Top 5 Things to watch out for in Student Loan Forgiveness

If the current student loan trend is to be believed, almost every borrower seeks a cover from the Obama student loan debt forgiveness program. This is the easiest method to earn relief without having to pay a certain amount of the interest back. With benefits, there are some latent dangers as well that most student loan borrowers often overlook. Reason: Obama student forgiveness scheme is still very new in both concept and implementation.

We bring you quick pointers that you should stay clear in case you have taken a federal student loan.

1    Do you qualify for the forgiveness after 10 years: Your documentation counts
If you availed the Public student loan, you may qualify for the forgiveness after 10 years or 120 months of interest payment, whichever is later. In order to qualify, you have to do two things:
-    Make monthly payments continuously without deferments or forbearance
-    Work at a qualified organization or institution that serves public

You must submit all your paper documents related to your interest payments and work assignments annually to the federal loan service provider. If you fail to submit them, you may be disqualified from the student loan debt forgiveness scheme.

2    Changing Jobs
Changing jobs in the span of 10 years can have significant repercussions on the student loan debt forgiveness qualifications. You must be employed continuously with a public service providing organization to earn full forgiveness after 120 monthly instalments. Even if you have made all the payments for 10 years, a change in jobs could set you on a track of disqualification.

3    Is there a Loan forgiveness limit?
The most latent danger than almost every student loan borrower seems to have missed is the forgiveness ceiling. As per the ruling under the Obama student loan debt scheme, only a sum of USD 17,500 from the loan principal would be forgiven. The reminder principal sum and its interest are still payable to the federal loan providers.

4    Perkin Loans attract cancellation and not Forgiveness
Perkin Loans, however, are forgiven completely but with their own set of qualification requirements. They are covered under the ruling of Perkin Loans Cancellation and not under the Student Loan debt forgiveness schemes.

5    Increase in the Tax liabilities post-Forgiveness
Student Loan forgiveness has a serious tax liability. The loan debt amount that is forgiven is turned into the taxable part of the borrower’s income. After receiving the forgiveness, the tax affordability could be the next big hurdle for the Student Loan borrowers after 10 years or 25 years, as the case may be.

Example:
If you have earned a forgiveness of USD 25,000: your taxable income will increase by USD 25,000.
This happens for the borrowers who have linked their student loan debt repayment with Income-based Repayment Plan (IBR) or PAYE.
The repayment plans offer advantageous position to the student loan borrowers as it is better to own smaller amounts than have USD 20,000 as a taxable sum despite forgiveness.
Just evaluate the perils of the student loan forgiveness plan before hand.