Student Loan Forgiveness – What You Need to Know
Are You Borrowing Student Loans and Are Considering Forgiven Relief Plans? – Get all the facts now
This program is based on a federal law that allows the Secretary of Education, in an emergency situation, to change student loan programs. Some borrowers may find it more difficult to qualify for this program than they expected.
Interest Rates
Private student loans do not offer benefits such as loan forgiveness or flexible repayment plans, which federal student loans do.
However, the rate increase on July 1 will have an impactful ripple effect that affects both current and prospective student loan borrowers alike. It will make borrowing more expensive for people considering student loans for the first time or who have taken out variable-rate private loans previously.
This year, the Federal Reserve raised interest rates twice to curb fast inflation; additional hikes are planned throughout 2022.
For example, the rate for a new auto loan is calculated using the federal funds rate. However, other factors are also considered, such as the type of vehicle you choose, the loan term, etc.
The Federal Reserve must take into account all of these factors when it raises interest rates. However, for existing borrowers, both of federal and private student loan, the change will not have much impact on their monthly payment or the amount of interest owed.
Repayment Options
If you have taken out federal student loans, you have a variety of repayment options at your disposal. These include standard, graduated and extended plans as well as income-driven repayment (IDR) plans which allow your payments to change with changes in income.
You can adjust your repayment plan at least once a year and potentially save money by switching repayment plans. Use the Loan Simulator tool to see what savings you could expect.
There are four popular income-driven repayment plans for FFELP and Direct Loan borrowers that limit monthly payments to a certain percentage of discretionary income, typically 10%, 15%, 20 or 25% depending on your unique situation.
Forgiveness Options
If you have federal student loans, there are multiple programs and ways available to you that could provide debt cancellation or relief – these include Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness.
After 10 years of making on-time payments, the Public Service Loan Forgiveness Program will forgive your Direct Loan after you have worked full-time for a government agency or a non-profit. Before applying, make sure you research its eligibility requirements and eligibility criteria – they`re free and available through the U.S. Education Department`s help tool!
Under the Teacher Loan Forgiveness program, teachers can have up to $17,500 of loan debt forgiven after five years teaching at low-income elementary or secondary schools. There are specific rules in this program; therefore it is imperative that applicants review them prior to submitting an application.
Forgiveness options can help borrowers better manage their debt by helping them build up savings or pay off other obligations, like credit card bills. You should save any money that you may receive as a forgiveness so you can use it for an emergency fund.
Taxes
Additionally to grants and loans from federal programs, students are also entitled to various tax benefits for education related expenses, including the American Opportunity Tax Credit and Lifetime Learning Credit which can significantly reduce tax bills.
Students who are unable to cover their entire educational costs through financial aid, such as scholarships, grants, or private student loans, may find these tax savings especially beneficial.
The tax consequences of debt forgiveness can be significant, depending on the size and amount forgiven. An analysis by Tax Foundation indicates that 13 states could consider such debt relief to be taxable income, leading to tax bills as high as $1,100 in some instances.
New York and other states have already exempted student loan forgiveness from state taxes; others are still considering this decision. Consult your tax advisor if you receive forgiven debt to determine what is best for you.
