By Cheryl Winokur Munk
With all the talk out of Washington about possible mass
student-loan debt forgiveness, it's easy for borrowers to lose
sight of the forgiveness options that already exist.
One important and often overlooked option is available to
borrowers in all professions who are enrolled in income-driven
repayment plans, which set monthly student-loan payments at an
amount intended to be affordable based on a borrower's income and
family size. After 20 or 25 years, depending on the plan, borrowers
can have the remainder of their federal student-loan debt forgiven,
though the remaining balance is considered taxable income.
Does it make sense for borrowers to try for this type of
forgiveness by paying only the monthly minimum? Or would borrowers
with extra cash be better off paying down their loans more
There is no one-size-fits-all answer, but here are a few things
How do I qualify for income-driven repayment forgiveness?
There are four income-driven repayment plans offered by the
federal government, and most federal student-loan borrowers are
eligible for at least one, according to the U.S. Education
Department's Federal Student Aid office. Under these programs,
borrowers might not have to make monthly payments at all if their
incomes are low enough. But it also could be that borrowers in some
cases end up paying more than they would under a standard 10-year
repayment plan, based on their income and other factors.
Borrowers in any of the four income-driven plans who have a loan
balance at the end of the repayment period are eligible to have
that debt erased. There is no requirement that they work in public
service or have a permanent disability, for example.
Is forgiveness under an income-driven repayment plan right for
Borrowers who qualify for the public-service loan forgiveness
probably would be better off seeking relief through that program
because they won't owe taxes on the forgiven amount. Also, loans
under the PSLF program are eligible for forgiveness after 10 years
of qualifying payments, rather than 20 or 25 years. There also
could be other forgiveness options available from the federal
government that are more appropriate to a borrower's situation.
Meanwhile, those who have the money to pay off their loans early
might benefit from doing so because holding out for forgiveness
could end up costing them too much in interest and taxes. Others
might prefer to pay off their debt sooner for reasons that include
lowering their debt-to-income ratio.
But for borrowers buried under a mountain of debt, it can make
sense to go for the lowest payment possible through an
income-driven repayment plan, and stick with it until they
eventually qualify for forgiveness, says Michael Lux, founder of
the Student Loan Sherpa, a website focused on student-loan
education, strategy and borrower advocacy. However, borrowers need
to remember that they will owe taxes on the forgiven amount -- and
that bill could be steep. For example, it isn't uncommon for
people, especially those with a low income relative to their debt,
to have a six-figure student-loan balance at the end of 20 or 25
years, says Tobin Van Ostern, co-founder at Savi, a service that
helps student-loan borrowers determine their best repayment
Depending on the amount of debt that is erased, forgiveness also
could push borrowers into a higher tax bracket, further increasing
their tax burden. "You need to make sure you're saving enough to
pay for that tax hit," Mr. Van Ostern says.
Borrowers who have the money to pay down their loans more
aggressively can use the federal government's Loan Simulator,
available at studentaid.gov, to determine how much more in interest
they would pay by stretching out payments. There also are online
services such as Savi and Summer that work directly with borrowers
or through their employers to help with these decisions.
Those who are less confident about their finances might want to
pay the minimum monthly amount under an income-driven repayment
plan and set aside any extra money in a special savings account,
Mr. Lux says. That way, if they decide to get more aggressive about
payments, they will have funds available. And if they decide to
ride it out and seek forgiveness on the balance, they will have
money for the tax bill, he says.
Should I rethink my payment strategy given the current
Since Washington has frozen payments and interest on many
federal student loans through September, it may not be worth it to
aggressively pay down this kind of debt right now.
Many borrowers might be better off putting the money they would
have spent on these payments into a high-yield savings account and
letting it grow, Mr. Lux says.
There's also the possibility that some amount of federal loan
debt will be canceled. President Biden has indicated he is leaning
toward $10,000 of federal-loan forgiveness per borrower through
Congress, whereas some Democrats are pressing for $50,000 through
executive order, a proposal that hasn't garnered presidential
If this is still in limbo once the payment pause is lifted, some
borrowers may want to pay only the minimum and take the chance this
additional forgiveness will materialize, Mr. Lux says. For others,
however, the cost of letting the interest linger could make that a
"The extra interest that you pay, hoping for forgiveness, is the
cost of the bet," Mr. Lux says.
Another unknown is how various efforts to change the current
system of income-driven repayment will play out. Among other
things, student-loan advocates would like the tax burden associated
with income-driven repayment forgiveness eliminated.
In any case, borrowers are advised to discuss their options with
their loan servicer before making any changes to their payment
strategy. Plan to do this before the payment freeze ends because,
once it does, servicers are likely to be swamped, Mr. Lux says.
Ms. Winokur Munk is a writer in West Orange, N.J. She can be
reached at email@example.com.
(END) Dow Jones Newswires
March 04, 2021 09:14 ET (14:14 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.