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Is Income Based Student Loan Forgiveness a Real Reality?

By on February 2, 2016

Question:

Dear Steve,

After 12 years of schooling to obtain a doctorate in veterinary medicine as well as a masters in public health, I managed to accumulate over $300,000 in students loans by the time I graduated in 2009.

Following a 1-year internship where I needed to defer the loans, this increased even higher. Consequently, I have had to transition my federal loans to an income-based repayment plan which I have faithfully been paying over the past 6 years.

Additionally, I have multiple private loans I am paying more than than minimal amount on in order to pay down the principal faster. My plan was to pay off the private loans asap, then hopefully qualify for the 25-year loan forgiveness program.

I read your article on IBR and how unhelpful it actual is. After looking at my most recent student loan statement, I realize I have hardly paid down anything in 6 years (and I am paying over 3,000 per month for all my loans)! Is the loan-forgiveness plan a reality? And what is the likelihood it will exist in 20-30 years for those of us with 30 year loans? Would you recommended paying off the federal loans before the private loans?

Thank you for your time.

Mark

Answer:

Dear Mark,

First off, thank you for your service to the animals in the world. When I’m not writing about debt I happen to be a dog rescue pilot.

It sounds like you’ve opened your eyes to the big hole in the income based repayment programs. Thank goodness.

The irony is the federal student loan income based repayment programs are NOT designed to help most people to get out of debt. I know that sounds counterintuitive.

It sounds like you’ve already read my article, Why Income Based Student Loan Payments Can Be a Terrible Trap.

All of the income contingent programs are better than nothing but not perfect by any stretch of the imagination.

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The programs require you to recertify each year and if you miss doing that your full balance comes roaring back. And that balance will be what you originally owed plus all the accrued interest that was gathering while you were making the income based payment.

And then, even if you managed to never make enough money not to qualify for the income contingent repayment plan each year, at the end of the forgiveness period, as it stands now, the entire balance of your ballooned student loans that would be forgiven would be taxable. When you understand the realities of these “awesome” programs you realize they are not as wonderful as most people think.

Mathematically, if possible, the least expensive way to pay off the federal student loans would be with the ten-year repayment plan or to qualify for Public Service Loan Forgiveness and have your loans forgiven, tax free, after 120 qualifying payments. For more on that program, click here.

It is perplexing that Congress decided to forgive student loans tax free for public service but not for the average person. Shrug.

And as far as your query if these programs will exist in 20-30 years, I would guess something will, but keeping in mind all of this can be changed by Congress at any time, I would not bet it will look the same as it does today.

Interestingly, nobody has yet had their loans forgiven under those plans.

I would focus on paying off the private loans first. Private lenders are ruthless when you run into financial problems and offer almost no options. However, the majority of people are not aware that private loans can be discharged in bankruptcy in a number of situations. If you want to learn more, read this.

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About Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

3 Comments

  1. TVJ

    February 22, 2016 at 9:42 am

    I believe that the earliest forgiveness applications for the 10-year public service forgiveness loans will be in 2017. I’m hoping to stay abreast of what’s going on because I’m scheduled to apply for the 10-year public service forgiveness in 2022.

  2. Anon Person

    February 2, 2016 at 7:06 pm

    Great questions and even better answers! Thanks Mark and Steve!

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