Forgivable Loan

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Updated September 4, 2020

What Is a Forgivable Loan?

A forgivable loan is a type of loan in which some (or all) of the amount can be forgiven or deferred if the borrower meets certain conditions. Since the loan balance is waived when the requirements are met, it is often considered a grant with conditions rather than a loan.

Forgivable Loan Agreements

A forgivable loan agreement is just like a regular loan agreement. Simply put, it is a contract between a borrower and a lender that outlines the details of a loan, along with the responsibilities of each party. 

Forgivable loan agreements may contain the following:

  • Loan amount and details 

  • Purpose of loan 

  • Conditions for forgiveness 

  • Interest 

  • Collateral

  • Event of default

  • Covenants (terms)

Types of Forgivable Loan

Multiple types of forgivable loans are issued to persuade borrowers to behave in a certain way (e.g. work in a specific field, live in a particular area). There are multiple types of forgivable loans.

Forgivable Student Loans

Governments and lenders use these loans as an incentive for students to pursue education in a specific field or occupation. Some examples of forgivable student loans include:

  • Student loans for future teachers if they agree to spend a certain period of time working in low-income areas or with students who have behavioral issues.

  • Student loans for medical school students if they agree to work for charitable organizations or places where their skills are needed.

  • Student loans for trade school students if they agree to work in a specific field or occupation. 

Forgivable Housing Loans

State or local organizations may issue forgivable housing loans if certain conditions are met. These conditions may include:

  • Living in a specific geographic area for a certain period of time

  • Being a first-time homebuyer

  • Using the funds for repairs, renovations, or accessibility improvements

  • Funding the creation of affordable rental units

Government Forgivable Loan Programs

Government forgivable loan programs can help stimulate economic activity, provide financial aid in times of uncertainty, and promote growth. Some examples of government forgivable loan programs include:

Forgivable Loans and The Coronavirus Aid, Relief, and Economic Security (CARES) Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a law that aims to mitigate the economic fallout from the COVID-19 pandemic. Passed on March 27th, 2020, the act provides direct economic assistance for American workers, families, and small businesses whose income has been affected by the pandemic. 

The package contains $2 trillion in economic relief, with over $350 billion earmarked for forgivable loans. These forgivable loans are available through the two programs mentioned above:

Paycheck Protection p\Program (PPP)

The Paycheck Protection Program is funded under the Small Business Administration (SBA) and provides loans to help businesses affected by COVID-19 cover rent, payroll costs, and other operating expenses. 

PPP Loan Amounts

Amounts vary from business to business, but here are the general guidelines for PPP loans:

  • 100% of the loan can be forgiven if all conditions are met

  • A maximum loan amount of $10 million

  • Individual salaries used to calculate total payroll are capped at $100,000. 

  • Loan amount is equal to:

    • For independent contractors: Average monthly earnings over the last 12 months multiplied by 2.5.

    • For sole proprietors: Average monthly net profit over the last 12 months multiplied by 2.5.

    • For partnerships: Average monthly earnings over the last 12 months multiplied by 2.5.

    • For S-Corps: Average monthly payroll costs over the last 12 months multiplied by 2.5.

    • For C-Corps: Average monthly salaries over the last 12 months multiplied by 2.5.

PPP Loan Uses

Loans from the Payment Protection Program can be used for the following:

  • Payroll

  • Rent

  • Interest on mortgage obligations

  • Group healthcare benefits during periods of paid sick, medical, or family leave

  • Utilities

  • Employee salaries, commissions, or similar compensation

PPP Eligibility Requirements

In order to receive funds from the Payroll Protection Program, businesses must meet the following eligibility requirements:

  • Businesses and nonprofits should have 500 or fewer employees

  • Certification that current economic uncertainty makes the loan request necessary

  • Self-employed workers, independent contractors, gig workers, and sole proprietors

PPP Forgiveness Conditions

In order to have the full amount of the PPP loan forgiven, the following conditions must be met.

  • All full-time equivalent employees must remain on payroll or be rehired within 24 weeks of receipt of the loan

  • Payroll expenses must account for at least 60% of the approved loan amount

  • No more than 40% of the loan is to be used for non-payroll expenses

If these conditions are not met, there will be a reduction in the forgivable amount.

Economic Injury Disaster Loan Advance (EIDL)

The Economic Injury Disaster Loans program existed before COVID-19, but received additional funding from the CARES Act to help support businesses affected by the pandemic. The program – run by the SBA – allows for loans of up to $2 million (which is required to be repaid). 

That said, the new program (EIDL Advance) allows for an advance of up to $10,000 while you wait for the EIDL loan to be processed. It does not need to be repaid even if you are denied or if you decline the EIDL.

EIDL Advance Amounts

The forgivable advance can provide up to $10,000, but that is not always the case:

  • The advance is not a flat $10,000. It is $1,000 per employee, up to a maximum of $10,000.

  • The average advance during COVID-19 has been $4,360.

EIDL Advance Eligibility Requirements

In order to be eligible for the EIDL Advance, businesses must meet the SBA's size standards:

  • Employ 500 or fewer people (number may be higher for businesses in some industries)

  • Must be organized for profit

  • Has a place of business in the US

  • Operate primarily within the US or make a significant contribution to the US economy through payment of taxes or use of American products, materials, or labor

  • Is independently owned and operated

  • Is not dominant in its field on a national basis

  • May be a sole proprietorship, partnership, corporation, or any other legal form

EIDL Advance Approved Uses

In order for the EIDL Advance to be forgivable, all of the funds are only permitted to be spent on the following:

  • Paid leave for employees

  • Mortgage, lease, or rent payments

  • Payroll

  • Increased cost of materials

  • Other commitments that can't be met due to loss of revenue

Other Loan Options

If you don’t qualify for these forgivable loans but need access to cash, consider applying for a personal loan. Whether you want to refinance a student loan, consolidate debt, or anything in between, our personal loan tool can help you find an option that's right for your situation. Once you’ve found a loan, you can use our loan interest calculator to find out how much interest you’ll pay over the course of the loan.

Ask an Expert

Are forgivable loans taxable? 

In most cases, yes. The forgiven portion of a loan is considered income and is therefore taxable. However, there are some exceptions to this rule depending on the purpose of the initial loan. For example: forgiven public service loans, forgiven teacher loans, and forgiven law school loan repayment assistance programs.

Can I receive a forgivable loan from an employer?

Yes. In fact, employer-issued forgivable loans are a popular way to attract top talent and are often used in lieu of signing or retention bonuses. They allow the employer to provide a tax-deferred payment that is contingent on certain requirements (such as the employee's continued service with the company).

Forgivable loan vs. signing bonus: Are they the same?

No. In order to be considered a forgivable loan, an official loan document must be signed. If there is no loan document, the payment would be considered a signing bonus, which is considered taxable income.

What is the interest rate if a loan is not forgiven?

Like standard loans, interest rates on forgivable loans can vary. The loan document will outline all loan details, including interest rates in the event that the conditions to forgive the loan are not met.

Are EIDL loans forgivable?

No. EIDL loans must be repaid. However, the $10,000 advance is forgivable. 

Are there forgivable loans for self-employed?

Yes. Both the EIDL and PPP programs have options for self-employed workers.