What is a Forgivable Loan?

When researching schools, jobs and government programs, you may come across the concept of a forgivable loan. Forgivable loans allow people to borrow money from different entities, typically federal or state organizations, without having to pay the money back, essentially turning the loan into a grant. There are certain stipulations, restrictions and conditions set out by the lender for these types of loans, and not everyone qualifies. Forgivable loans are most commonly available to students, but you may be able to obtain this kind of loan for other reasons.

Types of Loans

Government organizations, businesses and nonprofit centers offer forgivable loans in order to draw students into career paths that need more people. For example, teachers can have their loans forgiven if they agree to spend a certain amount of time in under-served areas or lower-income communities. Doctors and other professionals may have similar incentives, which can be beneficial since medical degrees are particularly costly. In addition to student-based forgivable loans, there are three types of loans that lenders offer that don’t have to be repaid monetarily: development loans, housing loans and employee incentives. Each loan has its own parameters depending on the lender, but in essence, forgivable loans require that borrowers meet certain conditions and agree to some restrictions.

Conditional Forgiveness

Development loans apply to businesses. A state, region or community might allow a business to move into the area with a loan that will be forgiven as long as the business generates more jobs and better incomes for the area. Housing loans are given to people in lower-income areas or people with disabilities who need assistance with home repairs. In exchange for the loan, the borrower has to live on the property for a set period of time while keeping the home in good condition. For top-earning or highly sought-after employees, some employers offer to pay off things like student loans in exchange for working for the company and excelling. It’s an incentive to draw in quality hires, and it’s a popular way to retain loyal workers.

Pros and Cons of Forgivable Loans

From a borrower’s standpoint, there are a few pros and cons to taking out a forgivable loan. Loans that don’t have to be repaid are effectively grants, making them particularly valuable to people with low incomes or jobs that won’t generate enough income to cover the cost of the loan. Borrowers also save thousands of dollars on interest over time. The downside is that forgivable loans come with restrictions, conditions and stipulations, and a lender can decide if the borrower has met all of the conditions before forgiving the balance. Also, certain types of forgivable loans are taxable once they’re discharged. Student loans that are forgiven may or may not be taxable, so borrowers should consult with a tax adviser before accepting a large payoff.

Paying for school, fixing your home or starting up a business can be great investments in your future, but these and other projects are also expensive. Taking out a loan to cover the cost could be a good option, especially if you plan to recoup the loss through forgivable loans. When agreeing to the terms of a forgivable loan, read the fine print carefully, ask as many questions as you can and know what you’re signing up for so that you don’t run into any problems once you’ve fulfilled your obligations.