The Big Problems with Student Loans

There is currently $1.7 trillion of student loan debt in the United States. That’s more than all credit card debt and auto debt combined. This debt is also one of the worst kinds of debt a person can have. There are 3 big problems with student debt:

  1. Student loans are very difficult to refinance to take advantage of lower interest rates.
  2. It’s too easy for students to sign up for large loan amounts they are unable to repay. 
  3. You cannot discharge student loan debt – even in bankruptcy.

Student Loan Payments & COVID

The good news is that 2021 might be different. With COVID-19, student loans were among the first financial hardships that were addressed in the stimulus legislation (the CARES Act) back in March 2020. Lawmakers recognized that individuals with student loans would be at high risk of poverty. As a result, lawmakers passed legislation which essentially “paused” payments on student loans between March 13th, 2020 and January 31st, 2021. This meant you could skip payments with no interest accruing and no penalties.

Pro Tip: If you are still able to pay your student debt, you should! The federal government also lowered student loan interest rates to zero, so any payments made will be applied to your principal balance.  **This applies to all federal student loans owned by the Dept. of Education.

What is Student Loan Forgiveness

There are actually a few different terms that are often used together, with some differences.

  • Forgiveness or Cancellation is when you aren’t required to to pay your loans (often because of your job). 
  • Discharge is when you aren’t able to repay your loans (often because of disability or school closure). 

Types of Loan Forgiveness/Cancellation

There are actually 11 types of loan forgiveness, but some of them are very rare. To avoid confusion, we’ll focus on the most popular ones:

Program NameDescriptionEligibilityResource Links
Public Service Loan ForgivenessRemaining loan balance paid after you’ve made 120 qualifying monthly payments while working full-time for a qualified employerGovt. employees & non-profit employeesLearn More
Teacher Loan ForgivenessUp to $17,500 on Direct or FFEL LoansFull-Time Teachers with 5 consecutive academic years in low-income schoolLearn More
Closed School DischargeFederal Loan DischargeStudents whose school closed while enrolled, or soon after withdrawLearn More
Total and Permanent Disability DischargeFederal Loan Discharge & Payment AssistanceTotally AND permanently disabled studentsLearn More
Borrower Defense to RepaymentFederal Loan DischargeStudents whose school  misled them, engaged in misconduct, or violated state law related to the loan or the educational services providedLearn More & Apply
Discharge for Parent BorrowersFederal Loan DischargeThe student for whom you borrowed dies. The student’s school closed. Your loan was discharged in bankruptcy. Loan eligibility was falsely certified by the school, or through identity theft. MORE…Learn More
Contact your loan servicer for more information.

Will My Application for Forgiveness be Approved?

It’s good to set your expectation low, and not depend on loan forgiveness as the basis for your financial future. The number of loan forgiveness applications has increased dramatically over the last few years (3 million+ students are approaching eligibility), and very few are accepted. 

Also, the Higher Education Act, which began in 2008, has never been fully funded by Congress.

Here are a few hard statistics to keep in mind:

  • While 6.7% of student borrowers apply for loan forgiveness, only 0.3% of student debt is eventually forgiven.
  • Of all forgiveness applications received since the program’s inception in 2008, 43% still have yet to be processed.
  • Only 4.1% of all applicants receive a partial discharge of the remainder of their student loans, usually following several years of required payments.

How to Apply for Student Loan Forgiveness

Even with very low odds of approval, it is still suggested that every student apply for all types of aid they may be eligible for. The process is often quick, and there is never any cost to apply. Head on over to StudentAid.gov to learn more about loan forgiveness and to begin the application process. After all, what do you have to lose? 

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