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 United States of America, there are mainly two types of student loans, namely, 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. Federal student loans can take two forms- Direct Subsidized loans and Direct Unsubsidized loans with the former offering certain advantages over the latter. 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.
Student Loan Forgiveness Program
With time, policy makes have realized that it would benefit the economy as a whole to facilitate the borrowers in full or partial repayment of their student loans. This sometimes takes the form of loan forgiveness for choosing a desired career path or discharge of loan in case of bankruptcy, medical complication or forgery et cetera. 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. 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 student loan Forgiveness program
There are various forms of Loan Forgiveness programmes such as Public Service Loan Forgiveness Programme, Teacher Loan Forgiveness Programme, Total and Permanent Disability Discharge, Death Discharge, Perkins Loan Cancellation and Discharge, Discharge in bankruptcy and Unpaid refund discharge.
Each program has its own set of advantages and disadvantages. It is important for an individual to assess his/ her current and future financial situation and apply for the best suited forgiveness plan. Apparently, such loan forgiveness programmes aim to offer borrowers with financial difficulties, reasonable loan repayment alternatives. At the same time, these programs help the economy as a whole to get qualified personnel to work for the public sector and low paying jobs. Among the benefits that such programs offer to the borrowers and the government, there are certain limitations that these programs contain within their working. Let us explore some of these limitations.
Limitations of Student Loan Forgiveness Plan
Due to various strict conditions imposed on the eligibility for such programs, many borrowers who are in need are left out from the ambit of the program. The forgiveness plans offered by the federal government do not include private loans and parent PLUS plans and hence, some financial aide experts believe that even though this expansion includes 5 million more borrowers, some of the most burdened students might receive very little relief, if at all.
One popular criticism that student loan forgiveness programs have faced is that they encourage students to take up huge student loans in the presence of high tuition fee charged by the institutions and it is the government that faces the ultimate liability of such sky rocketing fee expenditures. There are no measures to keep the cost of higher studies competitive and at least fixed.
Another problem associated with such forgiveness programs is the illusion they create in the minds of the borrowers who are left thinking that most of their debt would be forgiven and end up taking more debt.
Such forgiveness programs require a long term commitment and not everyone is clear enough of what’s life going to be like for the next ten years. It is important for a prudent borrower to carefully analyse the terms and conditions of the contract before entering into one.
What comes as a shock after discharge of student loan due to permanent disability is the tax implication that follows such a step.
Amount of discharge of student loan is considered to be taxable income. The borrower needs to prove his/ her hardship in paying the tax bill in order to get it reduced by the agency imposing tax. Therefore, it becomes important for the borrower to analyse the terms and conditions before availing the benefit of discharge of student loan.
Like everything, student loan forgiveness programs have their own drawbacks; some of them being psychological, other being financial. It is important for an individual to understand his/ her individual needs and estimate the disadvantages that the plan will bring along with the benefits before going for a forgiveness or discharge plan. The same plan might work wonders for some and might worsen the financial situation for the other. There cannot be any general guideline with respect to the benefits and limitations that these forgiveness plans carry because they are highly sensitive to an individual’s personal circumstances.