Student loan forgiveness is not a myth or a fairy tale. There are actual, legitimate programs that can provide partial or full forgiveness of your student loans – if the right conditions are met.

But it’s those conditions that often trip people up. A recent New York Times article provided real-world examples of student loan borrowers who thought they are on the path to loan forgiveness, only to find out later that they weren’t at all. I see this all the time in my practice, and it’s usually because people don’t fully understand the required criteria for student loan forgiveness programs (mostly due to the fact that these programs tend to be complicated, and student loan servicers do a pretty terrible job explaining them).

It’s important to take the time to understand these programs and determine whether or not you meet their requirements – because if you don’t, you may be in for some major disappointment later on. Here are the most common mistakes I see people make when it comes to student loan forgiveness. 

Assuming You Have the Right Type of Student Loan

The type of student loans that you have matters – a lot. Most student loan forgiveness programs are limited to federal loans (as opposed to private loans). But program requirements are often even more specific than that. Public Service Loan Forgiveness, for example, is only available to Direct federal student loans, which are loans disbursed or originated directly by the U.S. Dept. of Education. There are several other federal student loan programs that do not issue Direct loans, and those loans don’t qualify, even though they are still federal. Teacher Loan Forgiveness – another student loan forgiveness program – is generally only available for certain federal Stafford loans that were disbursed after a certain date. Perkins loan forgiveness is a program unique to only Perkins loans.

If you don’t have the “right” type of student loan for the program you intend to be on track for, sometimes this is fixable, such as by consolidating your federal student loans through the U.S. Dept. of Education. But this isn’t always the case (and consolidation in particular can have its own set of benefits and drawbacks). The bottom line is, you have to know what type of student loans you have, and whether this restricts your eligibility for loan forgiveness programs.

Misunderstanding Loan Forgiveness Requirements

This is a big one. Every student loan forgiveness program has its own unique programmatic requirements. It can be overwhelming to untangle this complex web of criteria, but it’s crucial that you do so. Otherwise, you might think you’re making progress towards loan forgiveness, when you’re actually not. Here are some common examples I see:

• Public Service Loan Forgiveness: You have to be in a specific type of repayment plan – usually an income-driven plan, like IBR or Pay As You Earn. Even if you have the right type of student loan and you’re working in qualifying employment, you probably are not on track for this program if you’re on an Extended or Graduated repayment plan.
• Teacher Loan Forgiveness. You have to be a specific type of teacher working in a specific type of school. It’s not enough to “just” be a teacher. You also have to have consecutive years of qualifying service (as opposed to Public Service Loan Forgiveness, where qualifying payments don’t necessarily have to be consecutive).
• Disability discharge / forgiveness: You have to be “totally and permanently disabled,” within the definition of the disability discharge regulations. The definition of “disabled” for this forgiveness program is different from the definition of “disabled” for other programs, such as Social Security. This means that you may be eligible for Social Security disability benefits, but not a student loan disability discharge.

Not Keeping Good Records

We all know student loan servicing is a mess. You simply cannot – and should not – rely exclusively on your student loan servicer to keep good records. And given that many of these student loan forgiveness programs have complex eligibility criteria, it may be up to you to prove your servicer wrong if they make a mistake.

What type of records should you be keeping?

• Payments records, if you have to show that you’ve been making payments.
• Correspondence from your servicer, such as approval letters for income-driven repayment plans (if you have to be in a specific type of repayment plan).
• Copies of loan forgiveness applications you submit to your servicer, such as the Employment Certification Form for Public Service Loan Forgiveness, or your annual Perkins Loan cancellation forms.
• Employment records, if you have to maintain some sort of qualifying employment for your loan forgiveness program.

Failing to Consider the Tax Consequences

Some student loan forgiveness programs have a relatively little known and potentially catastrophic consequence – taxes. This is because certain types of debt cancellation can be treated as “income” for the borrower, and that “income” can then be subject to federal and state income taxes.

Some student loan forgiveness programs are subject to potential tax consequences. For example, a disability discharge is a taxable event, and 20-year or 25-year loan forgiveness for income-driven repayment plans might be as well (although no one has gotten their loans forgiven yet under those programs, so we don’t know for sure yet). Other types of loan forgiveness, however, may not be subject to taxes. Most of the profession-based loan forgiveness programs (such as Public Service Loan Forgiveness, Teacher Loan Forgiveness, and Perkins Loan Forgiveness) are generally not taxable.

Since each program is unique, and there also might be tax code exemptions to having to pay taxes even if the loan forgiveness itself is technically “taxable,” it’s important to consult with a professional who understands these student loan programs, as well as a tax professional to better understand the tax consequences.