Student loan forgiveness: Understand the cons

Planning on using a student loan debt relief program? Make sure you understand all the rules! Debt Relief programs for student loans often come with strings attached.

November 14, 2012 - Author: Terry Clark-Jones, Michigan State University Extension

The Federal government is providing debt relief programs for many college graduates who owe on federal student loans. They can either erase 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 don’t complete your service, the grant will convert to an unsubsidized Federal Direct loan or Stafford 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 don’t 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 in 2012 is $5,000. To receive these funds, AmeriCorps volunteers must complete 1,700 hours of service; Teach for America volunteers must honor a one-year commitment. You can do up to two terms.

The Peace Corps program only forgives Perkins Loans, up to 70 percent if you serve four years. The downside: 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. 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 the student loan debt relief programs are tied to federal funding. This means that if you plan on these programs to assist in decreasing your student loans, it could be a potential risk factor with the current national debt crisis. AmeriCorps was slated to be cut in 2011 during the debt ceiling debate and the PSLF program is only five years old. The first group to benefit will emerge in 2017. Another factor with the PSLF program is that a great deal of public sector positions have been eliminated due to local and state budget constraints. A lot can happen in the next five years.

Michigan State University Extension offers this 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.

For more information, visit these websites:

Tags: family, money management, msu extension

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