Every year, millions of Americans enroll in colleges and universities. But the vast majority of students don’t have the ability to pay for their education in cash. In fact, two-thirds of students borrowed money to attend college in 2018, according to the 2019 annual report from the Institute for College Access and Success (TICAS). And that amount continues to steadily increase.
Student loans aren’t necessarily a bad thing, as they provide access to an education that most students would otherwise be unable to afford. A top reason students cite for attending college is the promise of a well-paying career, according to a 2016 survey conducted by the Higher Education Research Institute at the University of California, Los Angeles. And while it’s true there are plenty of well-paying careers that don’t require a college degree, the Bureau of Labor Statistics continues to find that, on average, those with college degrees consistently out-earn those without. It’s for this reason financial advisors often claim borrowing for college is “good debt” because it’s an investment in your future.
Yet overborrowing can easily cripple your future financial success, including severely reducing the amount of your discretionary income and impacting your ability to buy a home, start a family, or save for retirement, according to a 2019 report by the Washington Post. A Pew Research Center analysis of the Federal Reserve Board’s 2018 “Survey of Household Economics and Decision Making” found that graduates with student loans are more likely to report struggling financially than those without.
Thus, while borrowing remains a fact of life for most students, it’s crucial to be well-informed.
Types of Student Loans
Although the U.S. Department of Education (ED) is the most common source for student loans, students can borrow from a variety of lenders. These include state governments, private banks, and even colleges and universities themselves.
Federal Loans
The vast majority of student borrowers fund their education with loans from the ED. According to the National Center for Education Statistics, 62.8% — nearly two-thirds — of all students (those who borrowed student loans and those who didn’t) borrowed federal loans during the 2015-2016 school year. By contrast, only 15% of all students borrowed from other sources.
Direct Loans
All federal loans currently offered are through the William T. Ford Direct Loan Program. They include Direct subsidized loans, Direct unsubsidized loans, Direct PLUS loans, and Direct consolidation loans.
Subsidized Direct Loans
As of July 1, 2012, federal Direct subsidized loans are available only to undergraduate borrowers who meet financial need qualifications. The ED covers the interest on their subsidized loans while they are enrolled in school at least half-time, for the first six months following graduation (the grace period before repayment begins), and during deferment.
According to the ED, “financial need” is the difference between the cost of attendance at the student’s school and their expected family contribution (EFC), as determined by information provided on their Free Application for Federal Student Aid (FAFSA). Although one’s EFC does not change no matter where a student decides to go to school, the cost of attendance is entirely dependent on the school. It includes tuition, room, board, fees, books, and other related expenses. Thus, financial need is ultimately determined by where you go to college.
The caps on borrowing for subsidized Direct loans are:
- First Year: $3,500
- Second Year: $4,500
- Third Year and Beyond: $5,500
- Total Cumulative Limit: $23,000
Unsubsidized Direct Loans
Unsubsidized Direct loans are available to both undergraduate and graduate students. Additionally, independent undergraduate students are eligible to borrow even more than their fellow students who are legal dependents of their parents or guardians.
An independent student is defined as one who meets any of the following criteria:
- Over 24 years old
- Married
- Someone with legal dependents other than a spouse
- A graduate or professional student
- A current member of the armed forces
- A veteran
- An orphan
- A ward of the court
- An emancipated minor
- Someone who is homeless or at risk of becoming homeless
Unlike with subsidized Direct loans, there is no time period during which the ED covers the interest on the loan. This means that even though borrowers don’t need to start repaying until six months after they leave school or drop below half-time, interest begins accumulating from the moment the loan is disbursed. As interest accrues, it’s added to the principal loan balance.
And while the interest rate remains fixed for the life of the loan, it varies significantly between undergraduate and graduate student borrowers. For example, the rate on unsubsidized Direct loans disbursed between July 1, 2020, and July 1, 2021, is 2.75%. But the interest rate for graduate borrowers for loans disbursed during the same period is 4.30%.
The caps on borrowing for unsubsidized Direct loans are as follows:
- For undergraduate students (dependent):
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- First year: $2,000
- Second year: $2,000
- Third year and beyond: $2,000
- Total cumulative limit: $8,000
- For independent undergraduate students:
- First year: $6,000
- Second year: $6,000
- Third year and beyond: $7,000
- Total cumulative limit: $34,500
- For graduate and professional students:
- Annual limit: $20,500
- Total cumulative limit: $73,000
Grad PLUS Loan
Graduate students unable to cover the cost of their education with unsubsidized Direct loans and their other available resources have the option of borrowing additional amounts through Grad PLUS loans. Unlike with unsubsidized Direct loans, there is no federally mandated cap on borrowing. However, students can only borrow up to the school’s established cost of attendance minus any other financial aid. Thus, to discover the upper limit on how much you can borrow, you need to directly contact the financial aid departments of the schools you’re considering.
As with all other Direct loans, the interest rate remains fixed for the life of the loan, and the rate is determined by the year it was dispersed. The rate is also always higher than subsidized and unsubsidized Direct loans. For example, for Grad PLUS loans disbursed between July 1, 2020, and July 1, 2021, the interest rate is 5.30%.
Parent PLUS Loan
Parents with dependent undergraduate students can borrow funds to cover the cost of their child’s education through a Parent PLUS loan. Unlike other Direct loans, Parent PLUS loans require a credit check. Thus, parents without good credit will require a co-signer.
As with Grad PLUS loans, parents can only borrow up to the cost of attendance, minus any other financial aid. Likewise, the interest rates are the same as for Grad PLUS loans and remain fixed for the life of the loan.
Direct Consolidation Loan
Federal Direct consolidation loans aren’t available to students while they’re attending school. Rather, student loan consolidation is something students commonly do after graduating in order to simplify the repayment process. Students often borrow new loans annually, meaning they graduate with more than one student loan. Consolidation allows students to repay a single loan with a single monthly bill instead of making several monthly payments on multiple loans.
However, it’s still a type of federal Direct loan. Essentially, the ED pays off all your old loans with a single, new loan in the total amount of the original loans. And it calculates your new, fixed interest rate using the weighted average of the interest rates on the old loans rounded up to the nearest one-eighth of one percent. So the rate remains essentially the same as it was on the original loans. Unfortunately, this means there’s no way to lower your federal loan interest rate. The idea that consolidation can improve your interest rate is one of the common myths of student loan consolidation.
Aside from simplifying repayment, additional perks of consolidation include making old FFEL loans eligible for income-driven repayment (IDR), as only Direct loans qualify for the IDR plans. By consolidating FFEL loans with a Direct consolidation loan, you essentially wipe out the old FFEL loan and replace it with the Direct loan.
Additionally, consolidation allows borrowers to substantially lower their monthly payments by lengthening the repayment term. Be careful whenever you stretch out repayment, however. If you can manage your monthly payments, you’ll save a considerable amount on interest by sticking with the standard 10-year repayment plan.
And there are other reasons to be cautious about consolidation, including losing forgiveness benefits on any Perkins loans or losing credit on payments already made toward Public Service Loan Forgiveness. So before consolidating, be sure to consider all the situations for when you should (or shouldn’t) consolidate.
Discontinued Loans
For many years, the federal government offered a variety of student loans, including Direct Loans through the ED, Federal Family Education Loans (FFEL) through private lenders, and Perkins Loans for those with significant financial need. Although it’s no longer possible to get an FFEL loan or a Perkins loan, there are plenty of these still in repayment.
FFEL Loans
FFEL loans were loans offered by private lenders and guaranteed by the government. Thus, they were federal loans even though the money came from private banks. They included subsidized and unsubsidized Stafford loans, and FFEL PLUS loans. In an effort to streamline and consolidate government lending, The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) discontinued the program. As of July 1, 2010, the ED became the only institution that could offer federal student loans, and FFEL loans are no longer available.
Perkins Loans
The Perkins Loan Program expired on September 30, 2017, although final loan disbursements were allowed through June 30, 2018. Perkins loans benefited students with exceptional financial need by fixing the interest rate at 5% on a 10-year repayment plan. They also featured a variety of forgiveness options in exchange for working in a specified career-field in a high need area. For example, teachers with Perkins loans become eligible to have them fully forgiven after five years of qualifying teaching service.
Additionally, Perkins loans require students to repay their school rather than a loan servicer. This is because even though the majority of the money came from the federal government, many of the schools that participated in the program also contributed a portion. So, if you have a Perkins loan, be sure to speak with your school about repayment options. Typically repayment begins nine months after the student withdraws from school, regardless of whether they graduated.
Interest Rates
The interest rate on federal student loans depends on the loan type and the disbursement date of the loan. It’s determined annually for the 12-month period beginning on July 1 and ending on June 30. Additionally, it remains fixed for the life of the loan.
That means you could end up with a better or worse interest rate depending on when you borrow. For example, the interest rate for subsidized and unsubsidized Direct loans for undergraduate students disbursed after July 1, 2020, and before July 1, 2021, is 2.75%. But for loans disbursed the year before (July 1, 2019, to June 30, 2020) the interest rate was 4.53%. So students who borrowed in June 2020 are stuck paying a significantly higher rate for the life of their loan than those who borrowed in July 2020.
Fortunately, however, there are limits on how high the interest rate can go, which are determined by the Higher Education Act. The maximum interest rate for Direct subsidized and unsubsidized loans made to undergraduate students is 8.25%. For graduate and professional students, the interest rate on subsidized and unsubsidized Direct loans cannot exceed 9.50%. And for Direct PLUS loans, the interest rate is capped at 10.50%.
To find the interest rates for the current academic year, visit StudentAid.gov.
Qualifications
In order to qualify for a Direct loan, borrowers must meet the following criteria:
- Be either a U.S. citizen with a valid Social Security number or a qualifying noncitizen with an alien registration number
- Have a high school diploma or GED or have completed a qualifying home schooling program
- Be enrolled and making satisfactory academic progress at least half-time in a four-year college or university; community college; or a trade, career, or technical school
- Not be in default on a Direct loan that is currently outstanding
- Free of certain criminal convictions, including drug-related or sexual offenses, and must not be currently incarcerated — visit Student Aid.gov for information on eligibility for students with criminal convictions.
- Registered with the Selective Service System if a male U.S. citizen or permanent resident born after December 31, 1959 — visit FinAid for more information on requirements for registration.
Note there is no requirement for a credit check, with the exception of Parent PLUS loans, which makes federal loans an ideal way to borrow for young students who haven’t yet established a credit history.
How to Apply for a Student Loan
To apply for any kind of federal financial aid, students must fill out the Free Application for Federal Student Aid (FAFSA) by the deadline preceding the academic year of enrollment — usually the end of June. However, each college or university may have its own deadline, so be sure to check with the schools you’re considering attending.
The complete application can be filled out online. Before you begin, you’ll first need to create a Federal Student Aid ID (FSA ID). And if you’re a dependent student borrower, your parent or guardian will also need to create one. These allow you to “sign” the online documents.
Once you have your FSA IDs, gather the following documents:
- Social security numbers or alien registration numbers
- Federal tax information or tax returns
- Records of untaxed income, such as child support or life insurance
- Cash, savings, and checking account balances
- Record of investments, other than the home in which you live
Then visit the online FAFSA application and follow the prompts.
State Loans
State loans are offered through various state-sponsored programs, including state agencies and state-sponsored nonprofits. They’re usually restricted to state residents or students enrolled in state colleges and universities.
While they stand separate from federally subsidized loans, state governments typically offer better terms and conditions than private loans; they’re generally similar to those for federal Direct loans. Even better, some state loan programs offer state-specific loan forgiveness options for students who remain in the state after graduation.
Although state resources aren’t as deep as those of the federal government, they’re definitely a resource worth checking into before turning to private borrowing. The interest rates will be lower for most borrowers and typically remain fixed for the life of the loan. Further, state loans provide flexible repayment options and require no credit check.
Programs vary from one state to another, and some states have discontinued their lending programs. But there are still many states that continue to offer government-sponsored loans. For the most accurate and current information about any state-specific aid available to you, contact your state’s department of higher education. Or, to get a general idea of what’s available in your state, visit the state-by-state list on The College Investor.
It’s also worth noting that in addition to loan programs, states typically offer a wealth of grants and scholarships.
Institutional Loans
Depending on your college, your financial aid package might include institutional aid in addition to federal aid. Institutional aid comes from the college itself and usually includes grants and scholarships. However, some colleges and universities offer their own loan programs. These are provided as a way to help bridge the gap when state and federal aid falls short of covering the total cost of education at the college.
To find out what kind of institutional aid you qualify for, including institutional loans, you’ll need to submit a FAFSA. However, some colleges additionally require a form called the CSS Profile, which dives deeper into your family’s financial situation. If your school requires it, you can find the form on the College Board’s website. Unless you have a fee waiver, completing the form costs $25 for your first school and $16 for each additional school.
So be sure to reach out to your college’s financial aid department to find out if it requires the CSS Profile or any other additional school-specific forms. For example, you might need to apply separately (from the FAFSA) for any grants or scholarships offered by your college. Consulting directly with a financial aid officer at your school will ensure you uncover all the opportunities for institutional aid.
Private Loans
Private loans aren’t issued, subsidized, or processed by the government. Rather, they’re issued by private lenders — typically banks. And while refinancing your student loans with a private lender after graduation can yield some benefits, including lower interest rates for the most creditworthy borrowers, there are few advantages to borrowing private loans while in school.
First, to qualify you must have excellent credit. This makes private loans a barrier for most undergraduate students who haven’t yet established a credit history. Second, most private loans don’t have repayment programs should you fall into economic hardship. And while some have deferment or forbearance options, they’re usually much shorter time limits than with federal loans. Third, most private lenders cap the amount you can borrow at the total cost of attendance minus any other financial aid. This gives them few advantages over PLUS loans, which have the same borrowing limits and come with access to federal student loan repayment options.
Worse, as with federal loans, if you find yourself unable to repay you won’t have the option of bankruptcy, as student loan debt isn’t dischargeable under most circumstances. Although private loans don’t come from the federal government, they’re still considered student loans under bankruptcy law. And if you opt for a variable interest rate, you could end up paying exorbitant amounts with no way out. For example, the interest rate on my graduate school private loans is twice that of my federal student loans.
So be sure to weigh the pros and cons of private student loans before borrowing one to finance your education. And be sure to max out all federal, state, scholarship, grant, and work-study options before resorting to a private loan.
As of 2020, the amounts you can borrow from some of the top private student loan lenders are:
- SoFi: The school-certified cost of attendance
- CommonBond: The total school-certified cost of attendance, up to $500,000
- Earnest: The school-certified cost of attendance
- Citizens One: The school-certified cost of attendance, minus financial aid, up to $100,000 for undergraduates
- LendKey: The school-certified cost of attendance, minus other financial aid
Tax Rules for Student Loans
Although repaying student loans is no one’s idea of a good time, fortunately, there’s a tax advantage that can help ease some of the sting: the student loan interest deduction. Even better, it applies to all types of loans — federal, state, institutional, and private. As long as the loan was used to pay for qualified education expenses at a qualifying institution, it counts.
Qualified education expenses are those included in a school’s cost of attendance: tuition, room, board, books, and fees. And a qualifying school means an accredited post-secondary educational institution eligible to participate in a student aid program administered by the ED.
Eligibility for the deduction depends on your filing status and income. It begins to phase out if your individual modified adjusted gross income (MAGI) is above $65,000 and is eliminated entirely if it’s more than $80,000. If you’re married filing jointly, it phases out at $135,000 and disappears at $165,000. The Internal Revenue Service (IRS) defines MAGI as your adjusted gross income (AGI) before subtracting the student loan interest deduction.
Additionally, to claim this deduction, you must meet the following criteria:
- You cannot be married and file separately.
- The loan must be a qualified loan, meaning it was taken out to pay for education-related expenses for yourself, your spouse, or your dependents from a lending institution (not a relative, a friend, or your employer).
- You must be legally obligated to repay the loan.
- The student must have been enrolled at least half-time in a qualified degree or certificate program.
- You cannot be eligible to be claimed as a dependent on another taxpayer’s return.
The amount borrowers can deduct is capped at $2,500. But, if you meet the qualifications, the student loan interest deduction helps you reduce the total amount of your taxable income — especially since it’s an above-the-line deduction, which means you don’t have to itemize to get it.
To claim the deduction, add it as an “Adjustment to Income” on Schedule 1 of Form 1040. Your student loan servicer (for federal loans) or lender (for private loans) is required to issue you a Form 1098E to show the annual amount of interest paid, which you’ll include when you file your tax return.
Although this is the only tax advantage specific to repaying student loans, there are other education-related tax credits and deductions available to those who are currently paying tuition.
Repayment Plans
Federal Direct loans offer a variety of repayment options, each of which varies by length, eligibility criteria, and the amount you’re required to repay. Some repayment programs — those involved in income-driven repayment — even qualify you to have your loans forgiven after 20 to 25 years of making income-based payments. Additionally, if you enroll in an IDR plan and work full time in a public sector or nonprofit job, you can even qualify to have your loans forgiven in 10 years through the Public Service Loan Forgiveness (PSLF) program. Also note that you’re not stuck with any particular repayment plan. If your circumstances change at any time, you can always speak with your loan servicer — the agency that manages your billing and payments on behalf of the ED — about switching repayment plans.
Standard Repayment
After you graduate, leave school, or drop below half-time enrollment, your loans automatically enter into repayment following a six-month grace period. And unless you enroll in a specific repayment plan, they’ll automatically default to the standard 10-year repayment plan. This means your monthly payments will be calculated based on a fixed, 10-year repayment schedule.
If you can afford your monthly payment, in most cases the standard plan allows you to pay back the least amount. Although stretching the repayment term beyond 10 years will lower your monthly payment, you’ll end up paying more in the long run due to accumulating interest.
Graduated Repayment
The graduated repayment plan resembles the standard plan in that it has a 10-year limit, but it has graduated payments that increase every two years. No payment under this plan can ever be more than three times the amount of any previous payment. But the increase has no other limit, including no basis on your income. Rather, it continually rises to an amount that ensures the loans will be paid off within 10 years. This can benefit students who expect to enter their career field with lower pay but gradually rise in income over the next 10 years. However, in the final years of repayment, the monthly amount can be immense.
Extended Repayment
Borrowers with more than $30,000 of Direct loan debt who did not have an outstanding loan balance of any kind on or before October 7, 1998, are eligible for extended repayment. The plan can stretch out for up to 25 years, and payments can be either fixed over the life of the loan or graduated, where they are lower at the beginning and then increase every two years.
As with the graduated plan, this can be helpful for borrowers who expect their incomes to rise over time. But, unlike the graduated plan — because you’re extending the repayment term — you’ll end up paying back more than you would have on the standard repayment plan due to accumulating interest over a longer term.
Income-Driven Repayment
There are four IDR plans: Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Each of them can help borrowers who are struggling to make their monthly payments by calculating the amount borrowers have to repay each month as a certain portion of their discretionary income. Further, enrollment in an IDR plan is the only way to qualify for student loan forgiveness, including PSLF.
However, despite these similarities, the plans vary in the details. The differences include who qualifies, how discretionary income is calculated, caps on how much you have to repay each month, and how long you have to make payments before your loans can qualify for forgiveness.
Pay As you Earn (PAYE)
Under the PAYE plan, your monthly payment is set at 10% of your discretionary income, but never more than you would have to repay on a standard plan. For PAYE, “discretionary income” means the difference between your annual income and 150% of the current year’s poverty level in your state of residence for a family of your size. The repayment term for PAYE is 20 years, after which any outstanding balance becomes eligible for forgiveness. To qualify, borrowers must show partial financial hardship. For PAYE, partial financial hardship means the amount due on your loans on the standard 10-year repayment plan exceeds 10% of the difference between your AGI and 150% of the poverty line for your family size and state of residence.
Revised Pay As You Earn (REPAYE)
Your monthly payment under REPAYE is also calculated as 10% of your discretionary income, but unlike PAYE, there is no cap. This means there’s no limit to how much your monthly payment could be. No matter how high your income rises, you’ll always pay 10% of your income until your loan is fully paid off. Additionally, your repayment term will be 20 years if you borrowed for undergraduate studies only, but 25 years if you also borrowed for graduate school. Unlike PAYE, there is no financial hardship requirement.
Income-Based Repayment (IBR)
Like PAYE, eligibility for IBR is dependent on financial hardship. For IBR, financial hardship means the required payments on the standard 10-year plan exceed 15% percent of your discretionary income — calculated as the difference between your AGI and 150% of the poverty line for your family size and state of residence. However, once a borrower qualifies, they can stay on the plan no matter how high their income rises and will never pay more than they would be required to repay on the standard plan. This is particularly advantageous for borrowers with very high amounts of debt, such as graduate and professional students, who are looking to have their loans forgiven. The required number of payments before becoming eligible for forgiveness is 20 to 25 years, depending on when the money was borrowed.
Income Contingent Repayment (ICR)
This is the only repayment plan available to Parent PLUS borrowers. However, the terms are the least favorable of all the IDR plans. The monthly payments are calculated as the lesser of either 20% of the borrower’s discretionary income — defined for ICR as the difference between one’s AGI and 100% of the poverty line for one’s family size and state of residence — or the amount that the borrower would pay each month over a 12-year period. Additionally, if the calculated payment is not enough to cover the amount of interest that is accruing on the loan, then the interest is capitalized (added to the principal balance). That means borrowers in an ICR plan could end up paying interest on top of interest. However, the amount of unpaid interest that is capitalized cannot exceed 10% of the total loan balance. With ICR, borrowers must make 25 years of payments before becoming eligible for forgiveness.
Deferment & Forbearance
Deferment and forbearance options allow you to temporarily suspend or reduce payments during times when making payments would be too difficult.
Deferment
Deferment is a temporary postponement of student loan payments. It differs from forbearance in that deferments prevent the accrual of interest on Direct subsidized loans and Perkins loans. However, interest is added to the principal balance for unsubsidized loans. Academic deferments are automatically available for students enrolled at least half-time in school. And those deployed for active military duty can qualify for a military deferment.
Additionally, borrowers facing unemployment or low income can qualify for an economic hardship deferment. However, in these cases, it may be more advantageous to enroll in an IDR plan. If you’re unemployed, your monthly payment is calculated at $0, but each “payment” still counts toward eventual loan forgiveness.
Forbearance
If a borrower doesn’t qualify for a deferment, or their allowable time-limit on deferment has run out, forbearance allows payments to be suspended or reduced. It differs from a deferment in that interest continues to accrue on all loans — subsidized or otherwise — during the forbearance. At the end of the forbearance, the interest is capitalized, increasing the total amount owed.
There are two types of forbearances available. Discretionary forbearances are granted at the discretion of the lender in the event of a qualifying financial hardship or illness. Mandatory forbearances are required to be granted by lenders under the following circumstances:
- The borrower is serving an internship or residency in the medical or dental fields and meets a specific list of related criteria
- The borrower is serving in a national service program, such as AmeriCorps or Senior Corps, for which the borrower has received a national award
- The borrower works as a teacher in a capacity that qualifies him or her for the loan forgiveness program for teachers
- The borrower qualifies for partial loan repayment under the student loan repayment program sponsored by the Department of Defense
- The borrower is a National Guard member who is activated into service by the governor and does not qualify for military loan deferment
As with deferments, because of the impact of accumulated interest on your loans and the benefit of potential loan forgiveness, it’s best to explore an IDR plan before resorting to forbearance.
Forgiveness, Cancellation, & Discharge
Under certain conditions, you can qualify to have your loans forgiven, canceled, or discharged. This means your loans are effectively gone — you are no longer obligated to repay.
Forgiveness
Forgiveness typically comes after making a required number of payments in an IDR program. At the end of your repayment term, you qualify to have your outstanding balance wiped out. Be aware there are some disadvantages to student loan forgiveness, the biggest of which is that you’ll owe income tax on the amount forgiven.
If you work full time in a public sector or nonprofit job while enrolled in IDR, you can qualify for Public Service Loan Forgiveness. This program allows your loans to be forgiven after 10 years of payments. (Note that in neither circumstance are the payments required to be consecutive.) Even better, in addition to the shorter repayment term, the borrower isn’t required to pay income tax on the forgiven amount.
Additionally, although not technically “forgiveness,” a variety of jobs qualify for career-specific loan repayment assistance plans. These are federal, state, or private programs that repay either a portion or all of a borrower’s student loans in exchange for qualifying work.
Cancellation or Discharge
Although different programs are labeled either “cancellation” or “discharge,” they effectively mean the same thing. As with forgiveness, when a loan is canceled or discharged, the borrower has no further obligation to repay. However, a discharge could happen immediately and the borrower isn’t required to pay income tax on the canceled amount.
The circumstances for which student loans can be canceled or discharged include:
- Qualifying Employment (for Perkins Loans). Public servants who work as teachers, librarians, nurses, social workers, firefighters, law enforcement officers, and public defenders as well as those serving in the military, Peace Corps, or AmeriCorps VISTA can have their Perkins Loans canceled if they meet certain conditions. Typically this means working in an area of greater need — such as teaching in a low-income school, in special education, or in a field with a shortage of qualified teachers — for a specified number of years. For more details and information on how to apply, visit the ED’s Perkins Loan Cancellation information page on StudentAid.gov.
- Closed School. Borrowers who attend a school that closes for any reason before the borrower can graduate are eligible to have their loans discharged.
- False Certification. If your school falsely certified your eligibility to receive your student loans, including through identity theft, or lied about your ability to benefit from your educational program, you can have your debt discharged based on false certification. However, loans may not be forgiven because a student fails to graduate, is merely dissatisfied with the institution, or is unable to find work in his or her chosen field.
- Unpaid Refund. Borrowers who left school and were not paid a refund they were rightfully due are eligible for a discharge of the unpaid amount because they never received it.
- Borrower Defense to Repayment. If your school misled you or violated state law directly in relation to either your federal loans or the educational services provided by the school, you can apply to have your federal loans discharged.
- Total and Permanent Disability. Borrowers can have their student loans canceled if they meet the conditions of being permanently and totally disabled. This means they’re disabled to the extent they can no longer work and, therefore, can never make loan payments, even under an IDR plan. A doctor’s certification is required.
- Death. Loans are discharged for deceased borrowers upon the receipt of a certified death certificate. Additionally, Parent PLUS borrowers can have their loans discharged if the student on whose behalf they borrowed the loan dies.
- Bankruptcy. Borrowers who file for bankruptcy can only have their loans forgiven if they can furnish hard evidence that convinces the judge paying off the loans will cause “undue hardship.” Courts have interpreted this to mean that at one’s current level of education and ability there is no possible way they’ll ever be able to pay off the loans, even under an IDR plan. This standard is generally impossible to meet since IDR plans can calculate your monthly payments as low as $0. Thus, it is exceptionally rare for a borrower to succeed in having their student loans discharged in bankruptcy. For more details, visit StudentAid.gov.
Defaulting on Student Loans
Most federal student loans go into default when the borrower fails to make payments for 270 days, or roughly nine months. Federal Perkins loans can go into default immediately if you don’t make a payment by the due date, as can private loans.
If you’re unable to make your loan payments, you should exhaust every other possible option before defaulting. Once you’re in default, your loan becomes due in full. If it’s through a private lender, your loan may be referred to a collection agency or the lender may pursue legal action to recover the amount due.
With federal loans, you’ll no longer have access to federal repayment programs. You’ll also owe any unpaid interest and any fees associated with collecting on the amount. Worse, the federal government has extraordinary powers to collect, including garnishing your wages or social security and seizing your tax refunds. And, unlike a private lender, they can do all of this without having to go through the process of suing you.
If you default on a private loan, your only recourse is to attempt to settle the debt. You can either negotiate with your creditor yourself or hire a reputable debt settlement agency or an attorney who specializes in student loans to negotiate on your behalf.
When it comes to federal student loans, there are three ways you can get out of default: pay the balance in full, go through the process of student loan rehabilitation, or consolidate your loans.
If you can’t pay the balance in full, consolidation is the fastest route out of default. In order to qualify, you must make three consecutive on-time monthly payments and agree to repay your loans under an IDR plan. However, there is one major drawback to this method: consolidation will not remove the “default” line from your credit report.
Student loan rehabilitation is the only way to do that. To rehabilitate your loans, you must make nine monthly loan payments within 10 consecutive months. Mandatory payments made through garnishment or seizure do not qualify. Your payments will be calculated as 15% of your discretionary income, which is the difference between your AGI and 150% of the poverty line for your family size and state of residence. You can only rehabilitate your loans once, so if you opt to do that, make sure you can afford the payments.
Final Word
Student loans provide access to an education for the majority of Americans who can’t afford to pay for college out-of-pocket. But if you’re not careful with how much you borrow — or who you borrow it from — borrowing for college can end up crippling your future instead of enhancing it. And, unfortunately, the majority of student loan borrowers are ill-informed about their options, according to a 2016 study published in the Journal of Financial Planning and Counseling.
I know this from personal experience. Not only do I have more than 12 years experience working in higher education, but I also made my own ill-informed borrowing decisions to finance my way through graduate school. And the No. 1 piece of advice I’d give new borrowers is to carefully weigh your future career prospects against what you’re considering borrowing.
According to the UCLA survey, more students than ever are entering colleges and universities to pursue a passion. In fact, the survey found that was the No. 1 reason students cited for attending college, over and above getting a well-paying career. But if you overborrow for school, repaying your student loans could drive you to pursue a job for the money, not the love of it. According to a 2015 study by American Student Assistance, an educational nonprofit, more than half of student loan borrowers say their debt has impacted their career choices.
So before you borrow, think carefully about the return on your investment. And if you’re truly passionate about pursuing a particular career — one that may not enable you to comfortably pay off your student loans — consider attending a less expensive school or one that offers a better aid package. And if your dream career requires a four-year degree, consider attending a community college for the first two years and then transferring to a four-year college or university.
And always be sure to exhaust every other resource you can to reduce or avoid student loan debt.
What are your top concerns when it comes to borrowing student loans?
