Forgiveness programs can be lifesavers for borrowers drowning in student loan debt.
For example, graduates with a high debt load and meager paycheck can look to Pay As You Earn and other income-driven repayment plans to make monthly bills more palatable. Civil servants can see debt forgiven after 10 years through Public Service Loan Forgiveness. Education students may cash in on Teacher Education Assistance for College and Higher Education, or TEACH, grants of up to $4,000 per year in exchange for committing four years to a needy school.
But enrolling in a forgiveness program is only the first step – and borrowers tend to drop the ball when it comes to seeing student loan cancellation through to the end.
When the Department of Education polled the six largest federal student loan servicers in November 2014, it found that nearly 57 percent of borrowers didn’t submit on-time paperwork to renew their income-driven repayment plan. Without filing those forms, borrowers risked losing the ability to repay based on income – and could give up the forgiveness benefit.
Another estimate shows that TEACH grant recipients, who need to complete four years of teaching to receive the grants, struggle to make it through the program. About 36,000 students have failed to meet the requirements since the program’s launch and an estimated 75 percent won’t complete the necessary steps in the future, according to the U.S. Government Accountability Office. Their fate: To see their TEACH grants convert to unsubsidized direct loans, with back interest included from the date the grant was disbursed.
With numbers that dismal, “it’s a loan masquerading as a grant,” says Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators.
These students, and others who embark on the path to forgiveness only to get run off the road, may end up paying more in the long run. Here’s how to ensure that student loan forgiveness doesn’t become a student loan fail.
1. Prepare for paperwork:
Qualifying for a student loan repayment plan that ends in forgiveness has its own challenges. Keeping on top of income and employment paperwork is another hurdle. “There’s never anything automatic about loan forgiveness,” says Heather Jarvis, an attorney specializing in student loans.
Participants in income-driven repayment typically must submit annual paperwork on income and family size. Public sector employees will need to demonstrate that they worked for a company that qualifies for Public Service Loan Forgiveness for at least 10 years. The Department of Education is still writing the necessary forms for the first cohort to see forgiveness in October 2017. TEACH grant recipients will have to prove that they’ve put in the necessary years with a qualifying program.
Students that take out TEACH grants are expected to fill out paperwork every year, including getting signatures from their principal, superintendent or other official, says Tamara Hiler, policy adviser for education at Third Way, a liberal think tank. That back-end paperwork can overwhelm a busy new teacher, she says.
2. Commit to a program:
In some of these programs, dropping out can bulk up students’ loan burdens. For example, income-based repayment participants who leave the plan may have unpaid interest capitalized and added to the total cost of the loan.
TEACH grant recipients who fail to teach in a qualified subject and at a qualifying school will see those grants become unsubsidized loans, at 4.29 percent for undergraduates. If those students had opted for cheaper, subsidized debt – which has that interest rate covered in school – they’d have paid less.
And when new teachers commit to a low-income school, they might not know what they’re getting into, says Hassan Brown, who earned his teaching degree through the New York City Teaching Fellows program. He taught special education while earning his master’s degree at night as a condition of the fellowship, with subsidized tuition and a Segal AmeriCorps Education Award helping with costs. “It is a high-stress career, especially if you’re doing an alternative teaching program and coming from industry that’s unfamiliar to education,” says Brown.
3. Forgiveness is finicky:
Students who reach forgiveness may still find that it’s not as they expected. For example, the amount forgiven under income-based repayment, which is wiped clean after 20 years of payments, may be taxed. And students will need to prepare financially for that year’s much-higher tax bite. “It’s not the sort of thing you want to be surprised by,” says Jarvis.
And there is talk of limiting the amount forgiven under Public Service Loan Forgiveness to $57,500, the most that undergraduates can borrow.
While forgiveness can be the saving grace for some students, taking care to meet all the requirements is essential. After all, “the real risk was borrowing the money to begin with,” says Jarvis.