Forbes - December 1, 2020
Many student loan borrowers are hoping that Joe Biden will forgive their student loans. But, these common errors may make you ineligible for student loan forgiveness or reduce the amount of forgiveness you will receive. Don’t miss out on student loan forgiveness because of these common blunders.
Refinancing Federal Loans into Private Student Loans
If student loan forgiveness is limited to federal loans, refinancing federal loans into a private student loan will make them ineligible for loan forgiveness, in addition to missing out on other benefits of federal student loans.
A private refinance is a new loan that pays off the old loans. Consolidating a Federal Family Education Loan (FFEL) program loan or Federal Perkins Loan into a Federal Direct Consolidation loan may be necessary if loan forgiveness is limited to Direct Loans.
Consolidation of a Federal Parent PLUS loan may be necessary if forgiveness requires the borrower to be in an income-driven repayment plan. Federal Parent PLUS loans are not eligible for income-driven repayment plans directly, but may become eligible for income-contingent repayment if included in a Federal Direct Consolidation Loan. Borrowers should consolidate Federal Parent PLUS loans separately from other federal loans to ensure that the other federal loans remain eligible for other income-driven repayment plans, which may have a lower monthly loan payment.
Making Extra Payments on Your Student Loans
Borrowers who are seeking loan forgiveness should not make extra payments on their student loans or make payments when payments are not due.
Paying more than the minimum required payment just reduces the amount of forgiveness that the borrower will eventually receive. Likewise, voluntary payments do not count toward loan forgiveness.
Borrowers who qualify for the payment pause and interest waiver should not make payments on their student loans, even though the payments go entirely to principal, if they are working toward loan forgiveness.
Defaulting on Your Student Loans
Some loan forgiveness programs are not available to borrowers who are in default on their student loans.
Signing up for auto-debit, where your monthly loan payments are automatically transferred from your bank account to the loan servicer, reduces the likelihood of delinquency and default.
Not Paying Attention to Details
Details matter. Read and follow the rules carefully.
Loan forgiveness programs are often complicated, which can contribute to errors. For example, borrowers who work directly for the government are eligible for public service loan forgiveness, while borrowers who work for a government contractor are not. Similarly, borrowers who work for a union or a partisan political organization are not eligible for public service loan forgiveness, even if their employer is tax exempt.
Failing to Confirm Eligibility Another common error is failing to confirm eligibility before applying for forgiveness. Don’t assume that you will qualify for loan forgiveness. Borrowers who are seeking public service loan forgiveness can file an Employment Certification Form (ECF) to confirm that their job and monthly loan payments qualify for loan forgiveness. Borrowers should file this form at least once a year and whenever they change employers.
Failing to Plan for the Tax Bill
Normally, the cancellation of debt is treated like taxable income to the borrower, per 26 USC 61(a)(12).
Some types of student loan forgiveness qualify for special treatment and are tax-free, but some are not. Public service loan forgiveness, teacher loan forgiveness and other loan forgiveness based on working in certain occupations is tax-free. The borrower defense to repayment is tax-free. The closed school discharge, false certification discharges and unpaid refund discharges are tax-free. Death and disability discharges are tax-free through the end of 2025.
But, the forgiveness of the remaining debt after 20 or 25 years in an income-driven repayment plan is currently taxable. Borrowers who expect to receive taxable loan forgiveness may want to save for the expected tax bill.
Although the IRS may forgive the tax debt if the borrower is insolvent (read IRS Publication 4681 and file IRS Form 982) or negotiate an offer in compromise (file IRS Form 656), forgiveness is not guaranteed. IRS payment plans are limited to a maximum of six years (file IRS form 9465).
Paying for Help Applying for Loan Forgiveness
Many “paperwork” firms are scams. If they promise quick qualification for loan forgiveness, ask you to make loan payments to them or ask you for your FSA ID, they are probably a scam.
The Federal Trade Commission and state attorneys general have shut down many such scams through Operation Game of Loans.
Failing to Update Contact Information
It is important to tell the lender or loan servicer about changes in your contact information. You are required to report changes in your mailing address, telephone number and email address to the lender and loan servicer. If you don’t, you might not get notified about future loan forgiveness programs. Your payment is still due even if you don’t receive a loan statement or coupon book.
Assuming that Loan Forgiveness is Automatic
While the payment pause and interest waiver is automatic for eligible borrowers, most student loan forgiveness programs are not. You have to submit an application form to be considered for the loan forgiveness. Counting on Full Forgiveness
Student loan forgiveness may be partial, so you might still have some student loan debt to repay even after loan forgiveness. For example, Joe Biden has proposed forgiving up to $10,000 per borrower. This will still leave about two-thirds of federal student loan borrowers with some debt to repay. By Mark Kantrowitz, Contributor
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