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. 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. 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).
Student loans can be of two types- Federal student loans and Private student loans. Federal student loans are funded by the federal government. Interest rates on a federal loan are fixed and in some cases, tax deductible. 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. While federal student loan programs follow the guidelines laid down by the federal government; terms and conditions on a private student loan differ with different lenders. Some of the Private Student Loans servicing giants are Sallie Mae, New York HESC and WellsFargo. Student loans are different from scholarships and student grants and are liabilities waiting to be repaid. This sometimes, becomes a source of discouragement for people to avail student loans and continue with their studies.
Student Loan Forgiveness Programs
It was to remove this limitation and discouragement arising from student loans that the concept of student loan forgiveness programs was introduced. Forgiveness of a loan means when the borrower is no longer liable to repay one’s loan. In other words, the loan is forgiven and the debt burden is removed. A student loan forgiveness programme is designed to help students pay full or a part of their student loan in exchange of pursuing a particular occupation or volunteering service. 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. 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. Federal student Aid, An office of the US Department of Education is responsible for managing federal student loans and also provides for forgiveness, discharge and cancellation of federal student loan under various forms and plans to help students in genuine need to come out of their student loans. Student loan forgiveness programs are also available on private student debt but the provision of the same highly depends on the private lender.
Forms of student loan forgiveness program:
Federal student Aid, An office of the US Department of Education provides for forgiveness, discharge and cancellation of federal student loan under various forms and plans to help students in genuine need to come out of their student loans. It offers in all eight programs for student loan forgiveness. These are:
- 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 that has lasted or can be expected to last for 60 consecutive or is expected to end up in death.
- 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. 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
- 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
- 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.,
- 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.
Benefits of student loan forgiveness program
Student loan forgiveness programmes aim to offer borrowers, with financial difficulties, various reasonable loan repayment alternatives. With the passing of time, the horizons of student loan forgiveness programs have been further broadened. Following are the benefits of such programs:
- Limiting payments to 10 percent of income : Borrowers with federal student loans would be required to pay not more than 10 percent of their income under the Income- based repayment (IBR) plan. This plan would help more than 1 million people to lessen their monthly payment. For example, for a person earning $30,000 per year and carrying $20,000 of student loans, monthly payments would reduce by more than $110 each month.
- 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.
- Reducing and fixing interest rate on Federal loans : The most recent amendment in federal law has allowed for a capping of interest rate on federal loans to 3.4 percent as against previous interest rate of 6.8 percent.
- No tax penalty on forgiven debt amount : Student loan forgiveness programs previously carried a catch in the form of tax penalty for the amount of debt forgiven. With the latest changes in law, tax liability on the student debt amount has been done away with, leaving a huge benefit for borrowers with insufficient incomes to meet the previously levied tax burden.
- Benefit to people committed to public sector services: While student loan forgiveness programs allow forgiveness after 240 qualifying payments made towards debt, for borrowers who wish to join public sector services after studies, the number of qualifying payments to be made is reduced to half, i.e., 120.
Student loan forgiveness programs were originated with the soul objective to alleviate debt burden among the student class of the society and contain a series of benefits for the borrowers. With a number of student loan forgiveness programs present, it is important for the borrowers to prudently analyse all available options and go for the best suited one. However, among these benefits, such programs are criticised by a section of economists and financial aide experts for adding extra burden on federal subsidies which are already high due to various college education subsidizing programmes. In the mid of all the criticism, such forgiveness programs have succeeded in benefiting more people with each amendment and hopefully, would continue the legacy with coming years. One solution, although, to reduce such student debt burden would be to have competitive fee structure for private institutions offering undergraduate and graduate education, which can be only possible with a strong presence of government sector in this field.