Jill on Money: Student loan forgiveness update
The Biden administration’s plan to cancel billions of dollars of student loans is in jeopardy because of a series of legal challenges. That means more than 40 million Americans who expected student debt relief could start getting billed if a pandemic-era moratorium expires. (On Tuesday, the Biden administration extended the relief, tying it to the resolution of the legal challenges.) Here is a Q&A to help those in limbo create a plan of action.
Who is eligible for loan forgiveness?
Loan forgiveness only applies to federal loans — not to private ones or to Federal Family Education Loans that were issued and managed by private banks but guaranteed by the federal government.
The administration’s plan intended to provide a one-time loan cancellation of $10,000 to any borrower who earns less than $125,000 annually ($250,000 for Married Filing Jointly or Head of Household). Recipients of a Pell Grant (student aid that is geared to lower-income borrowers) would be entitled to $20,000. (The rationale for the larger amount is that Pell Grants used to cover nearly 80% of the cost of a four-year public college degree; now, they cover only a third.)
Parent Plus loans held by the Department of Education — and whose borrowers fall under the income limits — would be eligible to receive cancellation of up to $10,000.
While current students are also eligible for loan forgiveness, those claimed as a dependent would have their eligibility determined based on their parents’ or guardians’ income.
What should borrowers do now, as the legal battle continues?
Given that federal loan payments are on pause, accruing zero percent interest, it makes sense to get a jump on any outstanding balances above the forgiveness threshold amounts if you can afford to do so. Payments now will shorten the amount of time on your loan, which can be an emotional relief and may allow you to fund other priorities sooner.
During this waiting period, go to studentaid.gov and make sure that you have auto-debit enrollment — doing so will keep you on track for the resumption of payments and help avoid missed payments and penalties. If your financial situation has changed, check out the DOE Loan Simulator to determine whether a different repayment plan better meets your needs or whether consolidation might help.
If you previously had not signed up for loan forgiveness, what should you do?
The Department of Education says that because of the current court orders, they are not accepting new applications. If you have already applied for forgiveness, they will hold your application.
The Biden plan also contemplated changes to Income-Driven Repayment plans — are those at risk of being rolled back?
IDR plans are for borrowers who can’t afford the scheduled loan repayments. The repayment, based on what you earn, is currently 10% of your discretionary income. The Biden plan contemplated that payments would be capped at 5% of income; would raise the amount of income that is protected from repayment; and would forgive loan balances after 10 years of payments, instead of 20, for borrowers with original loan balances of $12,000 or less. All of these changes are on hold until there is resolution of the legal battle.
Are there updates on the Public Service Loan Forgiveness program?
The administration had previously eased some of the rules for PSLF, meaning that more people who work full time for the government, the military or nonprofit organizations may qualify for loan forgiveness or cancellation.
What will loan forgiveness cost?
Debt cancellation will cost around $500 billion, according to analysis by researchers at the Penn Wharton Budget Model. However, adding forbearance and changes to IDR could swell it to $1 trillion.
With AP
