Understanding US Student Loan Forgiveness Rules

1. Core Federal Forgiveness Programs

The majority of forgiveness relies on two major federal programs:

Public Service Loan Forgiveness (PSLF)

• Requirement: Must be employed full-time by a government organization or a 501(c)(3) non-profit organization.
• Forgiveness Term: After making 120 qualifying monthly payments (10 years).
• Loan Type: Requires Federal Direct Loans. FFEL/Perkins must be consolidated.

Income-Driven Repayment (IDR) Forgiveness

• Requirement: Enrollment in an IDR plan (e.g., SAVE, PAYE, IBR). Payments are set based on income and family size.
• Forgiveness Term: Remaining balance is forgiven after 20 or 25 years of qualifying payments, depending on the plan and loan type.
• Note: While you may pay less monthly, the forgiven amount may be considered taxable income (check current tax laws).

2. Key Financial Rules & Capitalization

Simple Daily Interest

Federal loan interest is generally calculated daily on your unpaid principal balance. This is calculated as:

$$ \text{Daily Interest} = \frac{\text{Current Principal Balance} \times \text{Annual Rate}}{365.25} $$

Interest Capitalization (The Hidden Cost)

Capitalization occurs when unpaid interest is added to your principal balance, meaning you then pay interest on the interest. This significantly increases your total cost.

• When it happens: Upon graduation for Unsubsidized Loans, and when forbearance/deferment periods or certain IDR plans end without full interest payments.

3. Critical Eligibility Checks

Before applying for any program, ensure you meet these fundamental criteria:

Loan Consolidation

If you have older loans (like FFEL or Perkins), you **must** consolidate them into a Direct Consolidation Loan to become eligible for PSLF and many IDR plans.

On-Time Payments

Payments only count if they are made in the full amount, on time, and while you are actively employed in a qualifying role (for PSLF).