What’s forgivable, and what’s not?
One of the most misunderstood and confusing areas of federal student loans. What’s forgivable, and what’s not? Although it’s quite simple, the promise of loan forgiveness is so alluring that it’s easy to follow misinformation and the questionable practices that some companies promote under the idea of a free loan. It’s true that federal student loans may be eligible for certain forgiveness plans for certain professions, but most forgiveness plans are just an extension of the Income-Driven Repayment Plans. IDR plans require years of regular payments while enrolled in the plan before a remaining balance is “forgiven.” For example, while on an IDR plan, making regular on-time payments for 20 years, any remaining balance is eligible to be forgiven. It’s very likely that by the end of the 20 years, your loan will be close to being paid off. It’s also important to note that the forgiven amount is subject to federal and state taxes as taxable income.
For the cancellation or discharging of a federal student loan, only a few circumstances would apply.
• The school permanently closed while you were attending or within 90 days after withdrawal.
• You or the loan servicer were owed a refund after you withdrew but never provided it.
• The loan was part of identity theft.
• The loan borrower dies.
• The borrower is totally and permanently disabled.
Accrued Interest — Interest that has accumulated on a loan but has not yet been paid.
Capitalized Interest — The amount of accrued interest that is added to the loan balance resulting in a new (higher) balance.
Consolidate — Combining multiple loans into a single loan with a single payment.
Default — The failure to repay a loan according to the terms agreed to in the promissory note. May result in legal action, including wage and tax seizure.
Deferment — A set time for a temporary postponement of loan payments. Does not always postpone interest.
Delinquency — A loan status for overdue payments. Extended delinquency can result in loan default.
Discretionary income — The amount after taxes and living expenses used as qualification for some repayment plans.
Forbearance — An option to temporarily suspend or reduce loan payments.
Garnishment — A legal course of action for a percentage of money to be withheld from a borrower’s paychecks, tax refunds, and Social Security Income (SSI) and applied towards student loan repayment.
Grace period — The set amount of time after you graduate, withdraw, or drop below half-time enrollment before you must begin loan repayment. Not all loans have grace periods, but for most federal student loans, the grace period is six months. Confirm with your servicer.
Interest — The cost of borrowing money that is added to the loan based on the rate of the original loan amount.
Interest rate — A set percentage of loan principal that calculates the amount of interest due.
Loan rehabilitation — The recovery of a defaulted loan through required payments over a specific time that reinstates the loan to good standing. Also reinstates loan repayment and postponement benefits.
Loan servicer — Companies that disburse, manage and collect payments on a loan.
Promissory note — A legal document stating the terms of a loan that is agreed to by all involved parties.
Subsidized — A type of student loan that the government partially or temporarily pays the interest that accrues.
Unsubsidized — A type of student loan that accrues interest as soon as the loan is disbursed-including while students are enrolled in school.