The Education Department is set to unveil new loan forgiveness rules that could benefit millions of borrowers, such as an account adjustment that allows past periods of repayment, deferment and forbearance count towards IDR loan forgiveness.
Rules would also halve monthly payments for many borrowers with undergraduate debt and prevent interest from compounding. Other proven paths towards loan forgiveness include income-driven repayment plans, public service loan forgiveness and specialty programs tailored for specific professions.
Public Service Loan Forgiveness (PSLF)
Public Service Loan Forgiveness (PSLF) program enables borrowers to have their federal student loans forgiven after working 10 years for any government-related or not-for-profit organization, with Direct Loans on an income-driven repayment plan and 120 qualifying payments made towards loan forgiveness. Borrowers can use the PSLF Help Tool to certify employment and track progress toward forgiveness; annual applications or when changing employers should also be submitted as proof.
Daniel graduated college and served eight years in the U.S. Army while making payments on his federal student loans while making payments under Public Service Loan Forgiveness regulations (PSLF). Due to recent changes, he may now qualify for forgiveness due to his military service; to do so he must submit a PSLF application with all qualifying employment details included and complete all relevant details on it.
Income-Driven Repayment (IDR)
The federal government offers several income-driven repayment (IDR) plans that tailor student loan payments based on income levels. Payments could range between 10%-15% of discretionary income, with any remaining debt forgiven after 20-25 years.
REPAYE plans are the most frequently chosen IDR plans. They cap loan payments at 10% of discretionary income and offer forgiveness after 20-25 years for both undergraduate and graduate loans.
IDR plans are generally tailored towards borrowers with large debt balances relative to their income. To qualify, the borrower must demonstrate financial need and provide documentation annually.
Low-income borrowers may qualify to reduce their loan payments to $0. To do so, they must first complete an application with their loan servicer, either online or by mail, and then annually recertify their income and family size to maintain eligibility. Failing this step could potentially damage credit.
Waiver Initiatives for PSLF and IDR
Recently, the government unveiled a one-time PSLF and IDR waiver in order to give millions of borrowers new hope for loan forgiveness. Although this change is significant, action still need to be taken by borrowers themselves in order for this initiative to succeed.
This waiver permits payments made toward almost any type of federal student debt to count towards PSLF and IDR forgiveness as long as loans are consolidated by June 30, 2024. That means many borrowers who had not qualified for PSLF before could now potentially see their accounts updated to reflect PSLF eligibility immediately upon consolidation.
Borrowers who spent years repaying IDR loans like the SAVE plan could now qualify for 17 years of student debt forgiveness after consolidating and qualifying for a PSLF waiver, making this new opportunity particularly useful to highly educated professionals like physicians, nurses, teachers, or social workers who have taken on significant student debt to pursue their careers.
Interest Waiver
SAVE plans will replace REPAYE plans in 2023 with an interest waiver feature that cancels unpaid monthly interest instead of increasing loan balances when payments do not cover accruing interest, thus solving one key weakness of previous IDR plans and offering significant advantages to borrowers.
Under SAVE, our median borrower (Panel B) experiences significant loan forgiveness benefits – with significant portions of debt forgiven in years six and seven as her income rises. Furthermore, interest waiver enables this borrower to keep more cash in hand monthly as she becomes eligible to take on lower rate debt in future. These advantages combine with reduced time-to-forgiveness to produce substantial lifetime wealth benefits that may provide lifetime wealth gains over time for this borrower and others; similar advantages also extend to graduate and professional borrowers who typically start off with lower initial earnings but earn more throughout their careers compared with conventional loan borrowers.
