Potential Dangers Associated With Student Loan Forgiveness

Potential Dangers Associated With Student Loan Forgiveness

Please welcome our latest guest writer… Sherley Alaba is an undergraduate student. She loves to write about the top trends in finance   and lifestyle. Follow @SherleyAlaba for more updates….

Amongst all the things that could possibly go wrong with the Trump administration, critics say that he might actually be good for the education department. And no, it’s not the sudden increased interest in Canadian universities. Rather, it’s his policies on student loan forgiveness. Higher monthly payments, and a reduced number of years before which you can seek forgiveness. Sounds interesting! But before that, let’s take a look at some of the concerns associated with student loan forgiveness that you should be aware of to make better decisions in the future.

Keep waiting for forgiveness

Yep, that’s right, you’ll have to wait for a decade – or longer – to actually be granted forgiveness! If you’re applying for a student loan through Public Service Loan Forgiveness (PSLF), you’re going to be eligible for forgiveness after no less than 120 qualifying payments, or 10 years. Alternatively, if you go for an income-based repayment plan such as Pay As You Earn (PAYE), you’re going to have to wait until 20 or 25 years of qualifying payments to be legible. Whichever the case, it’s way too long a period to have outstanding student loan debt lingering in your life. In fact, if you can afford to pay out your loan in that length of time, which shouldn’t be too hard considering the length, you’re better off paying the loan as fast as you can instead of opting for such payment methods to complicate your life and block your finances when you could make use of them elsewhere.

Negative amortization

Negative amortization – or simply put as an increase in the principal amount of a loan as a result of failure to cover the interest due, can lead you to paying a bit more for no real reason. Most government student loan forgiveness programs demand that you get on an income-based repayment plan first before actually being eligible for forgiveness. The main attraction that these plans offer is that they enable you to significantly reduce your monthly payments – sometimes as low as to $0 per month. Sounds pretty cool! However, interest charges on the principal loan continue to accumulate regardless of whether your monthly payments aren’t high enough to cover them. Now, the downside of this negative amortization on your student loans is that if you end up paying your principal balance before actually being eligible for forgiveness (let’s say you had an increase in income and could restructure faster payments), you’ll possibly end up paying more interest.

More taxation

So let’s say your loans have been ‘forgiven’ and you end up saving a couple of thousand bucks – yay! On the contrary, that money that you’ve saved directly translates to income and is thus liable to being taxed. The amount can be rather overwhelming when you’re filing your tax returns, especially If you’re not expecting something that’s too ‘big’. Added to that, the IRS is nonetheless a lot more inflexible than the Department of Education for you to buy some sort of considerations. However, unless you’re earning forgiveness though PSLF, you’re probably safe.

Has anyone ever received it yet?

Now that’s an interesting question! PSLF was institutionalized in 2007, the 20-year forgiveness term for income-based repayment plans in 2014, and PAYE only applies to new borrowers as of 2007. In other words, none of these systems has been in place for anyone to have actually successfully been granted student debt forgiveness. That doesn’t, in any case, imply that the system is ineffective, but it does raise a certain degree of uncertainty especially if changes are made before the time is ripe.

 Author Bio:

 Sherley Alaba is an undergraduate student. She loves to write about the top trends in finance   and lifestyle. Follow @SherleyAlaba for more updates.