans forgiven under some federal repayment plans typically had to pay income taxes on the forgiven portion of their student loans.
While certain repayment plans like Public Service Loan Forgiveness, Teacher Loan Forgiveness, National Health Service Corps Loan Repayment Program and similar repayment plans were already considered non-taxable, most income driven repayment plans weren’t. Borrowers who had their loans forgiven under Income Driven Repayment (IDR) plans like REPAYE would receive a 1099-C once their loan was forgiven and would be responsible for paying income taxes on the forgiven amount.
The new law eliminates this tax burden… for now, but if this provision doesn’t become permanent then after 2025, any borrowers still on IDRs may once again find themselves on the hook for a sizable tax bill.
One additional thing to consider is, while this law makes forgiveness tax-free on the federal level, not all states may treat forgiven loans the same way. If your loans are forgiven between now and 2025, it’s best to talk to a tax-advisor to figure out what your tax liability might be.
Speaking of forgiveness, our next myth is…
Not exactly.
In theory, an income-driven loan forgiveness program sounds straightforward and fantastic. You pay a reduced amount for 20-25 years and at the end of your program term, the rest of your debt is wiped away.
The reality is a lot more complicated.
First of all, income-driven student loan forgiveness programs are only available for federal loans, so if you’ve taken out a private loan or have refinanced your loans with a private lender, loan forgiveness is not really an option for you.
Second, it’s not always easy to get on an income-driven repayment plan. Loan forgiveness programs are not available for any student loans in default and may only be available to you if you have an eligible federal loan and/or meet certain eligibility requirements like a high debt-to-income ratio (depending on the plan you want to apply for).
Third, the requirements around loan forgiveness programs can be tricky to navigate once you’re in a plan. Under all income-driven repayment plans, your monthly required payment could change from year to year depending on your annual income and family size. Each year, you’ll be required to re-certify your income and family size by submitting another application for an income-driven repayment plan. If you forget to re-certify before the yearly deadline, any unpaid interest will be capitalized into your loan balance and you may even lose eligibility to make income-based repayments.
Note: If you aren’t familiar with interest capitalization, basically any unpaid interest on your student loan is added to your outstanding principal and you’ll start to accrue interest on the new outstanding total. Interest capitalization is one of the reasons why it can take years for people to completely pay off their student loans.
Finally, an income driven repayment might not be the best option for you if you’re able to make your monthly payments on a standard repayment plan with a 10-year period. Income-driven plans generally require you to make payments for longer (20-25 years vs 10) and may result in you paying more over the lifetime of your loan than you would have on a standard repayment plan. This is especially true if your minimum monthly payments don’t completely cover your accrued interest and the rest of the interest is capitalized back into your loan.
Interest can be tricky, which is why you should watch out for this next myth.
If you graduated during the pandemic or haven’t had to apply for forbearance prior to the pause on student loan repayments, you might think that it’s common for loans to not accumulate interest while your payments are paused or deferred. However, this could be a costly assumption.
Right now is a special time in student loan history. Generally, when your loan is in forbearance, it continues to accumulate interest and, if you aren’t making any payments, that interest is capitalized into your outstanding student loan balance.
If you find yourself needing forbearance or deferment on payments for your student loans again once the federal payment pause has ended, be aware that the 0% interest rate will likely not be in effect anymore and interest will probably start accruing on your loan balance.
While federal loan payments are on pause, you might consider paying down some of your loan principal now (if you are financially able to), to save on future interest. Better yet, convince your employer to adopt a student loan contribution benefit, which brings us to…
Many people don’t realize this but there actually is something your employer can do to help you with your student debt: offer employer student loan repayments as a benefit.
Under the CARES Act, employer-sponsored student loan repayment assistance is now tax-free up to $5,250 per employee per year until 2025. That means that, if your company offered an employer student loan repayment benefit, you could receive up to $5,250 in tax-free dollars each year to pay off your loans. If applied towards your principal, these employer contributions to your student loans could help you pay off your student loans faster and save you thousands of dollars in interest over the life of your loan!
Sound appealing? We think so too. That’s why we, at Highway Benefits, want to help companies tackle the ballooning student loan crisis with this modern benefit.
If you wish that your company had a student loan repayment benefit, let us know who to reach out to and we’ll be in touch.
Disclaimer: This article is purely informational and is not intended as financial or legal advice. For more in-depth questions on how to interpret US laws, we recommend you speak to a specialized attorney.
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