Student loan cancellation is a process by which a borrower’s debt is forgiven. There are many reasons why a borrower may choose to cancel their student loans, such as financial hardship, career change, or death. The process of student loan cancellation can be complex, so it’s important to understand how it works and what to expect.
In this guide, we’ll cover the following topics:
Table of Contents
What is student loan cancellation?
Student loan cancellation is a process whereby a borrower’s entire student loan balance is forgiven. This could be done in full or in part. The reasons for cancellation can vary; however, it is typically done due to financial hardship, career changes, or even death. In any of these cases, the borrower is no longer responsible for any remaining loan balance.
How does student loan cancellation work?
Typically, the borrower must apply for a student loan cancellation and make a case detailing the reasons why they believe their loan should be forgiven. Once the loan servicer receives this request, they will review it and either approve or deny the application. If approved, the loan servicer will note on the loan’s account that it is being forgiven. Depending on the loan type, forgiveness may require additional action from the borrower.
Who is eligible for student loan cancellation?
The eligibility for student loan cancellation varies by loan type and lender; however, the borrower must typically make a case for why they believe their loan should be forgiven. For example, if the borrower was laid off from their job or suffered financial hardship due to an unexpected event, they may be eligible for partial or total loan cancellation. Other loan types may offer blanket relief to certain student populations, such as those of a certain income level.
What are the benefits of student loan cancellation?
The primary benefit of student loan cancellation is that the borrower is no longer responsible for the loan balance. This can provide financial relief for borrowers after unexpected life events and can make it easier for them to financially move forward. Furthermore, student loan cancellation can help borrowers avoid the impact of defaulting on a loan, which can affect their credit score and ability to take out other loans in the future.
Are there any drawbacks to student loan cancellation?
Student loan cancellation can be beneficial to those in need, but it is not without drawbacks. One such drawback is that the forgiven loan balance may be counted as taxable income. This means the borrower will owe taxes on the amount that was forgiven. Furthermore, if the loan was handled by private lenders, cancellation may not be an option.
What can borrowers expect in the future?
At this time, there are no official plans in place by the federal government regarding student loan cancellation. However, some states have passed legislation that makes it easier for borrowers to qualify for loan cancellation. Additionally, the federal government has created several programs that can offer relief to those in need, such as income-based repayment and loan consolidation. It is also possible for borrowers to contact their loan servicer to discuss their options.
Student loan cancellation can be an effective way for a borrower to manage their outstanding debt, but it should be carefully considered. Due to the complexity of the process and the potential for taxes, it is important for borrowers to understand how student loan cancellation works as well as its benefits and drawbacks. Additionally, states and the federal government have created several programs that can provide relief to borrowers in need. With the right information and assistance, borrowers can make an informed decision about their financial future.