What Is a Forgivable Loan?

How Does a Forgivable Loan Work?

For a loan to be forgiven, the borrower has to meet specific criteria that can vary depending on the program or lender that loaned the money. For example, a borrower might have to work for a certain type of employer, work in a certain community or neighborhood, or use the funds for specific purposes to qualify. It's important to note that loan forgiveness isn't always "total" forgiveness; borrowers still have to repay a portion of their loan in most scenarios. Of course, the best-case scenario is not having to repay the loan at all; that's almost like getting a grant.

Lenders who offer loan forgiveness are usually affiliated with the federal government, like the Department of Education or Small Business Administration, and the majority of forgiveness programs are focused on student loans. These programs are often geared to borrowers who work or volunteer in education, health care and other fields. The ultimate goal of most forgiveness programs is to make it possible for people to take on potentially less-lucrative jobs in fields such as nonprofit work, education and government. For example, teachers, lawyers, physicians, nurses and other professionals might be eligible for forgivable loans in exchange for working in certain communities, especially if the area is underserved. Loan forgiveness programs also encourage people to get into public service roles like those with AmeriCorps, Peace Corps or even military service.

Other types of loans are more business-focused. The more well-known business loan forgiveness programs, like the Paycheck Protection Program (PPP) and the Restaurant Revitalization Fund, were created to respond to the COVID-19 pandemic, as many businesses struggled to stay open and serve their communities. While there aren't many loan forgiveness options for businesses, the Small Business Administration is a great place to start your search, as it offers a variety of low-interest borrowing options geared at helping businesses expand.

If you're interested in becoming a homeowner someday, you might also be surprised to discover there are forgivable loans that provide down payment assistance to help you purchase a home. In the housing industry, a forgivable loan is a type of second mortgage. You don't have to pay this type of loan back unless you move before your loan term ends. These loans usually come with an interest rate of 0%, so it could be an excellent solution for lower-income homebuyers.

Additionally, while most programs are available on a national level, there may be loan repayment plans available through the state you live in. Moreover, some colleges help their alumni pay off student loans.

What Are the Requirements to Get a Loan Forgiven?

The requirements for loan forgiveness vary depending on the loan program you borrowed from. For example, many loan forgiveness programs for teachers require teachers to work in specific communities (usually lower-income areas) to qualify. Ideally, it's a win for both sides: Communities that often have trouble attracting skilled educators get fresh talent, and teachers who need experience and have student loan debt get help with both.

One of the most popular student loan forgiveness programs, Public Service Loan Forgiveness (PSLF), covers a broad choice of careers and employers. Since 2017, the program has discharged more than $452 million in student loans. To qualify for student loan forgiveness, you'll need to check the box for all of the below:

• Work full time for a government organization at any level (state, federal, local) or a tax-exempt nonprofit.
• Make 120 monthly on-time payments (they don't have to be consecutive; payments made during forbearance or in deferment don't count).
• Have direct loans or other federal student loans you've consolidated into a direct loan
• Repay your loans under an income-driven repayment plan.

Private student loans don't qualify for this program, so you'll have to find an alternative way to tackle these if you have private loans and you're hoping for some relief.

You can usually find a list of other loan forgiveness programs through a quick search online, or you might find resources that point you in the right direction on your industry's association websites. Sometimes the associations themselves provide financial help too.

What Are the Pros and Cons of Forgivable Loans?

Forgivable loans can be great opportunities for a lot of reasons, but they also have some drawbacks.

Pros

• Debt reduction for eligible borrowers. This could save you thousands of dollars and make paying off your debt more manageable.
• These programs encourage public service and provide an incentive for people in "helping" professions.
• The programs support under-resourced communities that wouldn't otherwise have access to the same pipeline of talent.

Cons

• There could be tax implications depending on the type of loan forgiven, although most student loan forgiveness programs are exempt.
• Because many programs require borrowers to work in a specific community or sector, you might miss out on opportunities (and income) that go along with working in a particular industry or locale.
• Many programs require a certain number of payments or length of time to have a loan forgiven. For example, PSLF requires 120 payments, which amount to about 10 years of service.
• Some programs (like PPP) require a lot of paperwork, and the fast-changing regulations can make it challenging to comply.
• For other programs, there are limits on what you can do to stay eligible for loan forgiveness. With mortgage-related programs, for example, if you sell the home, move or refinance your mortgage, you might have to pay back the loan.

The Bottom Line

If you think you might be eligible for loan forgiveness programs, it's worth the time to learn what they are and how they work. Of course, no program is perfect, but may be beneficial for both the lender and the borrower—and the broader community—if it's a good fit.