When it comes time to repay your student loans after college or grad school, you will find there are many repayment plans to choose from—and most are quite complicated to understand. One hot button phrase that is frequently used in the media is student loan forgiveness. In this definitive guide, we’ll sort out the facts on forgiveness plans, and help you assess whether student loan forgiveness might be an option worth pursuing.
Student Loan Forgiveness At-a-Glance
In a nutshell, student loan forgiveness is when the government frees you from your remaining federal student loan debt after you make a specific number of qualifying, on-time payments while enrolled in certain payment plans and/or programs. Private student loans aren’t eligible. It can take anywhere from 10 to 25 years for this to happen, and in some cases, the amount that is forgiven is taxed, which is important to plan ahead for.
These programs are littered with red tape and tricky qualifications. For example, if you don’t recertify your income every year, you could be kicked out of the program or you could have your progress toward forgiveness reset. Furthermore, if you pay a few months of student loan bills in advance (—paid ahead status”), then the months you don’t submit payments—even though you don’t have a bill—may not qualify toward your goal, and your progress may be reset.
This table provides a summary of the programs available, and some of their main features:
|Public Service Loan Forgiveness (PSLF)
|Income-Based Repayment (IBR)
|Pay As You Earn (PAYE)
|Revised Pay As You Earn (REPAYE)
|Income-Contingent Repayment (ICR)
|Loans older than 2007
|Better than REPAYE for married borrowers
|Better than PAYE for some single borrowers
|Minimum time to achieve forgiveness
|20 or 25 years (depends on when you borrowed)
|Undergrad: 20 years Grad/professional: 25 years
|Monthly Payment Cap
|Depends on repayment plan chosen
|10% of discretionary income (15% for older loans)
|10% of discretionary income
|10% of discretionary income
|It’s complicated. (see detailed section on ICR)
|Work certain jobs and enroll in certain payment plans
|Have high student debt relative to your income
|Have high student debt relative to your income
|Parents must consolidate loans first
|Likely tax burden?
Public Student Loan Forgiveness (PSLF)
The Public Service Loan Forgiveness program encourages college graduates to find jobs in the public or nonprofit sectors—jobs that are often overlooked following graduation. With Public Service Loan Forgiveness, eligibility is not about your job title, it’s about the company or organization that you work for. After meeting all the qualifications listed below and having your loan forgiveness application approved, the government will forgive your remaining loan balance. According to the IRS, the amount that is forgiven is not subject to income tax.
If you can qualify for Public Service Loan Forgiveness, it’s a far better option than the others listed in this guide—you can achieve forgiveness in half the time. That said, just 206 people across the country have been released from their debt through the program. Last year was the first year of eligibility, and as of September, about 41,000 borrowers applied for forgiveness. That means less than 1 percent of people who applied for public service loan forgiveness actually got it!
- You must work full-time for one of the following while you are enrolled in the program:
- You must have federal Direct Loans. If you have older Perkins or FFEL loans, you need to do a direct consolidation loan before you can enter this program.
- You must repay your loans on an income-driven repayment plan—you can read about these plans later in this guide, or in our federal student loans guide.
- You must make 120 qualifying payments.
- You must submit the Employment Certification for Public Service Loan Forgiveness form. The program requires this form for every year of service. Be sure to keep records of this form each year. There have been early horror stories of borrowers being denied forgiveness due to a paperwork error or missing the form for one year.
What to do if you’re not eligible for Public Service Loan Forgiveness
If you aren’t eligible for PSLF, there are still other options to explore to reduce the overall cost of your eduction. Student loan refinancing for example. Refinancing with a private lender enables qualified borrowers to select a repayment length that they are comfortable with and possibly to lower their interest rates. Purefy has a great tool that lets you easily compare rates from multiple lenders.
If your credit has a few dings, then we advise you stick to the federal standard repayment plan if possible. The standard repayment plan is the default federal repayment plan in which you’ll make equal monthly payments for 10 years. If you can afford the standard plan, you’ll pay less in interest and pay off your loans faster than you would with other federal repayment plans.
On the other hand, if you can’t afford the standard payment, there are additiional federal repayment plans, including four income-driven plans that allow forgiveness at the end of the term regardless of your employment situation. These four plans base your monthly payment on your discretionary income, which the government defines as the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state. Here’s an overview of each one.
Income-Based Repayment (IBR)
Income-Based Repayment is an option for borrowers who expect to stay in low-paying fields but have a large amount of student loans. A general rule of thumb is if your current student loan debt is larger than your current annual income, and you don’t expect your annual income to increase drastically over time, then proceed with IBR. If your student loan debt is less than your annual income, and if you have the capacity to do so, then it’s usually best to pursue the standard repayment plan or refinancing—these will save you money in the long run.
You do need to have a low income relative to your student loan debt to qualify for Income-Based Repayment.
Through IBR, your student loan payments are capped at 10% of your discretionary income (or 15%, if you borrowed prior to 7/1/14), and they will be recalculated every year. Your monthly payment will never be more what you would have paid on the 10-year Standard Repayment Plan (but you’ll usually pay more over time)
Your repayment term gets extended to 20 or 25 years (again, depending on when you borrowed), and at the end of those 20 or 25 years, any remaining balance will be forgiven. Unlike PSLF, loans that are forgiven under this program can be taxed as income. Keep this in mind when pursuing this program. That way, you’re not surprised by a potentially large tax bill.
If you are (or get) married, you can exclude your spouse’s income from consideration by filing taxes separately.
Pay As You Earn (PAYE)
Pay As You Earn (PAYE) is similar to Income-Based Repayment in that you could be eligible for forgiveness after a certain period of time. The biggest advantage of PAYE is that the government will cover 100% of the unpaid interest that accrues on subsidized loans in the first three years of repayment.
Another advantage is that PAYE doesn’t penalize people who borrowed before July 2014—your payment is capped at 10% of discretionary income and your loans are forgiven after 20 years of repayment, regardless of when you borrowed. Just like with IBR, your payment will never exceed what you would have paid on the standard 10 year plan.
Like Income-Based Repayment, you need a low income relative to your student loan debt to qualify for PAYE.
PAYE is also a solid option for married couples—you can exclude your spouse’s income from your monthly payment determination if you file taxes separately.
Really, we can’t see any reason to choose IBR over PAYE—the only exception would be if you borrowed before 2007, in which case PAYE is not an option for you.
Revised Pay As You Earn (REPAYE)
Revised Pay As You Earn (REPAYE) works much the same way as Pay As You Earn. One difference is that while undergraduate loans are forgiven after 20 years, REPAYE doesn’t forgive graduate school loans until after 25 years. Again, this amount may be subject to taxation.
Unlike IBR and PAYE, the main perk of REPAYE is that there is no income eligibility for this plan. Anyone with eligible loans can apply. However, you could end up making large monthly payments on this plan if you start making good money. The payments are 10% of your discretionary income, but they aren’t capped like they are in IBR and PAYE. So, they could even exceed the amount you would pay on the standard plan.
Those who are married also suffer under REPAYE—whether you file your taxes jointly or separately, your spouse’s income will be included in your payment calculations.
That said, REPAYE may be a better option for some single borrowers who don’t anticipate a large increase in income. This is because in addition to covering 100% of unpaid interest on subsidized loans in the first three years, the government will also pay 50% of unpaid interest that accrues on subsidized loans after the first three years and on unsubsidized loans during all periods.
Income-Contingent Repayment (ICR)
While Income-Contingent Repayment might not lower your payments as much as other plans, it does have one advantage. ICR is the only income-driven plan available to borrowers with Parent PLUS loans. If you have Parent PLUS loans, you can apply for ICR as long as you consolidate them first.
With ICR, you’ll either pay 20% of your discretionary income or what you’d pay on a fixed 12-year plan, whichever is less. You can exclude your spouse’s income from consideration by filing taxes separately. After 25 years of on-time payments, you’ll get the rest of your loan balance forgiven. As with the other income-driven plans, the forgiven amount may be taxed.