Student Loan Forgiveness for Private Sector Employees

Know if you can get your student loans forgiven by being an employee in a private sector. Learn how to plan for large tax bills and how to deal with private student loans. Learn the ways to clear to clear your student loans.

Updated by Kanishkar P on 26th February 2020

A student loan is a good thing that helps someone to make progress in their studies and achieve their goals. But when it comes to repayment of the student loans it a quite hard task. So when we talk about reducing the burden of repayment an important aspect that helps in repayment is forgiveness of the student loan. Borrowers who agree to work under the public sector are forgiven for their federal student loans under certain conditions. But if you are an employee working under a private sector who owns federal student loans and if you are seeking ways to get your student loans forgiven then you may find something here that may be helpful.

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Student loan forgiveness for Private sector employees

Borrowers working in private sector or for-profit companies can get their student loans forgiven by the help of Income-Driven Repayment Plans(IDR). There are different income-driven repayment plans for federal student loans, but all of them have the same fundamental features. Under these plans, the borrowers are not forced to pay a fixed amount that is demanded by the servicer or the lender instead the borrowers are expected to make payments based upon their income. A specific percentage of their discretionary income should be paid towards their federal student loan for a specific number of years. 

The table shows the percent of discretionary income to be paid as loan repayment for the number of years for each plan under income-driven repayment to get the balance of the loans forgiven.

 

IDR plan

Discretionary Income Required

Years of repayment

IBR- income-based repayment plan

15%

25

ICR-income-contingent repayment plan

20%

25

PAYE-pay as you earn

10%

20

IBR for new borrowers

10%

20

REPAYE-Revised pay as you earn

10%

20-25

Note: The IBR for new borrowers is applicable to those who started borrowing after July 1, 2014. And in REPAYE the borrowers with graduate school loans can qualify for 25 years as repayment terms whereas undergraduates can qualify for 20 years repayment plan.

Keeping student loans for 20 years is a long period. Dealing with the loans and getting rid off them within a short period of time is better. But these plans give you the benefit of forgiving the remaining amount of the loan after the specified number of years.

Outside of the long wait for forgiveness, the other major downside is that the forgiven debt can result in a huge tax bill from the IRS…


Planning for a Large Tax Bill

Student loan forgiveness has a drawback. The IRS treats forgiven loans as income. This will ultimately make you pay tax for the forgiven loan amount. If the borrower earns $20,000 in a year and gets $20,000 of student loan forgiven then the borrower has to pay taxes for a total of $40,000 that year. This makes your issues with student loan repayment to get transferred to tax payment. This tax on the forgiven debt is referred to as tax-bomb.

It is worth noting, however, that there is growing support for eliminating the taxation of all forms of student loan forgiveness. Public Service Loan Forgiveness does not come with a tax bill, and a recently created law eliminated the tax bill for student loans forgiven due to the death of the borrower.

The borrowers who have opted for income-driven repayment plans should be ready and should have planned well before for the extra taxes. If the student loan advocates can eliminate the tax bill, borrowers who set money aside will be able to use the funds towards retirement or other financial goals.


How to deal with Private student loans?

Private student loans are a little different from federal student loans. They are not much flexible as federal student loans and they come with fewer benefits when compared to federal loans. Private student loans do not have the option for forgiveness. The contract that a borrower signs while borrowing loans from a private lender will specify the repayment terms that are usually strict and rigid.

As you don’t get any forgiveness program or flexible repayment plan in a private student loan the next option to make student loan repayment easy is refinancing. Refinancing student loans can reduce the interest rates on the loan that makes the repayment a little easy. And there are many refinancing lenders, you must check out a few best company to refinance your student loans before choosing one.


How to clear student loans?

Federal student loans come with more benefits and are more flexible when compared to private student loans. They can also be forgiven on certain conditions. This is a reason for most of the borrowers to think of paying off private student loans before federal student loans. But those who choose this idea must make sure that they enroll in an income-driven repayment plan.

A Student loan forgiveness sounds like a very good plan but in the long run, it may cost you more. Chasing forgiveness can be expensive because borrowers the low monthly payments can mean significant interest accumulation. Taking 20 years to pay off a loan is more expensive when compared to paying off it in 10 years. And the forgiveness programs charge you with extra taxes for the forgiven loan amount.

For some borrowers, a student loan forgiveness program may become expensive when compared to just paying off the loan in full. Whereas it may be the best choice. For the borrowers who are stuck in the middle of these scenarios, an income-driven repayment plan will be a better way to sort out the problem. 


Concluding Thoughts

Student loan repayment is not a simple task, you need to be very careful until you pay off your student loans completely. Student loan forgiveness sounds very impressive and appealing, but it is not good for all the borrowers. The borrowers should opt for the right plan that is appropriate to them. The borrowers who are working in the private sector should not rely on forgiveness totally, they must understand that it is just an option to eliminate student loans.

Instead of taking the loans that don’t suit your requirements and repayment abilities you must choose the loans and repayment plans that facilitate you to clear your debts as soon as possible. Try to understand the terminologies and features in detail to choose the best student loans. This may help you avoid getting into risks in the future.