Experts say that roughly half of the people who borrow student loans in America are eligible for one or more student loan debt forgiveness programs. At Iron Fist Legal, we bring our readers the most up-to-date information about student loan debt forgiveness. A common question we’re asked is, “How many years must I pay before my student loan debt is forgiven?” For most students, the amount of time before the debt is forgiven depends on which qualifying repayment plan the borrower chooses. Some plans run for 10 to 25 years, at which point the remaining balance is forgiven.
In other cases, a student borrower’s post-grad income is low enough that they may qualify for minimal repayment (or even complete loan forgiveness). These low-income options may have tax consequences. Still, that shouldn’t stop anyone from exploring these options. If your income is low enough that you can’t comfortably afford your monthly student loan payments, student loan debt forgiveness programs are the best alternative. Some forgiveness plans involve a type of community service (such as working for non-profits or teaching in a low-income neighborhood for ten years).
Loan Forgiveness Terms to fit Your Time Frame
Let’s explore the five most common student loan debt repayment plans and the time schedules required for repayment. Repayment plans differ based on the time frame and income (cash flow), so you can find the one that fits your needs. We’ll also discuss the impact that student loan debt forgiveness programs may have on your taxes, so you’ll know exactly what to expect when that loan forgiveness finally comes through.
Some of these plans may feel like they take forever for loan forgiveness (25 years is a long time, we admit!) However, plans that take low income into account often result in such low monthly payments that a sizeable portion of the loan ends up being forgiven. Let’s check out the options.
1. ICR (Income Contingent Repayment Plan): 25 Years
This repayment plan works a little differently than others we’ll go over below. First off, the ICR has no initial income requirements attached to it. This plan allows any eligible student borrower to make their payments using this plan. The ICR is designed for student borrowers who will be pursuing jobs with lower salaries (such as the public service sector). It does this by tying the monthly payments to these three factors:
- borrower’s income
- family size
- total amount borrowed
The size of the monthly payment is adjusted on an annual basis, to account for changes in annual income and family size. The ICR plan is currently available from the U.S. Department of Education. This type of plan is not offered by banks or other privately-owned institutions who make government-guaranteed loans according to the Federal Family Education Loan Program (FEEL).
For this loan, your repayment period maxes out at 25 years. The lender forgives any remaining debt after this period. Currently, this becomes a taxable income. This means that you’ll pay taxes on whatever amount is left over after you pay for 25 years. But the savings can be significant for students who wish to pursue careers in public service. And because you will be paying the tax so long from now, the net present value of the tax you will have to pay is small.
Your monthly payment amount using this repayment plan gets fixed at a certain amount over 12 years. This number is in accordance with your income. By the end of a 25-year term, the lender will forgive the remaining balance.
It’s important to understand that if you choose to use this repayment plan, you could end up paying higher monthly payments than you would if you used the standard 10-year plan. The borrower has to submit proof of their income each year. If your income drops, your payments will drop for that year. If it rises, your payments will go up.
A Note on FFEL Loan Consolidation
FFEL lenders offered income-sensitive programs before July 1, 2010, as an alternative to the traditional payment plan. For student borrowers with more than one FFEL loan, the U.S. Department of Education will allow loan consolidation into a federal direct consolidation loan so that you can pursue the ICR program. Simply call 1-800-557-7392 or 1-800-557-7395 to pursue FFEL loan consolidation. Good news: students who already have a Federal direct loan are eligible for ICR without having to consolidate their FFEL loans.
2. IBR (Income-Based Repayment Plan): 25 Years
This particular type of student loan repayment plan is one of the most used repayment plans that student borrowers choose to utilize when they are experiencing financial hardship. For people with student loans you took out on or before July 1, 2014, you’ll have a payment that is no more than 15% of your after-tax (discretionary) income. When you switch to this one, you will have to pay monthly payments for 25 years. After that point, as long as payments have been made on schedule, the remainder of your lender will forgive the remaining loan balance.
Are you a student who took out loans after the date of July 1, 2014? If you are, you’ll get monthly installment payments that do not go higher than 10% of your after-tax (discretionary) income. The lender will forgive the remaining balance after 20 years of on-time payments.
Will the IBR plan make you pay more than the traditional ten-year repayment plan? Absolutely not! Breathe easy knowing your loan repayment will never be above the amount you’d make with a more traditional ten-year standard plan. Additionally, the lender will also forgive the remaining balance on your loan by the end of the 25-year plan. It’s a win-win.
A Note on Discretionary Income
The lender defines your “discretionary income” by looking at how much you have left over in your paycheck after the state and government take out taxes. Other mandatory payments, such as child support, alimony, court-ordered fines, or other mandatory payments, impact your discretionary income as well.
A few other key factors go into a formula that will tell the lender your discretionary income. It includes your income tax returns and your family size. Want to estimate your discretionary income? There are multiple Discretionary Income Calculators online you can use.
3. PAYE (Pay As You Earn Repayment Plan): 20 Years
If you chose to use this repayment plan, you’ll notice that certain parts mimic the Income-Based Repayment Plan. With this plan, you will not have to have payments higher than 10% of your after-tax income. When you hit the 20-year mark, the lender will forgive any balance. You also won’t pay more than you would if you had the standard 10-year repayment plan.
The most significant difference between the Pay as You Earn and Income-Driven Repayment Plan is that you had to take out your loans before 2007 to qualify for the PAYE plan. The PAYE program is also sometimes referred to as Obama Student Loan Forgiveness because it was developed during his presidency.
4. RePAYE (Revised Pay As You Earn Repayment Plan): 20 Years
RePAYE is an altered version of PAYE. This plan became available to any student borrowers after December 17, 2015. One difference from the Pay As You Earn Repayment Plan is that this plan is available to any direct loan borrowers, It doesn’t matter when they took the loan out. Your payment will be equal to 10% of your after-tax income, and the lender will forgive the balance after two decades of of-time payments.
Perhaps the greatest feature of this plan is that it has an interest subsidy attached to it. This handy help-out covers up to half of all of the interest payments in instances where the new refinancing can’t keep pace with the accelerating interest.
5. PSLF (Public Service Loan Forgiveness): 10 Years
Public Service Loan Forgiveness is no big secret. The PSLF program has been one of the most enduring and widely-used programs of student loan forgiveness.
Another great aspect of the PSLF program is that you can combine it with other repayment plans. Many clever student borrowers decide to combine either the Income-Based Repayment Plan or the Pay As You Earn Repayment Plan with the Public Service Loan Forgiveness program to reap the benefits.
If you want to learn more about these programs, you can click: Are You Eligible for Student Loan Modification Programs?, or you can fill out our quick online application to talk to Iron Fist Legal student loan debt experts.
Student Loan Forgiveness – Tax Consequences
Remember that although student loan debt forgiveness programs could be beneficial to some people, it may cause consequences with annual taxes with others. Under modern IRS rules, they could insist the borrower pay income taxes on any of their student loans that the lender forgives by the end of the term. The forgiven debt is treated as “income” by the IRS.
The PSLF program is the only allowance to these tax consequences. Why is the PSLF program exempted? Generally, student loan forgiveness is excluded from income if the forgiveness depends upon the student working for a period of time in certain professions. That’s why PSLF, teacher loan forgiveness, law school loan repayment assistance programs, and the National Health Service Corps Loan Repayment Program are non-taxable. That’s another reason why these types of loan forgiveness programs are so attractive to students
Loan forgiveness for closed schools, false certification, death, and disability, while still helpful, are considered taxable income by the IRS. Forgiveness of the remaining balance under ICR and IBR after 25 years in repayment is also considered taxable income.
Basically, the lenders will add any amount they forgive to your taxable income for the year they forgive it. If you had $25,000 in debt your lender forgave, and you made $35,000 from your job, your total taxable income to the IRS would be $60,000. In turn, you’ll pay a much higher tax bill because they $25,000 in loan forgiveness wouldn’t have taxes taken out. Many people still consider this one-time payment a better option than continuing to pay on the student loan amount.
Forgiveness and Insolvency
Once your forgiveness plan goes through and affects your taxes, the IRS does have options available that let you make repayment plans. These options will result in much lower loan payments to the IRS, which will be helpful, no matter your current lifestyle or situation.
Insolvency and forgiveness go hand in hand. Insolvency can be helpful for student borrowers who are stressed over large amounts of taxable income from having their student loans forgiven.
Insolvency is defined as the state of being unable to pay the money owed, by a person or company, on time. If a student borrower finds that their payments are too much, filing for insolvency is another route to consider.
For more information about the student loan debt crisis, Iron Fist Legal created a student loan blog. Check it out! We curate original content every month, so be sure to check back every month.
A Note On Private Student Loans
It’s important that you understand that a private student loan doesn’t come with any type of federal forgiveness program. If you can’t make payments, consider the possibility of refinancing them. You could get a new payment structure that is easier on your finances, and you may get a lower interest rate. Talking to a student loan lawyer may help you to come up with some helpful, creative solutions.
If you are a student borrower struggling to make loan debt payments, remember that you are not alone. Over 40 million Americans are burdened by student loan debt. Many are taking action, learning if they can modify their student loan debt and regain control of their financial future.
The Iron Fist Legal Team has over 45 years of combined experience assisting individuals who are suffering from student loan debt. Get in touch and start finding a solution to your loan debt woes today. We offer different solutions based on each situation.