Student loan forgiveness programs: understand the cons

Debt Relief programs for student loans often come with strings attached.

June 13, 2018 - Author: Teresa Clark-Jones

The Federal government is providing debt relief programs for many college graduates who owe on federal student loans. They can erase either government loans or award grants or stipends in exchange for public service.  Before you decide to utilize these programs, be sure to understand the guidelines of the programs.

Here are a couple of pointers to keep in mind:

If you drop out of the program, you could lose the benefits. TEACH grant  awards up to $4,000 per year for individuals willing to work four years in a high risk, high need teaching position.  The catch is that if you do not complete your service, the grant will convert to an unsubsidized Federal Direct loan.  

Some organizations offer grants after service is completed. Peace Corps, AmeriCorps and Teach for America are such organizations.  Your federal loans go into forbearance during your service, which means your interest on the loans will continue to add up. 

With AmeriCorps and Teach for America, if you complete your service the government will pay some or all of the interest. If you do not complete your service, you will have to pay all the interest. These two organizations are a little flexible because their volunteers are eligible for the Segal Ameri-Corps award, which as of Oct. 2017 was $5,900. To receive these funds, AmeriCorps volunteers must complete 1,700 hours of service and Teach for America, one year. You can do up to two terms. AmeriCorps pays a monthly stipend and Teach for America has a starting salary between $33,000 to $58,000 per year, depending on the location.

The Peace Corps program only forgives on Perkins Loans, up to 70 percent if you serve four years. The down side, you have to be willing to serve four years with minimal pay.

The Public Service Loan Forgiveness Program (PSLF) is for those interested in working or is working in the public sector. This program will forgive the remainder of your student loans after 120 monthly (ten years) on-time payments while employed in the public sector or with a non-profit organization.  Here is the issue; to benefit, you must also qualify for an income-based repayment plan. This plan reduces your monthly bill below the usual repayment plan of ten years.  If you drop out of the public sector before you make the 120 payments, you will end up losing the forgiveness and paying more than, if you had paid over ten years.

Your program may be cut. Most of these programs are tied to federal government funding which makes them vulnerable to potential budget cuts. 

Best advice: educate yourself on the pros and cons of each program to make sure you understand all the guidelines of these student debt relief options.

This article was published by Michigan State University Extension. For more information, visit http://www.msue.msu.edu. To have a digest of information delivered straight to your email inbox, visit http://bit.ly/MSUENews. To contact an expert in your area, visit http://expert.msue.msu.edu, or call 888-MSUE4MI (888-678-3464).

Tags: consumer education, money management, student, student loan forgiveness programs, student loans


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