Why You Shouldn’t Count Student Loan Forgiveness Into Your Finances

A debt forgiveness program for student borrowers sounded promising: Work in a public service sector for 10 years while making on-time loan repayments. Then—after a decade of working as, say, a nurse, police officer, teacher, social worker, first responder, or in some other public sector service job—have your remaining student loan balance erased.

But, since the Public Service Loan Forgiveness (PSLF) program began accepting applications a year ago (it was established in 2007), more than 99 percent of applicants have been rejected. Though 28,000 borrowers applied for the program, only 96(!) borrowers received loan forgiveness through the program, according to the Department of Education. (The program is being criticized for mismanagement.)

We don’t want to go all Negative Nancy here, but if you were planning on your loans being forgiven—and perhaps even waiting to buy a house until that debt was knocked down to a $0 balance—the preliminary numbers surrounding student loan forgiveness are discouraging, to say the least.

But, there is a possibility that more borrowers will qualify for forgiveness in the future. Plus, experts say there are some alternative strategies to help those with student loans break into the housing market while they’re waiting (and hoping) for that debt to be wiped away.

For example, an emerging trend: Some employers are working student loan relief programs into hiring offers, says Tisa L. Silver Canady, an author and educator who specializes in college financial education.

“Some are creating retirement programs that invest for student loan borrowers who feel they do not earn enough income to invest in a retirement plan and pay down student loan debt simultaneously,” she says.

Here’s what else you need to know about student loan forgiveness and back-up plans:

About 70 percent of the PSLF applications were rejected for not meeting eligibility requirements, which could include criteria such as being enrolled in the wrong repayment plan, working a job that didn’t qualify for the program, or having the wrong loan type. Suffice to say, a lot of borrowers are frustrated and confused as to why they are not qualifying. The Massachusetts Attorney General even went so far to sue the servicer for its handling of the program.

The remaining PSLF applications that were rejected, about three out of 10, were missing information, so there is some hope that once they are corrected and re-submitted, the student loan forgiveness rate will increase.

Also, it’s possible more borrowers could qualify in the future by consolidating their loans. Only those with direct federal loans qualified for PSLF.

For example, the Federal Family Education Loan Program and Perkins loans don’t qualify for forgiveness, but borrowers may be eligible to consolidate them into a Direct Consolidation Loan. The downside? Only qualifying payments that you make on the new Direct Consolidation Loan can be counted toward the 120 payments required for PSLF, which means your 10-year clock would re-start.

About 25 percent of the U.S. labor force is in public service, estimates the Consumer Financial Protection Bureau.

Eighty percent of millennials don’t own a home (according to a survey by the National Association of Realtors)—of this group, 83 percent believe their student loan debt has affected their ability to buy. Millennials expect student loans are delaying their home buying by a median of seven years.

Millennials with student loans also have an average 75 percent less wealth than those who don’t, according to a recent analysis, which makes it tough to save for a down payment. Plus, student loans factor into borrowers’ debt-to-income ratios (DTI), which could make it hard to get approved for a mortgage. (Oftentimes, an income-driven repayment plan can help lower DTI, though).

The loan forgiveness program could have been a lifeline for those saddled with student loan debt and working in fields with modest-paying salaries. Especially since the evidence above directly links student loans as a main factor holding millennials back when it comes to saving for retirement and investing in homes.

If student loan forgiveness isn’t looking to be in your near future, here are a few creative and alternative ways to save for a house while you’re still writing those monthly repayment checks.

While the PSLF is most widely known, there are other loan forgiveness programs for certain professionals worth checking into, says Silver Canady. For example, under the Teacher Loan Forgiveness Program, if you teach full-time for five consecutive academic years in a low-income school, you may be eligible for forgiveness of up to $17,500 on your direct subsidized and unsubsidized loans and your subsidized and unsubsidized Federal Stafford Loans. The National Health Service Corps also has a program that forgives student loans for healthcare workers who take jobs in underserved areas.

Find an owner who is willing to sell “Rent to Own,” suggests Don Wede, president of real estate investing company Heartland Funding Inc. This could also go by the names of Lease Option, Contract Sale, Owner Carry Back Financing, all of which have slightly different terms, but allows the owner to act like the bank, Wede says. Normally, a down payment will be required but it alleviates some of the debt-to-income pressure. Here’s what you need to know before signing a rent-to-own lease—and beware, these can turn scammy quickly.

This might be extreme, but if you’re a recent graduate and considering making a move, Maine has a tax incentive program that will help relieve student loan pressure. The state’s Educational Opportunity Tax Credit is available to those who have graduated from any college in the United States, as long as it was after 2016. Program details vary, but in a nutshell, those living and working in Maine can subtract their student loan payments over the year from their state income tax. So if you owe $2,200 in state income taxes, and paid $2,000 in student loans, you’ll owe the state just $200.

Relying on a renter to help pay the mortgage is a route that Shawn Breyer of Breyer Home Buyers took. When he and his wife graduated from school, they had $210,000 worth of student loan debt from their respective law and engineering programs. Instead of renting post-grad, they purchased a duplex in Grand Rapids, Michigan, living in one side and renting out the other.

“The benefits with this approach are that 75 percent of the rental income is counted as your personal income when applying for the loan,” he says. “You are [also] eliminating your housing expenses, which allows you to reallocate money towards paying down your student loans quicker.”

You can also use some of that rental income to invest in another rental property to help pay down student loans, he says.

A word of caution when it comes to house-hacking: If you plan to buy a big, single-family home and rent out a room, you won’t be able to use that projected rental income to qualify for a mortgage. It has to be a multi-family home with units carved out, and one of those units needs to be your primary residence.

Additionally, you will be a landlord—which comes with all kinds of unexpected costs and burdens. Of course, you’ll still need to have a down payment, too.