What Is Student Debt? How It Works, and Forgiveness

Student debt refers to the funds individuals borrow to cover educational expenses. These loans can be obtained through government programs or private lenders such as banks. Some lenders require students to start repaying their loans while still in school, while others permit repayment to begin after graduation.

Key Takeaways

• Student debt involves money borrowed to finance education.
• Loans can come from private lenders or government-backed programs.
• Student loans help cover tuition, textbooks, fees, and living expenses.
• The first federal student loan payments resumed on October 1, 2023, following the pandemic pause.

School Expenses

Student loans are often used to cover a range of educational expenses beyond just tuition, including:

• Tuition: Costs not covered by personal savings, grants, parental loans, or scholarships.
• Housing: Living expenses for on-campus or off-campus accommodations.
• Books and Supplies: Textbooks, laptops, and other necessary study materials.
• Administrative Fees: Additional fees charged by universities that can be covered by student loans.
• Advanced Degrees: Loans may also be required to cover costs for graduate studies.

Repaying Debt

While some students may save money to contribute towards their education, the high costs at many institutions often necessitate borrowing. Although there is an expectation that graduates will secure jobs to repay their loans, this is not guaranteed immediately after graduation.

Unlike other debts, student debt is challenging to discharge, even in bankruptcy, with exceptions made only in cases of “undue hardship.”

According to the 2022 Investopedia Financial Literacy Survey, 74% of millennials face significant financial stress, with borrowing and debt management being a major concern. The temporary relief on student loan payments during the pandemic ended, with interest resuming on September 1, 2023, and the first payments due on October 1, 2023.

Student Loan Forgiveness

Borrowers with federal student loans may be eligible for forgiveness under specific conditions:

• Public Service Loan Forgiveness (PSLF) Program: Available for those employed by government or non-profit organizations. After making 120 qualifying payments under an income-driven repayment plan while working full-time in a qualifying role, borrowers may have their remaining debt forgiven.
• Teacher Loan Forgiveness: Teachers who work full-time for five consecutive years in low-income schools or educational service agencies may be eligible for up to $17,500 in forgiveness on Direct Loans or FFEL Program loans.
• School Closure Discharge: Students whose schools close while they are enrolled might qualify for a discharge of their federal student loans.

Note that these forgiveness options apply only to federal student loans. Borrowers with private loans should consult their lenders for repayment assistance.

Debt Relief Programs

In August 2022, the Biden administration proposed canceling up to $20,000 in student loan debt for Pell Grant recipients and $10,000 for other borrowers, totaling an estimated $430 billion. However, on June 30, 2023, the U.S. Supreme Court blocked this initiative in a 6-3 decision, ruling that it exceeded legal authority by bypassing Congressional oversight.

In response, the White House introduced the Saving on a Valuable Education (SAVE) plan, which offers an income-driven repayment option reducing monthly payments to 5% of discretionary income for undergraduate borrowers. The SAVE plan also modifies the discretionary income formula, benefiting approximately one million low-income borrowers with $0 payments. Unpaid interest is not added to the loan balance as long as payments are up-to-date. Additionally, borrowers with balances of $12,000 or less can receive forgiveness after ten years.

On July 18, 2024, a federal appeals court temporarily blocked the SAVE plan while two related legal cases are resolved. During this period, borrowers under the SAVE plan are in interest-free forbearance. The Department of Education has provided options for borrowers close to qualifying for PSLF, including “buying back” PSLF credit months or switching to a different IDR plan.

Is All Student Debt Eligible for Forgiveness?

Only federal student loans are eligible for forgiveness programs. The Public Service Loan Forgiveness (PSLF) program offers forgiveness to those employed by federal, state, local, or tribal government or non-profit organizations. To qualify, borrowers must make 120 qualifying payments under an income-driven repayment plan while working full-time in a qualifying position. After meeting these requirements, the remaining loan balance is forgiven.

Who Manages Federal Student Loans?

When a federal student loan is issued, the Department of Education assigns it to a loan servicer. These servicers handle all inquiries related to the loan, including repayment plans and administrative issues. Some common loan servicers include:

• Edfinancial
• MOHELA
• Aidvantage
• Nelnet
• ECSI
• Default Resolution Group

Older loans from the Federal Family Education Loan (FFEL) Program, not owned by the Department of Education, may be serviced by providers like Aidvantage.

Can Student Debt Be Dissolved Through Bankruptcy?

In most cases, student debt cannot be discharged through bankruptcy unless the borrower can prove undue hardship, which is rare.

What Happens to My Student Debt if I Don’t Graduate?

Student loans must be repaid regardless of graduation status. Most federal loans offer a six-month grace period after leaving school or reducing enrollment below half-time, after which repayment begins.

The Bottom Line

With the increasing costs of education, student debt has become a common financial burden. There are various types of student loans, including federal and private, but only federal loans qualify for income-driven repayment plans and forgiveness programs. Students should consider reducing their debt by participating in work-study programs, working part-time, or choosing more affordable educational options. Repaying student loans can span decades and impact long-term financial planning.