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What is Loan Forgiveness?

Volunteer work may be an option for college graduates seeking loan forgiveness.
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  • Written By: Mary McMahon
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  • Last Modified Date: 09 October 2014
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Loan forgiveness is a program in which student loans are all or partly written down, as long as a candidate fulfills certain requirements. In nations where students must finance their education with student loans, loan forgiveness programs are designed to help make college more accessible for people who are willing to do a little bit of extra work. Loan forgiveness is available through colleges, government agencies, and non-profit organizations, and financial aid offices usually have information about available loan forgiveness programs.

These types of programs are not designed for people who cannot pay their loans. People who struggle with repayment may be encouraged to seek a hardship deferment, in which their payments are suspended for a few months. Rather, loan forgiveness programs reward people who are willing to join the military, perform volunteer work, participate in some government jobs, or work as teachers, doctors, or lawyers in at-need areas.

In a typical loan forgiveness agreement, the graduate's loans are partially erased for each year of work in the program. In some cases, people are given stipends which they can use to pay down their loans, and in other instances, the sponsoring agency simply pays down the loans directly. The amount of loan forgiveness varies, depending on the program. Some forgive a set percentage of loans each year, while others provide a cash amount, and the amount may be scaled depending on how many years of service have been put in.

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In order to be accepted into a loan forgiveness program, someone must usually be willing to relocate at the will of the program, and potentially to work in a sector which is not very profitable. The idea is that loan forgiveness programs encourage people to work in low-income communities because their loan forgiveness makes the work affordable, since they do not have to pay down loans while working. Therefore, communities benefit from the expertise of college graduates, and college graduates advance their careers while reducing their total debt.

Some people are actively interested in working for non-profits, government agencies, and low-income communities around the world, making loan forgiveness a great fit for them. Others are willing to do a few years of unprofitable work in exchange for the benefit of loan forgiveness before seeking work in a more desirable sector. Most programs are extremely competitive, because the idea of loan forgiveness is very appealing, so it pays to research programs thoroughly and to apply to several such programs to increase one's chance of getting in.

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MrsWinslow
Post 2

@Kat919 - It varies. If your employer pays your student loan for you as a special benefit, that is probably taxable. But loan forgiveness of federal loans, for special health care and teaching programs, is generally not taxable. Basically, the more strings attached, the more likely it is to be tax-free!

The IRS has helpful publications that you can look at to try to figure out if your particular situation would be taxable. But if in doubt, you should always consult a CPA. Their hourly fee is a lot cheaper than getting in troble with the IRS!

Kat919
Post 1

My understanding is that forgiven debt can be considered taxable income! Several years back, a friend of mine had to take a short sale on her house, meaning that the mortgage company accepted less than they were owed. Well, because they forgave about twenty thousand dollars in debt, she then had to pay taxes on that twenty thousand! She wound up in serious debt to the IRS that took quite some time to clear.

Does anyway know if student loan repayment forgiveness is also considered taxable income? Or is it just a free benefit?

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