How to Cancel Student Loan Debt
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When my husband and I combined our finances, between the two of us we had nearly $150,000 in student loan debt. We both had undergraduate and graduate degrees to show for it, but gosh, that’s a lot of money to pay back, especially with the entry-level salaries we were both making at the beginning of our careers.
At the time, there was no talk about student loan forgiveness. And even if there was, many of our loans were private anyway. We didn’t qualify for any alternative loan forgiveness programs either, so we made a plan and we plugged along, diligently making our payments each month. It was hard, but we paid them off in six years while still meeting our saving goals. We lived simply, but we also went on vacation and didn’t eat rice and beans every night.
If you’re one of the 43.4 million Americans who have outstanding student loans, you may be lost in a fog of information. There’s certainly a lot of buzz about it right now with the federal government talking about canceling student debt. You might be asking questions like: Will my loans be forgiven? Do I have other forgiveness options if I don’t have a federal student loan? Is consolidation worth it? Why have I been making payments for years and my loan never seems to go down? Is it even possible to pay them off while still having a life? This article is for you.
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What’s happening with loan forgiveness?
The Biden administration has talked about student loan debt cancellation since his campaign days, and details are still being kept close to the White House Press Secretary’s lectern. But here’s the information available:
How much?
As of late August 2022, Biden has announced up to $10,000 in debt forgiveness for students who make less than $125,000. Those in school will have their debts wiped based on their parents' income: $125,000 for single-parent households and $250,000 for married couples. For Pell Grant recipients, forgiveness climbs to $20,000.
Also, payments on student loans will be based on income and will be capped at 5% of your monthly income.
When?
Federal student loan payments will resume in January 2023.
5.24% - 12.42% VARIABLE rate APRs 4.17% - 16.69% FIXED rate APRs
- Easy online application!
- No origination fees, late fees, and no insufficient fund fees
- Flexible repayment options to help you find the right loan for you
- Student loans for college, graduate, law, MBA, Health Professionals, and Parent loans
- Students are 5x more likely to be approved with a cosigner
- 0.25% discount when you set up autopay
What if I don’t qualify for federal loan forgiveness?
Widespread loan forgiveness by the federal government might wipe out your loans if you have less than $10,000 in federal loans (and if you meet the income criteria). However, if you don’t meet the income criteria, have more than $10,000 in loans, or taking out private loans rather than federal, here are some other options for you:
Look to other forgiveness programs
You’re not completely dependent on the federal government for loan cancellation. If you’re currently attending or looking to attend a higher education institution, apply for Federal Student Aid — the Department of Education gives out $112 billion annually to help people pay for college and avoid debt. Other forgiveness programs exist, though most have strict criteria. Here are a few to look into:
Teacher Loan Forgiveness
To be eligible for this, you must have been employed full-time as a “highly qualified” elementary or secondary teacher for five consecutive years at a low-income school or educational service agency. See other requirements and definitions here. Teachers may also be eligible for Perkins Loan Teacher Cancellation.
Public Service Loan Forgiveness
To be eligible for PSLF, you must work full-time for the government or a nonprofit. You must have made 10 years’ worth of payments via an income-driven repayment plan. Teachers with Federal Family Education Loans can apply to this but cannot apply to both the Teacher Loan Forgiveness AND the Public Service Loan Forgiveness program. This is for those who have a direct loan, including direct PLUS loans.
Forbearance
With forbearance, qualifying student loan borrowers can basically request a payment pause or make smaller payments due to an emergency. Forbearance is NOT student loan cancellation, and interest may still accrue during your forbearance. The COVID-19 emergency payment pause has been extended through December 31, 2022.
Note: Perkins loans don’t capitalize interest during forbearance.
Income-Based Plans
Several similarly named income-based repayment plans exist — Income-Contingent Repayment Plan (ICR), Income-Based.Repayment Plan (IBR) and Pay as you Earn Repayment Plan (PAYE). They vary only slightly based on what type of loans you have. Typically, monthly payment amounts varied between 10% and 20% of your income. The new forgiveness plan will cap this at 5% of your monthly income. You are ineligible for these options if you are in default. You can read more on the StudentAid.gov site.
AmeriCorp
AmeriCorp volunteers are eligible for the Segal Americorp Education Award after completing a term of service. A full-time volunteer in 2022 would earn about $6,500 toward education or loans, and you may do two consecutive terms. Read more about eligibility requirements here.
Military Service
Military service to pay for education may be a good option for you if you consider it before you head to school. And if you have that forethought, you’d be utilizing Military Tuition Assistance (or the GI Bill) which covers 100% tuition up to a certain number of units per semester. While they have some benefits like loan deferral and interest rate caps while on active duty, they don’t do “loan forgiveness” for serving. View loan benefits here.
5.24% - 12.42% VARIABLE rate APRs 4.17% - 16.69% FIXED rate APRs
- Easy online application!
- No origination fees, late fees, and no insufficient fund fees
- Flexible repayment options to help you find the right loan for you
- Student loans for college, graduate, law, MBA, Health Professionals, and Parent loans
- Students are 5x more likely to be approved with a cosigner
- 0.25% discount when you set up autopay
Borrower defense
If your school was shady with you with misleading information or violating state law, you could try to get your federal student loan debt discharged through the borrower defense to loan repayment program. The application takes about 30 minutes, and you’ll need to provide documentation to support your claims about your school.
Loan discharge
You can apply for a student loan discharge under exceptional circumstances like permanent disability, bankruptcy, fraud, or school closure. But be warned: sometimes the amount discharged might be taxed as income.
Pay them off yourself
For the last two years, you may have been taking advantage of the pause on student loan payments. This means dedicating a chunk of change to loans again could be hard to swallow. But now’s the time. Whether you have $20,000 or $200,000 in loans, paying them off is doable with a little math and enough grit to commit to a repayment plan.
Consolidate and/or refinance
There’s a difference between consolidating and refinancing, though you often do both together. Consolidating your loans simply makes it easier for you. Instead of signing onto several places every month to make payments and check your principle, you can instead make a single payment.
Refinancing means getting a new (hopefully better) interest rate and payment terms.
Consolidation is not a great option if you are on an income-driven repayment plan, as you can lose credit for those payments.
You can consolidate through the federal government or private lenders. Forbes Advisor recommends RISLA (Rhode Island Student Loan Authority), PenFed Credit Union (PureFly), and SoFi. Other review sites include College Ave and Ascent. There are dozens to choose from, and all offer a smattering of pros and cons. Some private companies have income and credit requirements but offer better interest rates and terms.
Know the terms
Whether you consolidate with the fed or privately, watch the fine print. Consolidating and/or refinancing may change your payment amount and your repayment period. Watch for late fees, payment limits, early-repayment penalties, co-signer policies, and forbearance periods before you sign on the dotted line.
You want to keep as much control over your loan(s) as possible so you can pay them off as quickly or slowly as you need. You don’t want a loan that penalizes you for paying more each month or paying off the loan sooner than your term. In addition, a forbearance policy is a nice-to-have if you lose your job or have lots of medical expenses and can’t pay your loans for a few months.
Pay the highest interest loans first
If you decide consolidating isn’t for you or some of your loans aren’t eligible for consolidation, plan to pay the highest interest ones off first. This is a method called debt avalanche. Make minimum payments on all your loans except for the one with the highest interest. For that one, double or triple your payment until it’s paid off. Then move on to your next highest.
Make a pay-off plan
Many graduates head off to their first jobs, burdened by student debt. Because it’s a lot of money, you make the minimum payment toward your loans. The problem is the lender does not have your best interest at heart. They just want to make money and their best chance at doing that is by keeping you as a customer for as long as possible. That minimum payment you’re making mostly goes toward interest, not your principal (your loan amount). And the longer you have your loan, the more you’re paying in interest.
Use a student loan repayment calculator and play out some numbers. Calculator.net has a great one.
Say you have $50,000 in loans. You refinance at an interest rate of 6.8% for a 10-year loan. You decided on a 10-year because you knew you could comfortably make the minimum payment and most months likely pay more toward the principal. Your minimum payment is $580 per month. Your plan is to pay an extra $200 each month. There may be several months where you can make a double payment. Here’s what that looks like in three different scenarios:
If you make the minimum payment every month for 10 years, you’ll pay almost 20k in interest, meaning your 50k loan turned into a 70k loan.
If you make your payment plus an extra $200 payment each month, you’ll pay off your loan in 6 years and 8 months, paying about 12k in interest over the life of the loan.
If you make a double payment each month of $1,160 — which will certainly be difficult and might not be possible for some months — you’ll pay off your loan in just 4 years and 2 months, paying just $7,500 in interest over the life of the loan.
Here are even more strategies for paying off $50,000 in student loan debt.
Costs
It costs $0 to refinance your loans — just ensure you’re doing it with a credible lender and that you won’t be penalized for early repayment. Interest rates are based on federal rates, which are rising steadily. This is the only real cost when it comes to student loans, which means it’s more costly to keep them long-term than paying them off as quickly as possible, despite how difficult it is to make that payment each month.
Pros and cons of canceling your student loans
Pros
- It’s free to consolidate, refinance and make a game plan.
- Eliminate the mental and emotional burden of having student loans hanging over you.
- More money in your pocket long-term because you end up paying less in interest.
Cons
- It takes time, commitment, and a lot of paperwork.
- It’s hard to cut costs, especially if you’re already used to a certain lifestyle.
- You can no longer claim student loan interest on your taxes.
5.24% - 12.42% VARIABLE rate APRs 4.17% - 16.69% FIXED rate APRs
- Easy online application!
- No origination fees, late fees, and no insufficient fund fees
- Flexible repayment options to help you find the right loan for you
- Student loans for college, graduate, law, MBA, Health Professionals, and Parent loans
- Students are 5x more likely to be approved with a cosigner
- 0.25% discount when you set up autopay
The bottom line
Student loan debt is no fun, and it certainly requires budgeting and cutting out some luxuries while you pay them down, but if the options for canceling debt aren’t in your favor, it’s in your best interest (yep, I said it) to be swift in your payoff.
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Writer
A veteran wordsmith and research nerd, Brittany Wren spent a decade working in higher education where she helped people overcome challenges to chart a path forward. These days, she writes about personal finance, careers, parenting and education. Her content has been published by a wide variety of brands including T-Mobile, Intuit, LifeLock, Reliant Fund Administration and CURO Financial Technologies Corp.
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