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Mar-19-2020 00:09printcomments

Why Student Loan Forgiveness Might Not be Worthwhile

Many students find they pay more to get loans forgiven than if they’d just paid them off.

college student
Photo by Stanley Morales from Pexels

(SALEM, Ore.) - “Wait, all I have to do is work in an area deemed to serve the public good and a significant portion of my student loans will be wiped away — just like that?”

There would be no need for an article of this nature if that were it, 100 percent. Sadly though, the reality can be quite different. Things don’t always go as planned, or even as described for that matter.

Here’s why student loan forgiveness might not be worthwhile — for you.

It Can Take Decades

Teacher Loan Forgiveness, Public Service Loan Forgiveness (PSLF) and forgiveness from income-driven repayment plans all require years of service, along with certain rates of repayment before your debt is canceled.

At five years, the Teacher Loan Forgiveness program has the shortest term of all of the above. However, it also only offers between $5,000 and $17,500 toward your debt, depending on the subject you teach.

Meanwhile, the PSLF requires 10 years of service before forgiveness is granted.

That’s a long time to work in a field that might not be on your career path just to get a loan forgiven. Many income-driven plans can run for up to 20 years or more, with interest accumulating all the while.

You Might Actually Pay More

Tales of people starting out with $300,000 in student debt and ending up with $450,000 in debt are increasingly becoming the norm. It’s very possible to be so focused on getting your loan forgiven you’ll overlook the fact that you’ll pay more to get it forgiven than if you’d just paid it off.

As we mentioned above, in some cases, you’ll have to make payments anywhere from 10 to 20 years before the loan is forgiven.

If you put your loan in an income-driven repayment plan, an extraordinary amount of interest can accrue over those years. How much will all of those payments add up to in total?

Compounding interest, as these Freedom Debt Relief reviews illustrate, can make debts grow out of control. You could very possibly pay more than you would’ve if you’d just satisfied the loan at the standard rate.

You Could Encounter Opportunity Costs

Let’s say you chose to go into the private sector, rather than public service. What kind of salary would that work earn for you?

Given what we’ve discussed above about how long it can take to qualify for one of these programs — and how much interest can accrue over the years — would you really profit from being enrolled in a forgiveness program, or will it cost you money?

You Might Get Taxed

The IRS considers many forms of loan forgiveness taxable income. The argument goes that’s money you have to spend because you weren’t required to pay a creditor. Thus, the Fed is due a slice of that “income.”

The following types of forgiveness are taxable:

  • An income-driven repayment plan
  • Closed-school discharge
  • Borrower defense to repayment
  • Discharge for false certification, unauthorized payment or unpaid refund

These forgiveness programs are tax-free:

  • Public Service Loan Forgiveness
  • Teacher Loan Forgiveness
  • NURSE Corps Loan Forgiveness
  • Loan discharge due to total and permanent disability or death

These are just four of the reasons why student loan forgiveness might not be worthwhile. It’s a good idea to look into any program you’re considering with these thoughts in mind. It could be the difference between getting your debt cleared or signing up for a never-ending financial obligation.

Source: Salem-News.com Special Features Dept.

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