Up to $20,000 in loan debt forgiveness was announced for federal student loans for undergraduate and graduate programs. Navigating these changes and eligibility can be complicated and confusing. With more than 43 million federal loan borrowers, it’s important to prepare for the upcoming changes and potential impact on your financial future.
Key updates and takeaways
In an August 2022 announcement, President Biden stated that up to $10,000 in federal loan debt for individuals with income under $125,000, or married couples with income under $250,000, would be forgiven. Further, Pell Grant recipients could have up to $20,000 in student loan debt forgiven. At this point, we are unsure if this amount will be determined by overall income in 2021 or adjusted gross income (AGI).
Borrowers will wait to receive a notification from their loan servicer regarding eligibility for this new debt relief program. According to the Department of Education, nearly 90% of debt cancellations will benefit borrowers earning less than $75,000. Please note that student loan forgiveness is federally tax-exempt. The state tax treatment of this forgiveness varies, and borrowers should check with the tax rules in their state.
In addition, student loan payments that have been suspended since the start of the pandemic will remain paused until the end of the year, with expectations this will be the last extension of forbearance.
The end of the forbearance will conclude the suspension of loan payments, 0% interest rate and stopped collections on defaulted loans. Most borrowers should expect resumption of payments and notification from their loan providers 21 days before the first due date.
Student Loan Providers Shakeup
A number of loan borrowers have had their debts transferred among loan servicers. For example, FedLoan transferred to Mohela; Navient transferred to Aidvantage; and Granite State Management & Resources transferred to Edfinancial.
The transfer of loans among these loan servicers ultimately should have no effect on the terms and conditions of the student loans. According to studentaid.gov, the existing terms, conditions, interest rates, loan discharge or forgiveness programs, and available repayment plans remain the same.
Eligible Loans for Administrative Forbearance and Zero Interest Rate
- Direct Loans (defaulted and non-defaulted)
- Federal Family Education Loans (FFEL) owned by the DOE (defaulted and non-defaulted)
- Defaulted FFEL program loans not owned by the DOE
- Federal Perkins Loans owned by the DOE (defaulted and non-defaulted)
- Defaulted Health Education Assistance Loans (HEAL)
To find out your eligibility, please visit studentaid.gov and follow these steps:
- Access the borrower’s dashboard
- Select “View Details”
- Click on “View Breakdown”
- Scroll to “Loan Breakdown”
- If applicable, the DOE will appear in the name of the loan
Public Service Loan Forgiveness (PSLF) and Income-Driven Repayment (IDR) Updates
In October 2021, the DOE announced an update to the PSLF program rules allowing borrowers, for a limited time, to receive credit for payments that did not qualify for eligibility in the past. Previous payments counted as qualifying payments regardless of the loan program, repayment plan, or whether the payment was made in full/on time, as long as the borrower met the following requirements:
- Loan Eligibility: Federal Direct Loans or enrollment in Direct Consolidation Loans by October 31, 2022
- Work Eligibility: Work full-time for a U.S. federal, state, local, tribal government or not-for-profit organizations during the repayment period
Preparing to Resume Loan Repayment
To prevent delayed or missed payments, you must update your contact information on studentaid.gov and your loan provider’s website before resuming loan payments. If you are enrolled in auto-debit payment, it is important to confirm your information to prevent the loss of benefits associated with direct debit (such as discounted rates). If your income or family size changed within the past year, consider applying for an income-based repayment plan for a more affordable payment option.
Pros and Cons of Federal Loan and Loan Refinancing
If your student loan started before 2019, you likely have an interest rate greater than 5% – compared to loans after 2019, which can average 3.7%. Due to the volatile current interest rates, you may want to consider whether to refinance your student loans with a private lender that can offer rates between 2.25% and 12%. However, evaluate your budget before refinancing and be aware of the benefits and drawbacks of both federal and private loans.
Federal Loan Advantages:
- Fixed interest rate that is typically lower than those offered by private loans (unless your loans were provided or consolidated before 2019)
- No requirement for a co-signer, which may benefit those with a lack of credit history or income
- IDR could result in more affordable payments based on income or family size
- PSLF forgives the remainder of student loan debt for those who make 120 monthly payments while employed by a qualifying organization
- Emergency economic relief with suspension of payments and 0% interest rate as part of the CARES Act for temporary COVID-19 relief
- Loans are forgiven with death or total disability of the borrower, relieving families of a potential financial burden
- Forbearance and deferment of loan options due to job loss or other qualifying reasons
Federal Loan Disadvantages:
- Cap on borrowing limit of student loans
- All borrowers have same interest rate regardless of credit score
- Federal loans are not discharged if you declare Chapter 7 or Chapter 13 bankruptcy
Private Loan Advantages:
- Higher borrowing limit, which can supplement federal loans in covering the cost of more expensive schools and living expenses
- Loans with high interest rates may qualify for a lower rate and better terms through refinancing for borrowers with good credit scores
- Quicker application process than federal loans through bypassing the FAFSA
Private Loan Disadvantages:
- Interest rates might vary based on the lender and the lender’s credit profile
- Some lenders require a co-signer even for borrowers with a high credit score
- Most lenders do not offer IRD plans, so monthly payments remain the same despite changes in income or family size
- Privates loans do not qualify for PSLF
- Fewer repayment options than federal loans
- Not all lenders offer total loan discharge at death or disability
It’s highly encouraged to make payments on your remaining loans during the forbearance period to decrease your overall debt burden. If you have not been making payments, consider repaying now while the interest rate is set at 0%. Utilize the loan simulator on studentaid.gov to calculate your payments and how to fit it in your budget. If the Department of Education already has your income data, you may be eligible for automatic forgiveness. Otherwise, keep an eye out for the launch of the application in the coming weeks. Click here for a link to the federal student aid webpage.
As always, consult with your financial and tax advisors before making any important financial decisions. To speak to our team, please contact us.