Chasing after student loan forgiveness seems like an obvious decision. Student debt disappearing is far preferable to the painful process of repayment in full. However, if we look beyond the obvious, there are significant pros and cons to going after student loan forgiveness.
Student loan forgiveness comes in many forms. All federal loan borrowers can qualify for forgiveness from an Income-Driven Repayment Plan. Some borrowers can also qualify for Public Service Loan Forgiveness. Many others hope for forgiveness in the form of massive debt cancellation.
The pros and cons discussed below will apply to all of the federal student loan forgiveness strategies.
Pro: Borrowers chasing forgiveness can focus on other financial goals.
Maximizing student loan forgiveness means making the smallest monthly payment possible.
These small monthly student loan payments open up many doors for borrowers.
While other borrowers are making larger payments in an effort to eliminate their debt, those pursuing forgiveness can save more towards retirement. In fact, because of the way monthly IDR payments are calculated, putting money in tax-advantaged retirement accounts is a great way to maximize forgiveness. From a wealth-building perspective, this approach could be incredibly efficient.
Sticking with smaller monthly payments can also open up the door to home-ownership. Low monthly payments make it easier to set aside cash for a down payment. Additionally, these lower monthly payments can make it easier for student loan borrowers to qualify for a mortgage.
Con: Student Loan Forgiveness could be the expensive option.
Qualifying for student loan forgiveness may not be the best way to save money.
Because interest accrues daily, borrowers might save money by paying off the loans right away. Stretching payments out over a period of 20 years or more could end up being very expensive. In some cases, quick repayment could cost less money than chasing after forgiveness.
Taxes may also tip the scales. Borrowers who qualify for loan forgiveness from 20 or 25 years of income-driven repayment will be taxed on the debt forgiven. The money spent on interest over the life of the loan plus the tax on forgiveness can add up.
Chasing forgiveness won’t be too expensive for borrowers with large amounts of debt and little chance of paying it off. However, things may be different for those who can reasonably afford to pay off their loans. The math could show that payment in full is the best approach.
Pro: Monthly budget flexibility
Borrowers aggressively repaying their student loans often have a tight monthly budget.
Those chasing forgiveness may have a bit more flexibility. The lower monthly payments of income-driven repayment plans can be really helpful when unexpected bills arrive.
It is also possible to leverage this monthly flexibility into long-term flexibility. Borrowers can set aside some money each month to build up a robust emergency fund.
If your budget isn’t stretched thin due to student loan payments, it will be much easier to handle surprises.
Con: You may never qualify for student loan forgiveness.
While there are many words to describe student loan forgiveness programs, simple is not one of them.
When borrowers first became eligible for Public Service Loan Forgiveness, the early results were ugly. Over 99% of applicants were rejected. Even after Congress tried to fix things, rejection rates were still well over 90%.
Planning on forgiveness under the current rules could be a mistake. Betting on the rules changing could be a risky and expensive bet.
Borrowers planning on student loan forgiveness should proceed with caution. Don’t assume forgiveness will work. Instead, be proactive and take all available steps to track your progress.
Steps to Follow to Decide on Forgiveness
- Do the math – Repayment in full could be the best option. Use the Federal Student Loan Simulator to see how much it will cost to pay off the loans and how much it will cost to qualify for forgiveness.
- Track your progress towards forgiveness – Borrowers chasing PSLF can verify employer eligibility and track progress towards forgiveness by submitting an employer certification form.
- Revisit your plan – For a borrower right out of college, forgiveness may be the best option. After a couple of years of repayment or a promotion at work, things might change. Refinancing to a lower interest rate, or other strategies for aggressive repayment might become the best option.