Debt Forgiveness Options for Struggling Borrowers

If you're struggling to pay off debt, don't worry, there are options available to help.

Debt forgiveness is a legitimate way to get debt relief, but it's not a decision to be taken lightly. It can have serious consequences on your credit score.

The National Foundation for Credit Counseling (NFCC) estimates that over 77% of Americans struggle with debt. This can be a stressful and overwhelming experience, but there are resources available to help.

One option is debt consolidation, which can simplify your payments and potentially lower your interest rates.

Debt forgiveness options can vary widely depending on your situation. If you're a student in North Carolina, you might be eligible for the North Carolina Forgivable Education Loans for Service, which can forgive up to $7,000 for a certificate, associate, or bachelor's degree, and up to $14,000 for a Master's or Ph.D.

Some debt forgiveness options involve negotiating with creditors to settle the debt for less than the full amount owed. Others, like bankruptcy, can wipe the debt out altogether.

You might also be eligible for federal repayment plans or state-based student loan repayment assistance programs (LRAPs). Additionally, some private education debt can be forgiven through special programs.

Here are some student loan forgiveness options to consider:

You may have heard of bankruptcy as a last resort for debt relief, but it's worth exploring if you're struggling to make ends meet. Initial consultations with a bankruptcy attorney are often free, so it's a good idea to start there.

There are two main types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 liquidation can erase most credit card debt, unsecured personal loans, and medical debt, but it will hurt your credit scores and stay on your credit report for up to 10 years. Chapter 13 is a three- or five-year court-approved repayment plan, based on your income and debts, and may be necessary if you have a home you want to save from foreclosure.

If you're considering bankruptcy, it's essential to know the rules. For example, Chapter 7 bankruptcy will not erase child support obligations, and if you have used a co-signer, your bankruptcy filing will make that co-signer solely responsible for the debt.

Here are some key differences between Chapter 7 and Chapter 13:

You have two main bankruptcy options: Chapter 7 and Chapter 13. Chapter 7 is the most common form of bankruptcy, which can erase most credit card debt, unsecured personal loans, and medical debt in three or four months if you qualify.

Chapter 7 won't erase child support obligations, and it will hurt your credit scores and stay on your credit report for up to 10 years.

Chapter 13 bankruptcy is a three- or five-year court-approved repayment plan based on your income and debts. If you stick with the plan for its full term, the remaining unsecured debt is discharged.

If you have a home you want to save from foreclosure, you may need to file for Chapter 13 bankruptcy. Chapter 13 stays on your credit report for seven years from the filing date.

Here are the key differences between Chapter 7 and Chapter 13:

Keep in mind that Chapter 7 may not be the right option if you would have to give up property you want to keep, or if you don't have any income or property a creditor can go after.

If you're considering debt management plans, it's essential to understand your options. Debt management plans allow you to pay your unsecured debts in full, but often at a reduced interest rate or with fees waived. You make a single payment each month to a credit counseling agency, which distributes it among your creditors.

Credit counselors and credit card companies have agreements in place to help debt management clients. However, your credit card accounts will be closed, and you'll have to live without credit cards until you complete the plan.

Here are some key facts to keep in mind:

It's worth noting that missing payments can knock you out of the plan. To avoid this, make sure to pick an agency accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Debt forgiveness options can be tempting, but it's essential to understand the risks involved.

Debt settlement can lead to debts ballooning due to late fees, interest, and other charges, potentially making them even bigger than when you started.

Debt settlement companies may ask you to stop making debt payments and put the money in an escrow account, which can lead to collections calls, penalty fees, and even legal action.

You may face tax bills on forgiven amounts, as the IRS counts them as income, which can add to your financial burden.

Debt settlement companies are often riddled with bad actors, and reputable organizations like the CFPB, National Consumer Law Center, and Federal Trade Commission caution consumers about it.

You may need to seek relief from debt if you have no hope of repaying unsecured debt within five years, even if you take extreme measures to cut spending. This can include credit cards, medical bills, and personal loans.

The total of your unpaid unsecured debt can also be a sign that you need relief. If it equals half or more of your gross income, it may be time to consider DIY debt relief, bankruptcy, or debt management.

Here are some scenarios where you might need debt relief:

Keep in mind that debt relief options are available, and it's worth exploring them if you're feeling overwhelmed by debt.

Debt settlement can be a risky option, especially when it comes to late fees, interest, and other charges that can balloon your debt. You could end up with debts that are even bigger than when you started.

Not paying your bills can result in collections calls, penalty fees, and potentially, legal action against you. Lawsuits can lead to wage garnishments and property liens.

Debt settlement companies are often riddled with bad actors, and reputable organizations like the CFPB, National Consumer Law Center, and Federal Trade Commission caution consumers about it in the strongest possible terms.

Some debt settlement companies advertise themselves as debt consolidation companies, but they are not the same thing. Debt consolidation is something you can do on your own, and it will not damage your credit.

If you're considering debt settlement, be aware that you may face a bill for taxes on the forgiven amounts, which the IRS counts as income.

Here are some potential risks associated with debt settlement:

To apply for forgiveness, you'll need to submit the required documentation with your loan forgiveness application. Each forgiveness form has unique instructions, so be sure to check the form for clear guidance.

You can use the SBA form 3508S PPP Loan Forgiveness Application + Instructions, which has a section titled "Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application" for additional details.

Borrowers who work in public service can still apply for forgiveness, even if they haven't worked in the field for 10 years or more. However, they must apply before October 31, 2022, to take advantage of the limited-time offer.

If you're eligible, you can receive credit for past payments, even if they were not on time or for less than the amount due. This means that if you've made 120 monthly payments, you may receive forgiveness through the time-limited changes.

Here are some examples of forgiveness programs and their eligibility requirements:

You can apply for loan forgiveness through SBA's direct forgiveness portal, which is effective as of March 13, 2024, and can take as little as 15 minutes.

If you prefer to work with your lender, you can still have them assist you with the application process. Reach out to your lender for help.

Borrowers who work in public service can apply for forgiveness, and if you've worked in public service for 10 years or more, you may be eligible to have all your student debt canceled.

Applying for loan forgiveness can be a straightforward process, especially with the SBA's direct forgiveness portal. Effective March 13, 2024, all borrowers can use the portal to apply for forgiveness, and the process can take as little as 15 minutes.

To get started, you'll need to choose a forgiveness form, such as SBA Form 3508, SBA Form 3508EZ, or SBA Form 3508S. Each form has unique instructions for documentation that must be submitted with your loan forgiveness application.

Here are the key steps to follow:

You can apply for forgiveness once you've used all the loan proceeds you're requesting forgiveness for. Borrowers can also apply for forgiveness any time up to five years from the date that SBA issued the SBA loan number.

If you're a borrower who works in public service, you may be eligible for forgiveness, even if you haven't served for 10 years. However, you must apply before October 31, 2022.

To determine if you're eligible for forgiveness, use the SBA's simple tool to see if you qualify.

The cost of student loan forgiveness can be a bit tricky to figure out. Ultimately, the taxpayer is footing the bill for federal or state-offered loan forgiveness, as their taxes funded the loans for students in the first place.

For federal or state-offered loan forgiveness, the taxpayer is essentially covering the cost. This is because they're the ones who funded the loans through their taxes.

Employers or charitable donations may be paying for other forgiveness programs, but this is not the case for federal or state-offered loan forgiveness.

Public Service Loan Forgiveness (PSLF) is a great option for those working in public service careers. Direct Loans, including Direct PLUS Loans, are eligible for PSLF.

To qualify, you must work for a qualifying employer, which includes any U.S. federal, state, local, or tribal government agency. This can be a broad range of employers, such as public schools, universities, and even special governmental districts.

You must also be a full-time employee, and your job title doesn't matter as long as you're employed by a qualifying employer. For example, if you're a teacher, administrator, or support staff member in a public school system, your employment would meet the requirements for PSLF.

If you're considering a career in public service, you might be wondering if your volunteer work can count toward Public Service Loan Forgiveness (PSLF). The answer is yes, but only if you work for a qualifying employer.

AmeriCorps or Peace Corps volunteer service does count toward PSLF. However, no other full-time volunteer service is eligible. You must be a full-time employee who is hired and paid by a qualifying employer.

If you're interested in working for a qualifying employer, you can explore options in government or non-profit sectors. Any U.S. federal, state, local, or tribal government agency is considered a government employer for the PSLF Program. This includes employers such as the U.S. military, public elementary and secondary schools, public colleges and universities, and special governmental districts.

Here's a list of examples of qualifying employers:

Keep in mind that the specific job you perform doesn’t matter, as long as you’re employed by a qualifying employer. For example, if you’re a full-time employee of a public school system, your employment would meet the requirements for PSLF, regardless of your position (teacher, administrator, support staff, etc.).

Private education loans are not eligible for Public Service Loan Forgiveness (PSLF) and can't be consolidated into a Direct Consolidation Loan.

Most student loan forgiveness programs apply only to federally held education debt, but some state-based programs and employers may offer repayment assistance for private student loans.

Private lenders may offer forgiveness for private student loans in cases of total and permanent disability or death, such as Sallie Mae waiving the current balance if a student borrower dies or becomes totally disabled.

You can check your private lender's policy by contacting them or reviewing your loan closure documents.

Private lenders may offer significant repayment assistance, but it's generally rarer than for federal loans.

There are several types of student loan forgiveness programs based on profession, employer, or field of study. These programs are designed to help individuals in specific careers or industries manage their student loan debt.

Government and nonprofit workers, teachers, nurses, doctors, and health care professionals are among those eligible for student loan forgiveness. Military members and those working for certain employers may also qualify.

Here are some of the most popular student loan forgiveness programs based on profession: Government and nonprofit workersTeachersNurses, doctors and health care professionalsLawyersMilitary membersEmployer plans

Student loan forgiveness is also available through income-driven repayment plans, which adjust monthly bills based on income and family size. These plans include Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).

Debt management plans can be a viable option for those struggling with unsecured debt. These plans allow you to pay your debts in full, often at a reduced interest rate or with fees waived.

You'll make a single monthly payment to a credit counseling agency, which will distribute it among your creditors. Credit counselors and credit card companies have agreements in place to help debt management clients. Your credit card accounts will be closed, and you'll typically have to live without credit cards until you complete the plan.

Closing accounts can hurt your credit scores, but debt management plans do not affect your credit scores directly. Once you've completed the plan, you can apply for credit again. It's essential to pick an agency accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America.

To qualify for a debt management plan, you may need to meet certain criteria, such as having no hope of repaying unsecured debt within five years or having total unpaid unsecured debt exceeding half of your gross income.

Here are some income-driven repayment plans offered by the Department of Education:

These plans adjust your monthly bill based on your income and family size, and any remaining balance will be forgiven once you've reached the end of the term.

Private education loans aren't eligible for PSLF and can't be consolidated into a Direct Consolidation Loan.

Most student loan forgiveness programs apply only to federally held education debt, but some state-based programs offer repayment assistance for both federal and private student loans.

Employers may also match payments on both federal and private loans, providing additional incentives for repayment.

Some private lenders, like Sallie Mae, offer forgiveness for private student loans in the case of death or total disability, but this is relatively rare compared to federal loan forgiveness.

Many private lenders discharge outstanding private loan balances in the case of the primary borrower's total and permanent disability or death.

It's possible to forgive student loan interest, not just the loan itself.

This format of forgiveness could call for borrowers to repay only what they originally borrowed, or only what remains on their balance and not a cent more, since their loans would no longer accrue and capitalize interest.

To date, however, no major forgiveness program in existence has explicitly focused on interest as opposed to the entire loan balance.

The administrative forbearance awarded to most federal student loans in March 2020 temporarily set interest rates to zero, but borrowers were slated to resume repaying their loans at their original rates.

Forgiving interest can make a big difference in the long run.

It can save you thousands of dollars in interest payments over the life of the loan.

University-Sponsored LRAPs can be a game-changer for those struggling with student loan debt. Some universities help their alums pay back their loans, offering forgivable loans or debt coverage.

The University of Virginia School of Law, for example, will cover up to 100% of student debt for graduates who make less than $65,000 per year. This program encourages its students to work in public service.