When I say “Student Loan Forgiveness Program,” too many people hear “Get out of debt free card.” In all the political and media discussion of student loans, it can be tough to cut through the noise to understand exactly what these programs are. What is the best approach to paying off student loans?
A growing trend among millennials is the assumption that student loan forgiveness is the best way to take care of student loans. For too many, this has just become part of their financial plan.
The truth is for the clear majority of you there is a MUCH better strategy you can employ for getting rid of your student loans. I have nothing against these programs existing, but for your sake I don’t want them to be your goal in paying off your loans.
In this post, I hope to help you understand more of the ins and outs of these programs using two of the most popular ones as examples, and to convince you that they don’t need to be your plan A.
What Are Student Loan Forgiveness Programs and How Do They Work?
A student loan forgiveness program is simply a government program that, under certain conditions and with the right qualifications, will forgive or cancel the remaining balance of a borrower’s student loans. Sounds great, right? Well, keep reading…
For this discussion, we’ll focus on the Teacher Loan Forgiveness (TLF) and the Public Service Loan Forgiveness (PSLF) programs.
Teacher Loan Forgiveness Program (TLF)
The Teacher Loan Forgiveness program is available to teachers serving low income families in one of a few qualifying environments. These include schools in districts that qualify for Title 1 services, schools with at least 30% of the student body receiving Title 1 services, other schools selected as qualified due to low income situations, or schools on Indian reservations.
The basics of it are that if you work as a teacher in one of these environments for 5 consecutive, complete years, you are eligible to have up to $17,500 of your Direct or Stafford Loans forgiven. The TLF does not forgive any PLUS loans you have received. There is a Teacher Cancellation Program for Perkins Loans, but it too requires 5 years with similar stipulations.
Think About It
There are several things to me that are troubling IF you’re a teacher counting on using this program to get you out of student loan debt.
First off, we’re talking about signing yourself up to be in debt for 5 years! That’s a long time, and a lot can happen during that time! What happens if you’re just plugging along, making your minimum loan payments when suddenly you’re informed that your position has been cut? Or what if you are fired? It happens to young teachers all the time. Then you potentially lose your string of consecutive years built in the TLF program.
What if better job opportunities come to you during that 5 years, or you decide to take a different career path? Will you take that leap knowing that you’ve already invested time into qualifying for the TLF program?
Also, notice that the maximum amount you can be forgiven is $17,500. For those with student loans in America today, the average balance is $49,000. Sure, $17,500 is a nice chunk of that, but are you willing to let the loan hang around for 5 years just so you can be forgiven of a portion of it rather than the whole?
If you’re going to be making payments the entire 5 years to potentially not even get the reward of your entire remaining balance being forgiven, wouldn’t you rather go ahead and get the loans knocked out sooner? More on this later…
Public Service Loan Forgiveness Program (PSLF)
The Public Service Loan Forgiveness Program (PSLF) exists for those who work for the government, a 501(c)(3) non-profit organization, or a non-profit that provides certain public services. Anyone working for these employers who makes 120 “qualified payments” on their Direct Loans can have their remaining loan balance forgiven. Note that this program only applies to Direct Loans, not Federal Family Education Loans (FFEL) or Perkins Loans.
The 120 qualified payments do not have to happen consecutively, but must happen while employed at one of the specified types of employers in order to count. Also, if a payment is made more than 15 days past the due date, it doesn’t count.
Think About It:
As I’m sure most of you already figured out, 120 qualified payments take 10 YEARS of time. Just think about that for a second. 10 years of having this stinking loan follow you around wherever you go and tapping on your shoulder every pay period. Doesn’t sound fun.
Since this program only applies to Direct Loans, you’ll have to consolidate your FFEL and Perkins Loans into a Direct Consolidation Loan to get them under the forgiveness umbrella. Even then, none of the payments you’ve previously made on them count toward your 120 qualified payments. You’re right back at square 1 after consolidating.
One of the biggest misconceptions people have about this program is that you are automatically qualified for it by working at a qualified employer and making payments that meet the guidelines. You must first submit an Employment Certification form to certify that your employment fits the PSLF standards. All payments made on loans before this form’s submission and approval don’t count toward your 120 qualified payments. Sadly, lots of people have figured this out several years into repayment.
Lastly, and perhaps most important of all, to utilize this program you must be in government work or the non-profit sector for ten years. In many fields, you would have much higher income potential in the private sector. However, many are staying in the public service world and shunning these opportunities for fear of not having their loans forgiven. That’s like turning down a pay raise so you don’t enter a higher income tax bracket! It makes no sense!
OK. Are your eyes rolling back into your head yet? Anyone else’s blood pressure starting to rise just thinking about all of this? The fact is that these programs aren’t a strategy at all. They’re a safety net for people in extreme situations, but for most of you, I think you can be debt free in much less than 5 or 10 years!
Why There’s A Better Way
Again, I’m not against anyone using the loan forgiveness programs if they find themselves in a situation where it’s needed. What I’m adamantly against is you making it your whole plan from the start. Here’s why I think you can do better and should do better:
Morally, You SHOULD Pay It All Back
I promise I’m not some old man pointing his finger at you calling you a lazy entitled brat. I’m you. I’ve been through the process of paying off student loans. The fact is, when you borrowed the money, you entered a binding agreement and gave your word that you would pay it back.
It’s not about someone oppressing you or some system trying to get money from you. It’s a simple agreement. Your word is your integrity. If you gave your word that you would pay a loan back, the right thing to do is to pay it back in full.
Speed of Payoff
I understand that some of you have way more student loans than others. However, I think the vast majority of you could pay off them off in 2 to 5 years rather than the 5 or 10 year time span of forgiveness programs IF you made it the singular focus of your money management. All it takes is a clear goal, a clear plan, and a whole lot of passion.
The attitude that many planning on utilizing student loan forgiveness programs take is one that they’re stuck in their field. “Well I HAVE to keep doing this job, otherwise my loans won’t be forgiven.” This is a victim mentality that I want you to break!
YOU are in control of your life. You should feel free to advance your career in whatever direction you see holding the most potential for you!
If you’re planning to wait around for a decade to use one of these forgiveness programs, you could be losing a ton of money in lost potential earnings. I understand that some people feel a very noble calling to work in the government or non-profit worlds, and I’m not advocating that you’re wrong for staying there. But for a lot of you the truth is that you could probably make better money in a private sector job.
Deciding to pursue loan forgiveness will cause you to give up this potential advancement in your career in order to achieve your loan forgiveness. Why not pursue a career path of increasing income and paying them off faster yourself? Why hold yourself back for 10 years when you could’ve been climbing the ranks all that time?
Who SHOULD Use Loan Forgiveness?
When it comes down to it, the answer to this question is simply this: Hardly anybody.
As I said earlier, student loan forgiveness programs are a safety net for unusual situations, but a very poor Plan A.
Maybe you or a loved one are in a chronic medical situation that will require a lot of care and money for a long time. That will obviously strain your finances for years, so you need to be aware of how to participate in these programs. Any situation where you know that your family will be under financial strain and unable to pay more than loan minimums like this puts you in position to use these programs as needed.
Also, those of you I mentioned earlier who feel a particular calling or connection to your job may need to consider these programs as options IF there is little potential for income increases.
I won’t argue with you over what your career should be, but if it’s in something with an extremely low income potential, you need to know what you’re signing up for and avoid adding anymore loans to the mix (aka graduate degrees).
Many of you may respond to this with thoughts like “But you don’t get it! I can’t afford any more than the monthly minimum payments on my loans!” To you, I invite you to keep reading and to try what I recommend before painting yourself into that corner for good. I bet there’s a lifestyle you can cut or a practice you can start, like budgeting, that can change your situation.
A Better Plan
So what’s the better plan?
Most people don’t realize how much money they’re wasting simply by not being intentional with it. For most of you, following these straight forward steps, in order, with the clear focus of paying off your debt will get you debt free in 2-5 years or less.
Budget Every Single Dollar
A written (or typed) plan for your money before it’s paid to you could be the most stress reducing activity you can do. Budgeting is just another word for “planning,” and doing it will help you make all your dollars work for your goal. This applies to people with regular pay and inconsistent incomes.
Save for Minor Emergencies
Inevitably, while you’re drastically cutting your lifestyle to get your debt paid off, you’ll have some unexpected mishaps come up with the car, the house, or someone going to the doctor. Therefore, I recommend saving $1,000 before beginning to pay extra on your debt so that you don’t have to rely on a credit card when surprises come up. You can come back and beef this emergency fund up to 3-6 months’ worth of expenses once the debt is gone.
It’s so nice to have some cash between you and a bad day!
Cut Your Lifestyle and Put Every Extra Dollar Toward Debt
Now it’s time to flat out get it in gear. You’ve saved some cash, you’re budgeting your money, and all that’s left to do is put everything you can into your loans until they’re paid off. You don’t need repayment plans, forgiveness, or cancellations. You just need a couple years of working on nothing else so you can be set up for a lifetime of freedom.
Take the step to identify that the debt is yours to pay. Then, get motivated by wanting to be free! Don’t settle for your money getting sent away hundreds of dollars at a time to Navient or ACS or whoever else for the next 10 years! You can be done quicker, and get on with your life!
The bottom line is simple. Don’t plan your life around loan forgiveness. Student loan forgiveness programs are an ok safety net for a few situations, not a hammock for the masses. Pursue higher income, greater opportunities, and better control of your behavior. Pay off debt, save, and invest. You won’t be a millionaire one day looking back and giving all the credit to having your student loans forgiven.
How much student loan debt have you paid off or are you planning to pay off?
Author Bio: Right Hand Money Man is a millennial who, along with his wife, devoted the first two years of their marriage to getting out of debt and on a strong financial footing. His education is in finance, but his heart is for people. He devotes a ton of energy to helping people have clear vision for their finances and develop manageable steps to achieve it!