It’s no secret that college students often opt for student loans to help finance the debt they accumulate via tuition, fees and other school-related costs. So it’s no surprise that outstanding student loan debt in the U.S. hit $1.48 trillion in the second quarter of 2019, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit.
Although the burden of these obligations varies by state, full-time-equivalent students received an average of $7,254 in federal and nonfederal student loans in 2017-2018. Note that these are average costs. In an increasing number of cases, students leave school with six-figure loan balances.
Consequently, this problem has gained the attention of the Democratic presidential candidates in the 2020 race. Although most of the candidates have proposed some form of debt relief, few have gone as far as Sens. Bernie Sanders and Elizabeth Warren. Should one of them ascend to the presidency and implement their plans, it could change the financial lives of millions of borrowers.
GOBankingRates took a look at the different types of student loan forgiveness programs and at how Sanders’ and Warren’s plans compare. This guide to student loan debt forgiveness will cover the following:
- How Student Debt Affects the 2020 Election
- What Is Student Loan Debt Forgiveness?
- Qualifications for Student Loan Forgiveness Programs
- Public Service Loan Forgiveness
- Qualified Repayment Plans
- Federal Perkins Loan Cancellation
- Student Loan Forgiveness for Nurses
- Loan Repayment Assistance for Doctors and Other Healthcare Professionals
- Loan Repayment Assistance for Lawyers
- Student Loan Forgiveness for Teachers
- Military Student Loan Forgiveness and Assistance
- State and Other Loan Forgiveness Programs
- Disability and Special Circumstances
- One Thing Is Certain: Student Debt Is a Problem
Due to record amounts of student loan debt, millions of borrowers leave college unable to afford rent, a car and other necessities in life. Substantial debt from student loans could also hamper the ability of some to afford a home, marry, have children or save for retirement. Consequently, student debt has become an issue in the presidential race. While some candidates have at least paid lip service to this issue, others — including Sanders and Warren — have come up with a plan.
Both Sanders’ and Warren’s plans for student loan debt forgiveness would relieve the debt burdens for the majority of borrowers, regardless of the type of student loan. Both candidates also have plans for tuition-free two- and four-year colleges to address the issue. Despite their common goal, however, both Sanders and Warren take different approaches to this problem.
The Sanders plan would cancel all of the existing obligations for the estimated 45 million Americans carrying some level of student debt. Under this plan, all student loans would qualify regardless of type. The plan would cover all student loan holders, regardless of their current income.
Individuals with private loans would have a six-month window to apply for loan forgiveness through the Education Department under this plan. If granted, the government would pay all principal, interest and late charges due to the lender and cancel the loan. In addition, borrowers would not be responsible for any federal income taxes on the loan amounts forgiven.
Sanders’ plan to cancel student debt and provide free college would cost an estimated $2.2 trillion. The senator proposes to pay for it through a tax on Wall Street transactions — a tax he believes would generate $2.4 trillion over 10 years.
The Warren plan would cancel all debt for about 75% of Americans with student loan debt, and some debt for 95%. It’s designed to eliminate all student loan debt up to $50,000 for those with a household income of less than $100,000 per year.
For those with a household income of over $100,000 per year, the amount of debt forgiveness would fall by $1 for every $3 above $100,000 earned. For example, if your household income is $160,000 per year, the amount of canceled debt would fall by $20,000. In this case, only $30,000 worth of debt — instead of $50,000 — would be eligible for cancellation. Those with a household income of more than $250,000 per year would receive no help under this plan.
The Warren plan would make federal and private student loans eligible for cancellation. Moreover, the IRS would not treat the forgiven amount as taxable income.
Warren’s plan for debt cancellation and universal free college would cost an estimated $1.25 trillion over a decade. The senator would pay for this plan through what she calls an “ultra-millionaire tax” — a wealth tax on all net worth above $50 million.
Student loan debt forgiveness would look the same under both Warren’s and Sanders’ plans, regarding the types of student loans covered and whether the forgiveness amounts would be subject to federal income tax. Both plans would cover government-sponsored and private student loans. In either case, federal income tax would not apply to the forgiven amounts.
Moreover, the taxes that would pay for both plans tend to affect mostly the wealthy. Hence, both approaches treat all but the wealthiest individuals and stock traders the same from a tax standpoint. Finally, both Sanders and Warren are also offering plans for free college at two- and four-year public institutions. At least at the undergraduate level, both plans would tackle the student loan issue.
The most significant difference between the two student loan forgiveness plans involves the cost and loan relief amounts for those with the largest debts. Warren’s plan for debt cancellation and universal free college would cost about $1.25 trillion to implement, versus an estimated $2.2 trillion for Sanders’ plan to cancel student debt and provide free college. Consequently, the Warren plan would not forgive quite as much debt.
Under the Warren plan, those with a household income of more than $100,000 per year would receive less debt relief than the $50,000 offered to most debtors. Those with a household income of more than $250,000 per year would receive no student debt forgiveness at all.
The Sanders plan would burden taxpayers with a much higher cost. Interestingly, many see the Sanders plan as a giveaway to the rich. Many law and medical students carry six-figure debt loads but earn high incomes after graduating. Hence, a high-earning doctor with $500,000 in debt would benefit more than a low-wage earner with only $30,000 in obligations.
The Warren plan, however, could leave some individuals with high loan balances vulnerable. Some debtors accumulate six-figure debt balances but do not earn large amounts after leaving college. Such earners could still face heavy burdens even after $50,000 worth of debt relief.
Here’s a side-by-side comparison of Sanders’ and Warren’s student loan debt plans:
|Bernie Sanders’ and Elizabeth Warren’s Student Loan Debt Plans|
|Sanders’ Plan||Warren’s Plan|
|Maximum Benefit||No maximum||$50,000 if household income is under $100,000; less if household income is between $100,000 and $250,000|
|Would Federal and Private Loans Be Eligible for Forgiveness?||Yes||Yes|
|Would the Plan Treat Forgiven Loan Amounts as Taxable Income?||No||No|
|Estimated Total Cost||$2.2 trillion for plan to cancel student debt and provide free college for all||$1.25 trillion for plan to cancel student debt and provide universal free college|
|How To Pay For the Plan||Tax on stock market transactions||Ultra-millionaire tax on net worth over $50 million|
Student loan debt forgiveness means a release of your obligation to repay a loan. The Education Department uses several terms to describe this practice, depending on the circumstances of the loan amnesty. When debt repayment obligations are removed due to service in a job, it is usually referred to as forgiveness or cancellation. Should the release of debt obligations come from either a permanent disability or the closure of the school where you received the loans, it’s termed a discharge.
Here’s a look at how much student loan debt has grown in the U.S. from 2004 to 2017:
To pay off student obligations, debt holders can employ a wide variety of options. Some seek creative solutions such as debt consolidation or strategies to save money or earn extra income. As a debtor, you can also take advantage of one of several programs that offer forgiveness for direct federal loans, some of which can save thousands of dollars. Review the qualifications for the following student loan forgiveness programs to see if you are eligible.
The Public Service Loan Forgiveness Program helps those in public service jobs. Those in the PSLF Program qualify for 100% loan forgiveness after making 120 on-time payments.
Eligibility also tends to be based more on your employer than your job title. To qualify, you must work full time in a federal, state or local government capacity. You may also be eligible if you work for a 501(c)(3) nonprofit organization. Working full time as an AmeriCorps or Peace Corps volunteer also counts as qualifying employment. Under this program, you will not owe federal income tax on forgiven amounts.
The Income-Based Repayment plan is generally for those with lower earnings and high levels of debt. It caps payments at 10% or 15% of income. After either 20 or 25 years of consistent payments, depending on when the loan was made, the remainder of the loan balance gets forgiven at the end of the period.
To qualify, payments must come in at less than what they would be on a standard repayment plan. Also, those considering this program should note that the forgiven loan amounts qualify as taxable income.
Pay As You Earn
Like the Income-Based Repayment plan, the Pay As You Earn plan allows for forgiveness after a fixed amount of time. PAYE caps repayments to 10% of one’s income for 20 years. After the end of 20 years, borrowers can have their remaining loan balances forgiven. The forgiven amount will be considered taxable income.
To qualify, your PAYE payments would have to come in lower than they would under a 10-year repayment plan. You must also be a new borrower as of Oct. 1, 2007. Moreover, you must have received a direct loan disbursement on or after Oct. 1, 2011. Though the program caps the maximum payment at 10%, both income and family size will determine the final rate of your payment.
Revised Pay As You Earn
The Revised Pay As You Earn plan is similar to PAYE. It caps payments at 10%. It also sets the length at 20 years for loans for an undergraduate degree and 25 years if you earned a graduate degree.
Anyone holding direct federal loans with an eligible loan type qualifies for this program. Note that REPAYE could lead to you having to pay back more money than a standard, 10-year plan would have cost if your income increases, however. You may also have to pay income tax on any amount that’s forgiven.
With the Income-Contingent Repayment plan, you pay the lesser of 20% of your discretionary income or what you’d pay on a fixed, 12-year plan. The key advantage to ICR is that it is the only plan available for those who hold parent PLUS loans that have been consolidated. After 25 years of payments, the program forgives your remaining loan balance. You may have to pay federal income tax on the forgiven amount.
For every year you devote to service in a qualifying profession, a portion of your Perkins student loan will be canceled as part of this debt forgiveness option. Eligible professions include teachers and librarians. First responders, nurses, members of the military and other service-related professionals can also utilize this program.
To qualify, you must hold a Perkins loan and work full time in one of these designated professions. Loan servicers or your school’s student loan office can help you qualify.
All nurses in need of student loan debt forgiveness are eligible for the Nurse Corps Loan Repayment Program. Nurses in this program can have 60% of their loans paid over two years. Those who stay a third year can have an additional 25% forgiven.
You must be a registered nurse, nurse practitioner or nurse faculty member to qualify. Other qualifications include working in a critical shortage area and serving a high-needs population. The program accepts applications once a year.
Numerous programs offer assistance to doctors, dentists, pharmacists and other healthcare professionals. The National Health Service Corps offers up to $50,000 in forgiveness for working at an eligible site. Also, the NHSC Students to Service Loan Repayment Program provides up to $120,000 in forgiveness for those who work for three years at an approved site in a designated health professional shortage area.
For those who work in health facilities serving an American Indian or Alaska Native community, the Indian Health Service Loan Repayment Program offers up to $40,000 in student debt relief for an initial two-year commitment of service. Other programs include $50,000 annually for qualified education debt from the National Institutes of Health in exchange for engaging in NIH mission-relevant research. The Army will forgive up to $120,000 for active-duty doctors, and the Navy offers up to $275,000 in assistance for medical residents.
Some programs offer help to those carrying law school debt. The Justice Department provides up to $6,000 per calendar year, with a maximum lifetime benefit of $60,000 in assistance for those who agree to a renewable three-year service obligation. Public defenders can receive up to $10,000 per year — with a $60,000 maximum — in help from the John R. Justice program. The Herbert S. Garten Loan Repayment Assistance Program also offers up to $5,600 to 70 attorneys in qualifying programs through a lottery system.
The Teacher Loan Forgiveness Program offers forgiveness for elementary and secondary school teachers. Those who are eligible can receive a maximum of either $5,000 or $17,500 in loan forgiveness, depending on the subject area they teach. Such assistance applies to eligible direct loans or Federal Family Education Loan Program loans only. After five years of teaching, teachers can apply by filling out the Teacher Loan Forgiveness application and submitting it to their loan servicer.
Individual states, such as Arkansas, Delaware and Maryland, offer loan forgiveness programs for teachers as well.
The military assists more than just Army and Navy doctors. There are programs that help members of the armed forces, as well as veterans. Both the Army and the Navy offer up to $65,000 in assistance, whereas National Guard members are eligible for $50,000 worth of help.
Many states offer loan assistance programs for professionals. Forgiveness amounts and conditions vary by state. Some programs will require that you work in government or public-interest programs. Check to see if your state offers a plan that suits your needs, regardless of your occupation.
In rare circumstances, students can get their loans discharged. Discharge differs from forgiveness in one crucial respect. Forgiveness typically involves reducing or wiping out loan amounts after having worked in a profession or a geographic area for a time. When a loan is discharged, either fraud that victimized the borrower or an inability to repay usually serves as the basis. School closure, bankruptcy and disability are among the reasons you might get a discharge from your student loans.
Strategize: 15 Ways To Pay Off Student Loans
The high cost of college has left millions of young adults with a huge debt load. Worse, this often comes at a time when they are starting their careers and commanding lower salaries. They may also need to save to fund the purchase of a home, prepare for retirement, get married, and cover child-related costs. Massive debts could impede their ability to afford some of these things.
Fortunately, numerous debt forgiveness programs exist, especially for those who are willing to work in service to the public. Other programs can discharge your debt if you become a victim of fraud or face a disability.
Both Sanders’ and Warren’s plans offer complete debt relief to the vast majority of student debt holders. The Sanders plan, however, would cost close to $1 trillion more to implement. It would also force taxpayers to cover a lot of debt that some debtors can afford on their own.
Conversely, the Warren plan offers no relief to high earners. It would also leave many in the lower and middle classes with high debt levels — even after $50,000 worth of assistance.
No matter who wins the 2020 presidential election, student debt places a tremendous burden on society at large. But the outcome of the election may kickstart the process of determining whether debtors or taxpayers bear more of the responsibility.
More From GOBankingRates
- How This Expert Paid Off $40,000 in Student Loans in 7 Months
- Report Shows Millennial Student Loan Debt Has Grown to More Than $1 Trillion
- How To Get Out of Debt: A Step-by-Step Guide
- Student Loans 101: All Your Options, From Federal to Private
Will Healy is a freelance financial and political writer based in the Dallas area. He holds degrees in journalism and business and has covered a variety of topics, such as stocks, real estate, insurance, personal finance, politics and macroeconomics.