Debt Forgiveness: Programs, Pros And Cons, And Alternatives

Debt forgiveness may seem like a personal finance dream – a lender wipes out your debt or a portion of your debt, whether it’s related to credit cards, student loans, taxes, mortgages, medical expenses or more.

But what exactly is debt forgiveness, and what types of loans qualify for forgiveness? Let's take a look.

What Is Debt Forgiveness?

Debt forgiveness, also called loan forgiveness, means that a lender cancels all or some of the debt that a borrower owes. There's no recommended amount of debt a person should have to be considered for forgiveness, but borrowers must qualify through an established debt forgiveness program.

How Debt Forgiveness Works

Loan forgiveness programs work in various ways. Borrowers can determine their eligibility for a particular debt forgiveness program by checking with their loan servicer.

For example, if you're interested in seeking forgiveness for your loan balance in a student loan forgiveness program through the federal government, you can check the eligibility requirements and qualifying cancellation policies through the servicer that handles your student loans. Your servicer handles the billing and other services related to your loan.

Types Of Debt Forgiveness Programs

Let's discuss a few main types of debt forgiveness programs, such as ones for credit cards, student loans, taxes, mortgage debt and medical debt. There are even some niche programs such as teacher loan forgiveness and public service loan forgiveness (PSLF).

Credit Card Debt

Credit card debt is hard to wipe out. Since there’s no real option for credit card debt forgiveness or debt cancellation, you might pursue what’s called credit card settlement. It’s not the same as debt forgiveness – it means paying your lender less than you owe. A third party – a settlement company – typically works with you and your credit card company.

It might hurt your credit score and cost you money in fees due to the settlement company. In most cases, the only people who can attain this option are those who cannot escape their debt. If you choose this option, ensure that you choose a settlement firm with an excellent reputation.

Student Loan Debt

Student loan debt forgiveness programs are some of the most commonly known, with some individuals even pursuing a career path that offers forgiveness options. Federal student loan debt forgiveness options come from programs through the federal government, through the U.S. Department of Education. To qualify, you must meet specific eligibility requirements to ensure you don't have to pay back some or all of your loan.

In August 2022, the Biden administration proposed a one-time forgiveness program for student loans in response to the pandemic. It would’ve offered $20,000 in federal student loan forgiveness to millions of borrowers. The Supreme Court voted 6 – 3 against President Biden's sweeping student loan forgiveness plan on June 30, 2023.

Public Service Loan Forgiveness (PSLF)

Public Service Loan Forgiveness (PSLF) wipes away the remaining balance on your federal direct loans after you make the equivalent of 120 monthly payments under an income-driven repayment plan and work for a qualifying employer full-time.

Income-Driven Repayment Forgiveness (IDR) Plan

Income-driven repayment (IDR) gives you another option if you have trouble making student loan payments under a standard repayment plan, which lasts 10 years. You make payments based on your family size and income.

Depending on the type of plan, such as REPAYE (Revised Pay As You Earn), PAYE (Pay As You Earn), IBR (Income-Based Repayment) and ICR (Income-Contingent Repayment), you may make qualifying payments for 20 or 25 years. At the end of those years, any balance will be forgiven.

Note that the canceled loan amount will be taxable as income. Contact your loan servicer to learn more about student debt relief for student loan borrowers under this plan.

Teacher Loan Forgiveness

The Teacher Loan Forgiveness Program allows borrowers to qualify for up to $17,500 in loan forgiveness as long as they teach for at least 5 full years consecutively in a qualifying school district in certain subject areas. You also must have certain education loans – federal direct subsidized or unsubsidized loans. You can qualify after submitting the Teacher Loan Forgiveness application with your loan servicer.

Perkins Loan Cancellation And Discharge

Perkins loans are no longer available to current college students, as they were last issued in 2018. However, those who received a Perkins loan may still seek student loan repayment forgiveness. You may qualify for partial or full loan forgiveness if you work in public service. The types of career paths that could allow you to qualify for discharge of the Perkins loan include: 

• Teacher
• Nurse or medical technician
• Firefighter
• Early intervention service provider for the disabled
• Faculty member at a tribal college or university
• Speech pathologist working at a Title I-eligible school
• Librarian working in a Title I-eligible school
• Law enforcement or corrections officer
• Attorney in a federal public or community defender organization
• Employee of a child or family services agency
• Head Start program employee
• Educator in a prekindergarten or child care program
• Military member
• AmeriCorps VISTA or Peace Corps volunteer

Tax Debt

Tax debt forgiveness programs may be the right option if you don't have enough money to pay your taxes. The IRS offers a debt forgiveness program, including "offer in compromise." Offer in compromise (OIC) means you work directly with the IRS to show them that paying your bill will affect you negatively.

Note that tax scams exist – don't work directly with any company that guarantees it can get your tax bill forgiven, because it is never a guarantee. Work directly with the IRS instead.

Mortgage Debt

Mortgage debt forgiveness programs involve a lender forgiving some portion of a borrower's debt or reducing the principal amount. The 2020 Consolidated Appropriations Act (CAA) set a maximum amount of excluded forgiven debt from income tax at $750,000 through 2025.

If it’s not possible to obtain a loan modification through your lender in order to make payments more affordable, you may instead consider getting government assistance to determine next steps.

A housing consultant from the Department of Housing and Urban Development (HUD) can answer your questions about all your options that may come from the federal government.

Medical Debt

Medical debt forgiveness programs may come through your hospital or health care provider. They may offer financial assistance and possibly forgiveness options. Nonprofit hospitals must offer financial assistance to low-income patients, though you may need to submit official documentation to verify your income. Forgiveness options vary by state, so learn more about what your state will do for you through the National Consumer Law Center.

Specialized organizations, such as nonprofits and charities like veterans’ groups, foundations and funds, local businesses and churches, may help you get financial assistance for your medical bills. Government assistance programs may also help, such as Medicaid, Social Security, Medicare and other financial assistance programs through state and local agencies.

Pros And Cons Of Debt Forgiveness

While extremely beneficial for many borrowers, debt forgiveness may not be as rosy as you think. From minimal positive impact to your credit score to not having the full amount forgiven, there are pros and cons to consider.

Pros

The benefits of debt forgiveness include: 

• Can get some or all debt forgiven: The biggest benefit of debt forgiveness is that you get a portion or all of your debt forgiven, meaning you no longer have to repay your debt.
• Save money over time: Getting debt forgiven protects you from losing money that would ordinarily go toward loans or interest on your loan. You may save thousands of dollars over a number of years.
• Companies will not pursue collections: Your loan servicer or other companies will no longer pursue collections against you because forgiveness programs wipe your debt.

Cons

The downsides include:

• May not forgive the full amount: Debt forgiveness doesn't mean you always get your debt forgiven – only a portion of it might get "taken care of."
• May be taxable: You may have to pay taxes on your debt, particularly if it’s forgiven for less than the amount you must pay. You must report the canceled debt on your tax return for the year the cancellation happens.
• Hard to qualify for: You may find it challenging to qualify for debt forgiveness, especially if you don't have a super low income, which many debt forgiveness programs require.

Other Options For Managing Debt

You can tap into other options for managing debt if you don't qualify for debt forgiveness.

Bankruptcy

Bankruptcy is one option to relieve your debt. It involves a judge or court trustee that looks at your assets and liabilities and determines whether your debt can be discharged, meaning you will no longer have to repay it. It clears you of all your debt and liabilities.

The most common are Chapter 13 and Chapter 7 bankruptcy. Chapter 13 bankruptcy allows you to keep property like a home or car and repay debts over a few years. Chapter 7 bankruptcy offers one discharge of all debts and property.

The biggest downside to bankruptcy is the effect on your credit score – it can affect your credit for up to 10 years.

Credit Counseling And Debt Management Plans

Credit counseling and debt management plans are an alternative to debt forgiveness, putting you on a path to pay off your debt. For example, these services may help you create a repayment plan or help you consolidate your loans, which can lower your interest rates.

Unlike debt consolidation and bankruptcy, you still have to make payments on your debt, but a credit counselor will give you some tools to handle it.

Debt Consolidation

Debt consolidation, another alternative to debt forgiveness, means you take out a new loan and use the proceeds to pay off existing debt. Debt consolidation loans can help you pay off high-interest debt like personal loans and credit cards and in return, receive a lower interest rate.

Note that unlike debt forgiveness and bankruptcy, you still have the debt after consolidating it.

Balance Transfer Credit Cards

Balance transfer credit cards allow you to move the balance of one credit card account to another. You can save by accepting a lower interest rate – typically a 0% introductory annual percentage rate (APR) – and therefore lower your monthly payments. A balance transfer credit card may also offer other perks, like a $0 annual fee and a $0 balance transfer fee.

Going this route can be a great move if you plan to pay off your new credit card during the introductory period.

Debt Forgiveness Vs. Debt Relief

Debt forgiveness differs from debt relief. Debt relief lessens the impact of debt by making payments more manageable or lowering interest rates. Unlike debt forgiveness, debt relief does not completely get rid of debt.

Debt Forgiveness FAQs

Debt forgiveness of various kinds are a hot topic so check out these frequently asked questions.

How do I know if I qualify for debt forgiveness?

Read through all the requirements depending on the type of debt forgiveness you are seeking. If you believe you’re eligible, apply and your servicer will ultimately let you know whether you qualify for any debt forgiveness options.

How much debt forgiveness do I get?

The amount of debt forgiveness you can get depends on the type of program you apply for. For example, student loan debt forgiveness programs completely differ from tax debt forgiveness. You may not have the same options for a certain debt niche compared to another.

Are there programs for credit card debt forgiveness?

Credit card debt forgiveness usually isn't an option. However, most credit card companies offer debt relief programs, in which they work with you to make your payments more manageable. For example, you can communicate with your credit card issuer if you experience a job loss, divorce or other financial challenges.

Can debt forgiveness hurt my credit?

Debt forgiveness generally doesn't hurt your credit. Instead, not paying your bills can damage your credit score because you miss payments. Even not paying small bills can deliver a big hit to your credit score.

The Bottom Line: Canceling Debt Has Benefits, But You Have Alternatives

Debt forgiveness means that your lender eradicates some or all of your debt. Some examples of debt forgiveness include credit card, student loan, tax, mortgage or medical debt. Other avenues for debt relief or getting rid of debt include declaring bankruptcy, credit counseling and balance transfer credit cards. Consider all your options before you jump on any one of these opportunities.

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