I Feel Like I’m Screwing Up by Holding Out for Student Loan Forgiveness

A graduate wear a mortarboard made out of U.S. paper currency.
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Dear Penny,

I recently completed a life goal and finally finished my bachelor’s degree. After high school, I started college, but life and family happened, and I had to put school off until recently. I am happy to say that I now have the degree and a great job in my field.

Like most students, I left with a pile of student loan debt. I researched and ended up applying for one of the federal alternative payment plans. When I received my income-based repayment plan, the monthly payment was shockingly low — not even enough to cover the interest on the loans.

What was more shocking was the end date: Since I had been paying student loans in some form or another since my first run at college, my loans were scheduled to be forgiven in just over 10 years.

I did the math, and the monthly payment plus the monthly amount I would need to save to pay taxes on the forgiven loans (plus interest) was way lower than what I would need to pay to pay off the debt in that time frame.

I am reasonably well-paid at my job and expect to be promoted at some point, but not enough to jump the difference in the two plans. I can’t imagine ever closing the gap between what they are asking me to pay and what I would to pay off the loan.

I have been using the monthly surplus to pay off some credit cards and loans not in the IBR plan and stashing away for the expected tax hit in a CD.

Aside from my guilt for exploiting this loophole, is there anything wrong with my plan? Am I missing some pitfall that is going to really break me later?

Thanks for the help.

Lucky Loophole


Congratulations on your degree! What an accomplishment.

But oh, student loan guilt. It’ll take the shine off your new diploma in an instant.

Even when you have a repayment plan to follow, and even when you know you’ll be saddled with this debt for much of the rest of your mortal life, there’s still the guilt factor. The feeling that you should be doing more.

Have you ever grabbed a calculator to fiddle with the numbers and see if you have any hope of paying off your student loan debt quicker? I’ve done that. It usually ends in the fetal position on the couch. A high balance makes it difficult to make headway unless you come into some cash, like lottery or long-lost aunt cash. Otherwise, every month when the bill is due, you get a reminder of just how long you have to go.

But you’re doing it right, even if your income-based repayment (IBR) amount seems trivial. Interest rates for federal student loans are lower than for other consumer debt, such as credit cards. Long-term student loans are gross, but they’re just a third wheel in your relationship with your money. Everyone’s got a third wheel.

To knock out some of that guilt, stop thinking about your student loan balance as debt, and start thinking of it as just another bill. Instead of focusing on the total balance, take it month by month and focus on what’s due now. Then, free up some mental space to think about your other financial goals, like paying off your credit card debt or saving for retirement.

Don’t feel bad about the loophole — seriously. From you to me to the rest of the United States, we collectively have more than a trillion dollars of student loan debt. Take the way out.

Now, for a few words of caution about that way out.

I asked two experts about your situation: attorney Adam Minsky, whose Boston-based law firm specializes in student loans, and student loan consultant Heather Jarvis.

If you don’t already have proof of your forgiveness date in writing, make sure you get it and triple-check it. Minsky explained that since IBR wasn’t created until 2008, the earliest someone could get their loans forgiven with the 25-year payment plan would be 2033 — 15 years from now. If you had income-contingent repayment before IBR came into play, your situation may be different. It would behoove you to have a conversation with the federal Student Loan Support Center to verify your status and ask for proof. Always get proof, especially when you think there’s a loophole in play.

As for your income, remember that income-based repayment. “Your currently low payments are likely based on last year’s lower income, and so [they] won’t last,” Jarvis warned.

You’re smart to also be thinking about the tax obligation for the forgiven loan balance.

Jarvis explained that Public Service Loan Forgiveness, for those who work in government or nonprofits, is not taxable as income. But income-driven repayment plans of 20 or 25 years, depending on the plan, require forgiveness be taxed as income.

Minsky suggests working with a tax adviser or accountant if you haven’t done so already. “They would have a better handle on potential tax consequences of loan forgiveness,” he said in an email. “Any tax resulting from cancellation of debt typically must be paid either all at once, or over a relatively short installment period with interest and penalties added, and the IRS has powerful collections tools if the borrower cannot pay.”

Changes to federal law could impact your situation, too, Minsky warned. “We don’t know what the tax legal landscape will look like 10 to 15 years from now,” he said.

The inbox is open. Send your worries to [email protected], and I’ll see what I can do to help.

Disclaimer: Chosen questions and featured answers will appear in The Penny Hoarder’s “Dear Penny” column. I won’t be able to answer every single letter (I can only type so fast!). We reserve the right to edit and publish your questions. Don’t worry — your identity will remain anonymous. I don’t have a psychology, accounting, finance or legal degree, so my advice is for general informational purposes only. I do, however, promise to give you honest advice based on my own insights and real-life experiences.

Lisa Rowan is a senior writer at The Penny Hoarder.