The most obvious answer is no, but there are ways and circumstances allowing you to minimize or sometimes eradicate all of your student loan obligations.
The most obvious answer to whether student loan debt would go away after seven years or any amount of time, is no.
After all, student loans are obligations that should be paid back. But what if you haven’t found a job after student loans require you to start payment? What if you are still studying? What will you do with your student loans if you only have a part time job and have to deal with several expenses too?
There are ways and certain circumstances which may reduce the payment needed to cover your student loans, and in some occasions, remove all liabilities entirely.
Types of Student Loans
First, you have to understand differences between available student loans. The Federal Student Aid, the United States (US) government’s official site for student loans, has enumerated four of their federal loan offerings:
- direct subsidized loans which are offered to undergraduate students who need more money to fund a higher education;
- direct unsubsidized loans, which are given to students but in a scheme were eligibility is not based on financial need;
- direct PLUS loans are given to graduate or professional students or parents of dependent students who need extra money for educational expenses not covered by existing financial aid, and;
- direct consolidation loans, which allows loanees to combine all of their student loans into one single loan servicer.
As the name suggests, federal loans are sourced from public funds, which means that you are borrowing money from the government. On the other hand, there are student loans offered by private entities, mostly banks and other financial and credit institutions.
Some others also provide parent loans, which would mean having people with a better credit score or credit standing take the loan for the student.
Usually, availing private student loans are dependent on the credit report of an applicant, and if approved, is dictated by the lending institution’s terms in accordance with state regulations. Different payment plans are available — from different interest rates to various payment lengths, which means that an applicant may pick specific private student loans that would suit him or her best.
How Can You Clear Federal Student Loans?
So between federal student loans and private student loans, which may go away after some years? Are student loans forgiven? What does it even mean to forgive student loans in the first place?
There is a misconception that you’re automatically in a bad shape if you availed a federal student loan, as the chances of eradicating the loan debt over years is low.
Add the fact that the government may actually deduct funds from your wages and other benefits that you receive just to complete the federal loan payments, if you do not avail for a forbearance or a delay in payment time.
But that doesn’t mean you cannot reduce a federal student loan — there are ways, but the options are limited.
Two Ways To Do Away With Student Loan Debt
According to the Federal Student Aid, there are two ways to do away with loan debt: student loans forgiveness or cancellation, and discharge.
1. Student loan forgiveness or cancellation
Basically, forgiveness and cancellation of existing student loan debt occur in relation to an applicant’s current job whereas discharge would be caused by other circumstances. Absent these conditions, and you may not be entitled to any reliefs.
For example, people with existing federal student loans obligations but are working for government offices or non-profit organizations can apply for a Public Service Loan Forgiveness. Under this mode, the government would forgive your remaining balance provided that you have already made 120 qualifying monthly payments while working full-time for a qualified employer.
Teachers working for a low-income elementary school, secondary school, or an educational service agency are meanwhile eligible for the Teacher Loan Forgiveness. With this, the balance of qualified teachers’ federal loans may be slashed by up to $17,500.
Discharges on the other hand occur in various scenarios. Student loan debt may go away partially or entirely if a school closes while you are enrolled, if the school falsifies your records, when you have completed a certain amount of public service, when the loanee is permanently disabled, and death of the borrower or the student who benefitted from the loan.
There are also circumstances where the government would allow the discharge of student loan debt due to bankruptcy, provided that paying the loan meant one cannot maintain a minimal standard of living, if financial problems would continue for a long time, and if there were good faith efforts to repay student loans before bankruptcy.
What Happens If You Don’t Clear Loans?
But what if you availed a private student loan? There is this belief that student loans go away after around 7 or 10 years.
This originates from the fact that after more than seven years of disregarding your student loans, the debt incurred and other negative remarks would be removed from your credit report — which means increasing your chances of getting new loans with higher credit scores.
This also gives you a higher possibility of availing a credit card or other loans offered by credit agencies.
• It would tarnish your credit report, may lead to higher balances
However, it must be noted that the loans itself cannot be removed and would still have to be paid. Disregarding your loan payments would not only tarnish your credit report and lessen chances of having a credit card – it may lead to higher balances, as interest fees pile up, while it also affects the credit report of people who signed up the loan on your behalf.
• You can be sued
Also, private student loan cancellations are not required by law, and in some cases, not complying with the required payment may result in legal cases. This becomes a huge possibility especially if you have not paid your private student loan longer than the so-called statute of limitations, which varies from one state to another.
The statute of limitations is the amount of time before a borrower who defaulted on his or her loan may be sued. In some cases, it may be as short as 5 to 7 years, while other state’s statute of limitations may be as long as 15 years. If your statute of limitations was set at 5 years, then after that period, you can be sued in court.
Despite that, financial advisors advise students to opt for private lending firms because these do not wield as much power as federal lenders. Sure, credit score may be affected, but remember that the government can slash a part of your salary in the future to pay off your student loan – banks and lending firms cannot do this even with expired statute of limitations.
• It would be difficult to get a credit card
This doesn’t mean that you will not experience any problem. Some individuals who defaulted on their student loans felt they were harassed by private lenders and debt-collecting agencies tapped by the firms — even before the statute of limitations expires. And as said earlier, a credit card would be hard to come by.
Banks checking on you are a reality especially if you have not complied with the payment that they may have required.
How To Further Avoid Trouble
• Ask lenders for student loan refinancing
To avoid problems like this, you can ask the lender if they are offering any programs for student loan refinancing, that is, a bank or a credit union shouldering your student loan balance.
This would require you in turn to pay for them, possibly on terms more friendly to your financial situation. You can also seek a longer grace period so that you can comply with loan payments at a later date.
But student loan refinancing works well only if you have a good credit report, as banks and other firms would not give you a good deal if your credit report is bad.
Also, if you have a federal loan and would like to seek refinancing — yes, that is possible — you may lose some protections and rights reserved, including some seasonal reliefs like one being implemented due to the economic effects of the COVID-19 pandemic.
You will also lose the chance to avail forgiveness student loan or discharge of your student loan. In contrast, the Federal government claims that it would be better to get a loan from them as interest rates would probably be lower compared to private lenders.
• Look into debt strategies: debt snowball, debt avalanche
Eventually, you may use various strategies like the debt snowball and the debt avalanche — especially if you have more than one student loan or obligation. In debt snowball, you list all your debt balances and pay the minimum amount possible for all loans, except the one with the least balance.
Paying the debt with least balance a little higher means that you would take a quicker time to end the debt, improve your credit report, avoid other interest fees, and eventually save up.
How? Once the smallest loan is completely paid, it would reflect on your credit report and credit score — allowing you to seek more friendly terms under student loan refinancing. Or if you do not prefer refinancing, you would have already cleared one debt, which is a big feat.
After completing payments, the process repeats for the debt with the second-least balance, and so on. Being able to clear away all debts after years would bode well for your credit score.
The same concept applies to debt avalanche, except that you would list all existing debt according to which of them have the highest interest rate. In this strategy, your payments for all debts would be the minimum amount required, except the one with the highest interest.
Your payments for the debt with the highest interest would be slightly bigger, to finish it quicker and avoid higher interests. This would benefit you also since your other loans with smaller interest may possibly accrue a smaller interest value in the long run.
There are ways to reduce or totally clear your debt, but not all can actually apply for it. Experts still say that the best thing to do is to go settle student loans according to the terms set, as it would boost your credit score and give an appealing look to your credit report.
But this doesn’t mean it’s wrong to avail for lower debt. If you are eligible, then by all means go and take it, as it would be of great help especially during a pandemic.