Student loan debt relief: Forgiveness and other relief options when forbearance ends

Woman lying on the floor of her living room with her laptop open, considering her student loan debt relief optionsImage: Woman lying on the floor of her living room with her laptop open, considering her student loan debt relief options

In a Nutshell

Struggling with mounting student loan bills can be overwhelming. If the majority of your student loan debt is in federal loans, you might have a few options for student loan debt relief. And if you took out private student loans, don’t despair, there are options for you as well.
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Recap of Federal Student Loans in 2022 The Buck Starts Here

Student loans can be a roller coaster at the best of times. It’s been especially wild during the pandemic. Clint Proctor, Credit Karma writer, joins host Gaby Lapera to talk about COVID-19 federal student loan forbearance and the Public Service Loan Forgiveness program. Learn more about options after federal student loan forbearance ends here:

With outstanding student loan debt hitting a staggering $1.6 trillion in the third quarter of 2022, it’s no wonder that repaying this debt has become a challenge for many.

If you’ve ever had trouble repaying your education loans, you’re not alone. A recent report from the Federal Reserve found that 12% of people with student loan debt were behind on their payments in 2021.

But help is on the way. In a program announced by President Joe Biden in August, borrowers with annual income of less than $125,000 ($250,000 for households) in 2020 or 2021 could be eligible for at least $10,000 in federal student loan debt forgiveness.

But even with debt forgiveness, loan balances will linger for many.

If this is your predicament, it may be a good time to start exploring potential payment relief options. Read on for ways to get a handle on your student loan debt.

Is there debt relief for student loans?

The short answer is yes. But the next question is which debt solutions apply to you.

Federal student loans come with a handful of helpful features that other types of loans don’t often offer. But while these features may sound promising, they often come with narrowly defined eligibility requirements that might make them tough to actually qualify for.

Let’s explore what some of the most common relief options are, take a look at the eligibility criteria and talk about which option may be right for your situation.

Types of relief from student loan debt

If you took out federal student loans, you tend to have a wider range of debt relief options than if you took out private loans. Federal loans offer relief options both at the national and state level, with some programs targeting certain professions while others are tied to your income.

Under Biden’s student loan forgiveness plan, you may qualify for up to $20,000 in federal student loan debt relief.

Meanwhile, private student loans aren’t eligible for federal student loan forgiveness. But many private lenders have implemented forbearance options that allow you to postpone monthly payments, some for up to 90 days. To find out your options, contact your student loan servicer for details.

Here’s a closer look at some of the most common relief options for student debt.

Income-driven loan repayment

The federal income-driven loan repayment program is by far the most common relief option for student debt.

Most federal student loans are eligible for at least one of four income-driven repayment plans. The plans reconfigure your monthly student loan payments to a level that’s based on your income and family size.

The Department of Education is proposing a new plan that would cap monthly payments for undergraduate loans at 5% of a person’s discretionary income instead of the current 10%. Borrowers with both undergraduate and graduate loans would pay a weighted average rate. Additionally, it would raise the amount of income that’s considered nondiscretionary.

The plan would also forgive loan balances after 10 years of payments — instead of the current 20 years under many income-driven repayment plans — for borrowers with original loan balances of $12,000 or less.

If you’re enrolled in an income driven repayment plan and are also working toward loan forgiveness under the Public Service Loan Forgiveness program, you may qualify for loan forgiveness after you’ve made qualifying payments for just 10 years.

Teacher loan forgiveness

If you’ve been a full-time teacher for five consecutive academic years in a low-income public elementary or secondary school or educational service agency, and meet other qualifications, you may be eligible for forgiveness of up to $17,500 on eligible federal student loans.

Learn more about the Teacher Loan Forgiveness Program to see if you qualify.

Federal Perkins Loan cancellation for teachers

You may qualify for cancellation of up to 100% of a Federal Perkins Loan if you’ve worked full-time in a public or nonprofit elementary or secondary school system as a teacher for students from low-income families, a special education teacher, or a teacher of math, science, foreign languages, bilingual education, or of a subject in which there is a shortage of qualified teachers in your state.

Public Service Loan Forgiveness

If you’re a full-time government employee or work for a qualifying nonprofit organization, you may be eligible for loan forgiveness. The loan you’re trying to get forgiven must be a Direct Loan Program loan. Should you qualify, you might get the remaining balance of their loans forgiven after making 120 qualifying payments (10 years’ worth).

You must be employed by one of the two types of organizations below to meet the criteria for the program.

  • Government organizations at the federal, state, local or tribal level
  • Nonprofit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code

If you’ve previously enrolled in an income-driven repayment plan, you can still apply for Public Service Loan Forgiveness to see whether your student loan debt can be forgiven in 10 years — up to 15 years sooner than paying it off with IDR plans. Sound confusing? We know. Since each income-driven repayment plan is unique to your situation, we highly recommend doing your research. If you’re interested in learning more about PSLF and how it works, contact FedLoan at 1-855-265-4038.

Student loan forgiveness for nurses

Nurses who work for the government or a nonprofit may be able to find relief with the Public Service Loan Forgiveness program.

As with teachers, eligible nurses can apply to get the remaining balance of their loans forgiven after making 120 qualifying payments. To benefit from the Public Service Loan Forgiveness program, you’ll need to make your payments while enrolled in an income-driven repayment plan.

Keep in mind that if you’re a nurse working full time, you may also qualify for a Perkins Loan cancellation, with up to 100% of your outstanding Perkins Loan canceled for five years of eligible service.

Meanwhile, the National Health Service Corps offers student debt relief for qualifying nurses who agree to work a set number of years in areas that don’t have adequate medical care.

The Nurse Corps Loan Repayment Program pays up to 85% of qualifying unpaid nursing education debt for registered nurses, advanced practice registered nurses and nurse faculty.

Over the course of two years, accepted applicants who work in a critical shortage facility or as nurse faculty in a nursing school will be paid 60% of their outstanding nursing education debt.

After fulfilling the initial two-year agreement, participants may be eligible to apply for a third year for an extra 25% of their original nursing education loans.

Student loan forgiveness for veterinarians

Offered by the U.S. Department of Agriculture, the Veterinary Medicine Loan Repayment Program will pay up to $25,000 each year toward qualified educational loans for veterinarians who agree to serve for three years in an area with a veterinarian shortage.

Some states offer loan forgiveness

A number of states offer forgiveness and assistance programs to borrowers who agree to take an in-demand job for a designated period of time. Over the past couple of years, lawmakers across the country have enacted dozens of student loan forgiveness programs that provide debt relief in exchange for a commitment to work in such areas as healthcare, education and public safety.

Student debt relief in various states

Colorado expanded a loan forgiveness pilot program worth up to $5,000 a year for five years for teachers in high-poverty schools in rural areas or for those teaching math, science, special education or linguistically diverse education in any area in the state.

Hawaii provided $150,000 for the Healthcare Provider Loan Repayment Program as long as the funds are matched by another source (private or public).

Iowa established a rural veterinarian loan repayment program for veterinary students and certain licensed veterinarians. The $300,000 fund awards $15,000 a year in debt relief for at least four years but is limited to a total of five veterinarians who agree to work in a rural area or an area with a veterinary shortage.

Texas created a repayment assistance program that provides up to $4,000 per year (up to five years) for peace officers.

Utah has instituted a loan assistance program aimed at helping the elderly or those working in the healthcare field. But you’ll want to check with the state for further eligibility restrictions.

Washington is hoping that in return for help with the hefty student loans that often come with training for work in the healthcare industry, nurses, doctors, and other professionals may be enticed to work in underserved areas for a period of time.

Additionally, some states are looking at student loan forgiveness as a way to attract new residents. Utah’s $2.5 million Talent Development Incentive Loan Program forgives student loan debt for tech graduates who stay and work in the state.

Additional relief options

If you can’t find relief under the programs we discussed above, you may have some other options to turn to.

Student loan discharge

Many of us have seen the headlines of certain schools closing suddenly. If that’s happened to you, you might qualify to have your loans discharged. While this will likely be an uphill battle, in some situations, you may be able to have your federal student loans forgiven if your school shut down while you were actively enrolled — or within a certain period after you’ve withdrawn from the institution. If you become disabled (totally and permanently), you might also qualify for a loan discharge.

Federal student loans will be also be discharged if the student dies or if the person who took out a PLUS loan on behalf of the student dies.

And if your school misled you or violated state laws related to your loan or to educational services you received, you may be eligible for forgiveness of your federal student loans (known as “borrower defense to loan repayment forgiveness”).

Should I consider bankruptcy to discharge my student loan debt?

Although many types of consumer debts can be discharged in bankruptcy, student loans typically aren’t one of them. In rare cases you can have your federal student loan discharged — but only after declaring Chapter 7 or Chapter 13 bankruptcy and proving in court that repayment would impose undue hardship on you and your dependents.

Unless the federal government enacts laws making it easier to use bankruptcy to free yourself from student loans, contacting your loan servicer to discuss repayment plan options is probably a more realistic financial strategy.

What happens to my credit scores if my student loan is forgiven or discharged?

Your credit won’t be hurt if your student loans are forgiven.

But keep in mind that if you’re able to discharge your student loan debt in bankruptcy, which is rare, the bankruptcy will negatively affect your credit scores. You should note that bankruptcies can stay on your credit reports for up to 10 years.

Do I have to pay taxes on a forgiven or discharged student loan?

In general, if a debt is canceled, forgiven or discharged for less than the amount you agreed to pay, the amount of the canceled debt is taxable and you must report it on your tax return in the year it’s written off. However, there are exceptions when it comes to student loans.

Bidens’s student loan debt relief will not be treated as taxable income for the federal income tax purposes. But 13 states could potentially treat loan forgiveness as taxable income to borrowers, according to the Tax Foundation. You can check with your state for more information.

Student loan forgiveness is generally excluded from income if the forgiveness is contingent on the person working for a period of time in a certain profession, like teaching or nursing.

And if you participate in the Public Service Loan Forgiveness program, the amounts forgiven aren’t considered taxable income by the IRS. Similarly, amounts from student loans discharged because of the death or total and permanent disability of the student are not taxable.

But keep in mind that income-driven repayment plans are different. If you repay your loans under this program, you may be liable for income tax on the forgiven amount if you’re still carrying a balance at the end of your student loan repayment period.

Common pitfalls to avoid

As Dec. 31 approaches, marking the expiration of COVID-related student loan debt relief, you should prepare to resume making payments. But if student loan debt is preventing you from making financial progress, you may be able to find some measure of relief in programs designed for those with federal student loan debt.

Even if you don’t qualify for a debt relief program, the U.S. Department of Education and its federal loan servicers can offer help — for free. You don’t need to pay a student loan debt relief company for services that you can take care of yourself. At no cost, you can contact your loan servicer to ask about …

  • Lowering your monthly loan amount
  • Changing your repayment plan
  • Consolidating multiple federal student loans
  • Postponing monthly payments while you further your education or are unemployed
  • Seeing if you qualify for loan forgiveness or other programs
  • Getting your loans out of default

And know the warning signs for scammers. If a student loan debt relief company asks you to pay an upfront fee or monthly charge, promises immediate loan forgiveness, or asks for your Federal Student Aid ID password, you may be dealing with a bad actor. If you decide to work with a private company, double check with the U.S. Department of Education beforehand to make sure you’re working with a legitimate loan servicer.

Managing student loans is an important element of your financial journey. It’s not surprising that a recent report from the Federal Reserve found that adults carrying student loan debt reported lower levels of financial well-being than did similar adults without outstanding debt.

So if student loan debt is weighing you down, take some time to explore your options and see what relief programs or free loan services might make sense for you.

About the author: Brad Hanson is a senior editor at Credit Karma. His 30 years of experience in print and digital media includes work for the Los Angeles Times-Washington Post News Service, and Polyvore. Most recently before… Read more.