If you have a college degree, chances are, you also have student loans to pay off. Student debt is a crisis worth $1.5 trillion and the problem keeps getting worse as tuition fees continue to rise each year. Fortunately, there is a growing interest among students to minimize their expenses during college by winning scholarships, financial aid, saving up for college beforehand, attending public universities and also by being utterly frugal during college years. However, for the 44 million borrowers who already have student debt (Source: Federal Reserve Bank), it is a struggle to pay it back. Fortunately, there are a few debt relief and student loan forgiveness programs that will come to your rescue, as we discuss below.
Governments play an important role in reducing the burden of student debt for graduates who are struggling to find well paying jobs, or who work have high-social-impact-low-salary jobs. For instance, under Canada’s Repayment Assistance Plan, a debt relief measure allows student debt holders to delay the repayment of their debt up until they begin earning at least C$25,000 per year. Furthermore, if the student loan holder has a family of five or more, they can delay the repayment until they begin to earn around C$68000.
Many individuals see college degrees as a stepping stone for strong careers and a necessary step in the path towards financial independence, however, students often need to obtain large amounts of student loans to pay for high tuition fees at colleges and universities. Many financial advisers label student loans as good debt, because it helps create an asset (similar to housing loans) but the reality is, millions of graduates struggle with the repayment of student debt, which multiplies quickly over time because of compounding interest rates. Soon, graduates find themselves financially trapped by never-ending student loan payments that lead to bankruptcy.
What is Debt Relief?
The definition of debt relief (aka credit relief) is pretty loose and refers to any form of leniency from the creditor which leads to the following benefits:
- Partial forgiveness of debt – this means your outstanding debt balance falls, whether through a reduction in interest rates, loan principle, or even through a waiver of some installments,
- Full waiver of debt – this means you have no more debt to repay, and is not very common, understandably,
- Stopping the growth of debt – this will happen if future interest charges are removed from your loan agreement.
- Slowing down in the growth of debt – this would involve a reduction in interest rate,
Debt relief may be accrued both as a standalone debt repayment program, as part of a debt management program or other credit repayment programs such as debt consolidation. I may as well mention that when you successfully file for bankruptcy, you gain the benefits of debt relief in the form of full forgiveness of loans, albeit at a heavy cost to your credit score.
Types of debt relief programs
There are many types of debt relief programs in general, such as:
- Student loan debt relief – this type of forgiveness only applies to those who struggle with the repayment of their student loans, which is what this article is about.
- Medical debt relief – good medical care can be expensive, despite health insurance, and lead to crippling medical debt that can last for years. Fortunately, there are many ways to limit your healthcare bill, but if they fail to work, you can apply for medical debt relief.
- Tax debt relief (aka IRS debt relief) – this option is for tax payers who are unable to pay their taxes on time and accrue tax debt.
- Credit card debt relief – this option is offered to those who struggle with credit card debt.
We now look at 5 different student debt relief programs to help graduates get ahead on their repayments.
Types of student debt relief programs
We are going to cover 5 types of debt relief programs for people who have student loans.
1. Income based loan repayment plan for student debt holders
This program makes it easier for debtors to pay off their student loans who had low paying jobs or limited incomes. Here are some features:
- Borrowers can cut their monthly installments to only 10% of their income,
- The program runs for 25 years and the amount that borrowers pay would change in accordance with the income, as well as family size.
- Student loan holders have to prove they are suffering from financial hardship to qualify.
- Not all loans qualify for this debt-relief option. This program does not apply to loans that are sponsored by parents of borrowers, consolidated loans, and finally, loans taken from private financial companies.
Advantages and disadvantages of Income Based Loan Repayment Plan for student debt holders
While this debt-relief program seems to offer huge concessions, there is a major financial disadvantage to getting 20 years to repay your student loan – student loan holders will end up paying more interest over the extended repayment period.
On the bright side, any outstanding dues will be forgiven after this period (or sooner, if you work in the public or non-profit sector). Be sure to check the Federal Student Aid website that offers full information about this program.
2. Public service loan forgiveness programs (PSLF) by the government
You can have your student debt forgiven if you work in the public sector or the non-profit sector. This kind of debt relief is delivered under the Public Service Loan Forgiveness Program and covers loan holders who either work for the government or are employed by certain non-profit organisations, such as AmeriCorps and Peace Corps.
Some features of this loan forgiveness programs are:
- The relief offered to student loan holders varies under each organization. For example, under Peace Corps, debtors could have up to 70% of the loan forgiven while working in a government agency may get you full forgiveness of your student loan.
- To be eligible, you must work full-time in these organisations and should have already made 120 payments/installments on your loan.
- In some cases, the government may pay interest on your student loan for you.
Advantages and disadvantages of Public Service Loan Forgiveness Programs for student debt holders
The Public Service Loan Forgiveness Program seems like an obvious choice for anyone struggling with student debt because it generously compensates you for choosing a career that delivers immense social value. However, a major drawback associated with this choice is that you will have these benefits revoked if you fail to complete the designated duration of the job contract. Another drawback is that opting to work in the public sector or the non-profit sector for the sake of having your student loans forgiven will put a hold on your other life goals, but if this was your dream job to begin with, it’s a win win.
3. Loan Repayment Assistance Programs (LRAP) by employers
Many companies (public and private) are interested in helping their workers pay off student loans, which is an appealing part of the job contract. Employees may be entitled to some student debt relief as part of the employment package, which could reduce the duration of the loan repayment plan by a couple if years. Under Loan Repayment Assistance Programs (LRAPs) your company may pay you additional money (apart from your salary) to help pay off any student debt. To qualify for this perk, workers may have to work full-time or for a specific duration at the company.
The reason companies are interested in assisting workers in paying back student loans is simple – the aim is to attract talented workers. This is similar to having your employer pay for your college tuition as you enroll in a new degree while at work. All this happens under the condition that after graduating, you will, in return, work for the company for a certain number of years as payback on their investment in you.
4. Teacher loan forgiveness program (TLFP)
As the name suggests, the Teacher Loan For Program rewards teachers for their efforts, which may equated to “public service”. Here are some features of this type of student debt relief:
- You must have been working as a teacher for 5 years to qualify for loan forgiveness.
- As a teacher, you should have been working full-time for a school that teaches low-income students.
- Working for an educational service agency will qualify you as well.
Advantages and disadvantages of Teacher Loan Forgiveness Program
If teaching has been your dream job, this type of student debt relief is a blessing. Whether you work in a low-income elementary, middle of high school, your student loans can be forgiven if you happen to be a highly qualified teacher. The obvious downside of the Teacher Loan Forgiveness Program is that you can only be eligible if you have been working in this field for 5 consecutive years. Plus, the amount of debt relief you receive is limited to $5,000 if you do not teach maths, science or special education. Check the government source on the Teacher Loan Forgiveness Program.
5. Other ways to get your student debt discharged
When you are not required to repay your student loans because of reasons not related to your job, it is generally called a student debt discharge. Your student loans can be discharged under the following circumstances:
- Bankruptcy discharge – As a last resort, students can leverage the Bankruptcy Code and try to get their loans either fully or partially forgiven.
- Total and permanent disability discharge – if a student loan holder can prove they are permanently disabled, they can get their debt discharged.
- Closed school discharge – if the school you attended using your student loans shuts down, you may be eligible for a discharge of your debt.
The important thing to remember here is that not all types of student loans can qualify for the above debt relief programs run by the government. These concessions usually apply to federal student loans.
Advantages and disadvantages of debt relief programs
Debt relief may seem like an easy way out for consumers but creditors and courts are very selective about offering this benefit. If you are interested in getting your debt forgiven, your chances may be brighter if the amount of outstanding debt is small and your income and assets are limited. In this case, a court will issue a debt relief order, which is legally binding for you and your creditors.
Debt relief is not without it’s disadvantages. There is a credit-score ramification of getting debt relief that you must deal with. Like all other debt management programs, signing up for debt relief will reduce your credit score. Luckily, that is not the end of the road because credit scores can be gradually improved by following good credit practices. If debt relief does not work out, you can look into consolidating your student loans to help pay them back faster, which we discuss in another article.