Who doesn’t want to study in a top B-school or Law University and earn those multi-millionaire packages? Offcourse we all do. But it isn’t that easy to pay for books, tuition fee and living expenses. That’s when student loans come to our rescue. A student loan is specifically designed for students to pay for their education expenses and carry substantially lower interest rates and suitable repayment schedules to help students pay them back when they are capable of.

Student loans are different from scholarships and grants and are supposed to be paid off. In the US economy , government started offering student loans in 1950s under the National Defence Education Act. The Higher Education Act of 1965 further helped to broaden the scope of student loans.

Types of Student loans

In the United States of America, there are mainly two types of student loans, namely, Federal student Loans and private student loans. 

Federal student loans: These are funded by the federal government. Interest rates on a federal loan are fixed and in some cases, tax deductible. Federal student loans  can take two forms- Direct Subsidized loans and Direct Unsubsidized loans with the former offering certain advantages over the latter.

Direct subsidized loans are available to undergraduate students with the loan amount not exceeding the financial need. The interest on such a loan is paid by the US Department of Education if the individual is in school at least half-time and during the grace period of the student, i.e., six months after graduating. Direct unsubsidized loans are offered to undergraduates and graduates with the student being liable to pay interest payment for all periods. 

Private student loans: Other than government agencies; banks and finance companies also offer student loans. Interest rates on private student loans are generally variable and higher than federal student loans. Unlike federal loans, private student loans are never subsidized and might even require smooth credit history. 

One major difference  between federal and private student loans is that an individual with federal student loan is eligible for student loan forgiveness programmes whereas, an individual with private student loans is generally not eligible for the same. An obvious question that arises is – What is a student loan forgiveness programme? A student loan forgiveness programme is designed to help students pay full or a part of their student loan.

This sounds great but off course requires something in return. Student loan forgiveness programmes typically require the student to pursue a particular occupation or volunteering service in exchange of paying off the loan completely or in part. In the US, student loan forgiveness programs are also aimed at directing individuals towards sectors of national importance where there is lack of qualified personnel. The US Department of Education offers forgiveness on federal student loans and once forgiven, the student is not liable to pay his remaining loan balance.

There are two types of student loan forgiveness programmes; upfront forgiveness that eliminates a part of student debt with each passing year of service and back-end forgiveness that cancels whole of the student loan after a certain number of years of service. Back-end forgiveness programs come with all-or-nothing condition and therefore, might be risky for individuals who are not sure whether they would be able to complete their committed tenure of service or not. 

Forms of Loan Forgiveness programmes

Forms of student loan forgveness: 

Public Service Loan Forgiveness Programme  : The Public Service Loan Forgiveness Programme offered by The US Department of Education is intended to encourage individuals to join and continue full-time work in public service sector. This programme requires an individual to make 120 qualifying payments on one’s direct loans.

Payment made after October 1, 2007 are considered qualifying. Only loans availed under the William D. Ford Federal Direct Loan are eligible for Public service loan forgiveness programme. In case of Federal Family Education Loan (FFFL) and the Perkins Loan Program, the loan needs to be consolidated into a Direct Consolidation loan in order to be eligible for the Public service loan forgiveness programme. There are three modes of repayment plans under the

Public service loan forgiveness programme– Income Based Repayment Plan (IBRP), Income-Contingent Repayment Plan (ICRP) and the 10-year standard repayment plan. All three repayment plans have their own benefits and costs and thus, need to be carefully analysed before making any decision.

Employment with a federal, state or local government agency, entity or organisation or a not-for-profit organisation that has been designated as tax exempt by the internal revenue service (IRS) under section 501(c)(3) of the Internal Revenue Code (IRC) qualify for the Public service loan forgiveness programme. While working at any of the aforementioned agencies, once the individual completes his/her 120th qualifying payment, he/she can proceed to submit loan forgiveness application. 

Teacher Loan Forgiveness Programme : The Teacher Loan Forgiveness Programme offered by The US Department of Education is intended to encourage individuals to enter into teaching profession. An individual is required to teach full-time for five complete and consecutive years in certain elementary and secondary school and educational service agencies that serve low-income groups in order to qualify for Teacher Loan Forgiveness Programme. Also, such forgiveness is applicable for Direct Subsidized and Unsubsidized loan and Subsidized and Unsubsidized Stafford Federal Loans. Teacher loan forgiveness programme can help an individual have as much as $17,500 of loan forgiven. 

Total and Permanent Disability Discharge: An individual with William D. Ford Federal Direct Loan programme loan, Federal Family Education Loan programme loan or Federal Perkins Loan might qualify for Total and permanent disability discharge programme if they are incapable of arranging in any gainful activity because of physical or mental impairment.  

However, they are certain conditions for such impairment, such as the impairment has lasted or can be expected to last for 60 consecutive or is expected to end up in death. For an individual’s federal student loans to be discharged, he/she needs to provide information to the US Department of Education to prove one’s permanent disability. It is only after proper evaluation of that information that the US Department of Education discharges the loan. 

Death Discharge: Federal student loans are also discharged if the borrower dies. In case of parent PLUS loan, the loan may be discharged if the student himself dies or the student on whose behalf the loan was taken, dies. The loan is discharged on providing a copy of the death certificate to the school or the loan servicer. 

Perkins Loan Cancellation and Discharge: The Federal Perkins Loan Cancellation applies to individuals who perform certain types of public services or certain types of occupations such as Volunteer in the Peace Corps or ACTION program (including VISTA), Teacher, Member of the U.S. armed forces (serving in area of hostilities), Nurse or medical technician, Law enforcement or corrections officer, Head Start worker, Child or family services worker and Professional provider of early intervention services. 

Discharge in bankruptcy: Federal Student Loans can be discharged if one succeeds to prove in the bankruptcy court that paying off the loan would mean undue hardships for the individual. Undue hardship is measured in three aspects, i.e., the payer would not be able to maintain a minimal standard of living if forced to repay the loan, the hardship will evidently continue for a significant portion of the loan repayment period and good faith efforts for repayment before filing for bankruptcy should be seen which generally implies that the individual should be in repayment for a minimum of five years. 

Unpaid refund discharge: An individual might be eligible for a discharge of Direct Loan or Federal Family Education Loan programme loan if he/she withdrew from school but the school did not pay a refund that it owed to the U.S. Department of Education or to the lender. The amount of loan that can be discharged, however, is equal to the amount of refund not paid.

Obama Student Loan Forgiveness Program

Recently, there has been some major expansion of the student loan forgiveness program. As part of the Obama-Biden Administration’s ambitious agenda to make higher education more affordable and with the national goal of having highest proportion of college graduates in the world by 2020, President Barack Obama introduced what came to be known as Obama Student Loan Forgiveness Program. The Healthcare and Education Reconciliation Act provides to students new alternatives to repay their student debt. According to this law, student enrolling in or after 2014 have the following mechanisms to repay their student loans: 

  • Limiting payments to 10 percent of income: Borrowers using this plan for repayment will have to pay not more than 10 percent of their income above abasic living allowance. This plan would help more than 1 million people to lessen their monthly payment. 
  • Forgiving remaining debt after 20 years of repayment or after 10 years in case of choosing public services: Borrowers who have repaid their debt for 20 years can have the remaining debt forgiven. The repayment period reduces to 10 years if the choice of career is public sector services such as military services, nurses and teachers. 
  • Fully financed by student loan reforms: These loan forgiveness programmes are financed by the proposed student loan reforms wherein, current subsidies to financial institutions are ending and new loans will be direct loans provided and managed by private companies bound in performance based contracts with the US Department of Education.  

Experts  believe that students with high student debt and with better income earning prospects in the future are the ones who will financially benefit the most out of this new extension of the federal student loan forgiveness programme. According to Neal McCluskey, associate director of the Center for Educational Freedom at the Cato Institute, a libertarian think tank, this executive order is probably going to make very little difference for undergraduate students because undergraduate student loans are comparatively smaller and can be completely repaid in a time period of 10 years, however, such a policy will be highly beneficial for graduate studies because they generally carry a higher loan amount. 

Conclusion

Student loan forgiveness programmes have been an eminent feature of undergraduate and graduate studies in the US economy since 1950s, with its horizons been further broadened with the passing of time and growing importance of education. Student loan programme that was initially started in response to Soviet Union’s launch of Sputnik Satellite has now come to dominate the education scenario in the US with more than $1.2 trillion student debt accumulating in the economy (according to the Consumer Financial Protection Bureau).

Apparently, such loan forgiveness programmes aim to offer borrowers with financial difficulties, reasonable loan repayment alternatives. With various forgiveness programmes available, it is important for the borrowers to carefully analyse their current and future financial situation and accordingly select the programme that suits their needs best.