Is it a good idea to get your student loans forgiven?

Spiral windowsPhoto courtesy of christie yunhwa

Like approximately everyone, I graduated college with student loans.

If there was a way to get my loans “forgiven”, no one told me. At the time, all I knew was that I had to either pay what I owed, pay interest only, or ask for a temporary forbearance (which I did on occasion when times were particularly tough).

These days, though, with the twin perils of income stagnation and runaway tuition, student loan forgiveness is definitely more on people’s minds. Right now, in the U.S. the current plan in place is called the “William D. Ford Direct Loan Program” but is more commonly known as the “Obama Student Loan Forgiveness” program.

There are numerous options for how to pay back your loans these days. But what’s most interesting to me is that there is an option for loan discharge after a period of time, typically after 20-25 years. What you haven’t paid by that point, you won’t have to pay ever.

How did this miss my attention?

While the idea of debt forgiveness is certainly appealing, we need to look at the larger picture to see if it’s actually a good idea.

A sample scenario

The above linked site gives a good example of a situation where loan forgiveness would occur:

Borrower owes $85,000 in federal student loans. The interest rate is 6.875% and the term is 25 years in the Income Based Repayment Plan. The borrower is currently earning $35,000 per year, and expects their income to stay the same for the term of the loan. This borrower would qualify for an IBR payment of $218.69, and assuming the income doesn’t change, would make these payments for 25 years or 300 payments. The total amount the borrower would pay on this loan is 300 x $218.69 = $65,607 of the original $85,000 that was borrowed. This person would qualify for $19,393 in student loan forgiveness after making those qualifying payments.

This person would be able to get $20,000 of the $85,000 loan discharged!

Sign me up?

Whoops, forgot about taxes

Did you know that the amount that is forgiven on your student loans counts as taxable income? So if you have $20,000 forgiven, and in that year you made $50,000, you will have to pay taxes on $70,000 worth of income, which is an immediate charge of thousands of dollars.

If you can’t pay your student loans off over time when they are loans, how are you going to pay a chunk of them off right then when they convert to taxes?

Who’s paying for this anyway?

A reasonable question to ask is: if your loan is forgiven: where does that money go?

If I lend you money, and then I forgive the loan, I have paid for you. If the government lends you money, and then forgives it, the government has now paid for the loan.

I don’t know about you, that feels like everyone else is footing the bill.

I’m of two minds, to be honest.

On one hand, I think that those who have done well for ourselves have a societal duty to assist those who have been disadvantaged for one reason or another. And taxes are the great equalizer. You could say you’re helping people by giving money to your favorite charity, but if your favorite charity happens to be, oh I dunno, Neo-Nazis For a Better America, I’m not sure how much you’re really helping.

And call me naive, but I believe that with more government revenue, we can create stronger safety nets for all of us. And stronger safety nets have been shown over and over to be beneficial to all. (Did you hear that Kansas?)

But on the other hand, I’m not sure I like the idea of actively choosing to have someone else pay for your loans.

Don’t give up before you even start

Opting for intentional student loan forgiveness feels a little too pessimistic. Because otherwise, you’d believe that you could pay off your student loans in years instead of decades, along with all the rest of your debt, and then start to build wealth and do awesome things with it.

If you don’t feel like you can win, I challenge you to ask why this is. Why does it feel like you’ll never be able to pay back your student loans? Where did that belief come from? And is that an inviolate belief, or is there another story you could tell?

I want you to write in the comments below why you don’t feel like you’ll be able to pay back your student loans. No judgement, I just want to know.

I want you to not have to deal with your loans anymore. I want you get rid of this debt as quickly as possible. Forget math: how would it feel to still have your student loans two decades from now?

Conversely, how would it feel if you got your student loans out of your life? Even if it took a few years, how would it feel to be free?

How about a compromise?

Let’s agree that the student loan forgiveness program is better than nothing. To know that you could potentially get your loans forgiven so that you’re not retiring with student loan debt is a good thing.

So let’s think of this program as a safety net, like a welfare program.

And while I don’t believe that people would willingly choose to remain on a welfare program, let’s not choose to be on this particular plan unless we absolutely have to. Some people have to. Others do not.

So let’s all pay for what we bought. If you do that, and give it everything you can, I believe you will succeed. But even if not, you’ll have my forgiveness.

But enough about me. Are you going for the student loan forgiveness plan?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on July 4, 2016