While campaigning for President, Joe Biden pledged $10,000 in student loan forgiveness per borrower, thus borrowers are understandably curious about the current developments in President Biden’s student loan forgiveness proposal. Here’s a look at what’s new and what may happen next.
Recent Changes
As the Biden Administration pursues its agenda with dwindling legislative majorities, it has chosen a piecemeal approach to student debt relief while investigating its legal power to pursue larger loan forgiveness schemes without congressional approval.
According to an Education Department factsheet, a recent modification of the Public Service Loan Forgiveness program was announced in order to “restore the promise of PSLF.” A significant component of the plan is a one-time waiver that will allow payments from all federal student loan programs, including those that were previously ineligible, to be counted toward Public Service Loan Forgiveness progress.
On August 19, the Department of Education announced that over 300,000 debtors with complete or permanent disabilities will receive $5.8 billion in loan forgiveness. The Department of Education would start by comparing data from the Social Security Administration to identify borrowers who are qualified for the automatic discharge.
The Biden Administration also announced in August that the federal student loan payment halt and interest waiver, which was slated to expire in October, would be extended until January 2022. The Administration did state in that statement that this would be the final renewal of the student loan interest waiver, which was implemented as part of the CARES Act in March 2020.
Other Recent Student Loan Forgiveness Initiatives
The United States Departments of Education and Justice are investigating whether the President has the legal ability to erase up to $50,000 in federal student loan debt by executive action. There is no set date for the release of these reports. Delays are possible since Congress has yet to approve key policy advisors in both agencies.
Whether by executive action or legislation, the White House’s Domestic Policy Council will evaluate how student loan forgiveness should be targeted.
Borrowers should be wary of student loan scams that offer debt relief for a cost. When student loan forgiveness becomes available, it will almost certainly be automatic and free. The United States Department of Education will issue an upgrade to the StudentAid.gov website.
The United States Department of Education has lately taken several moves toward offering student debt relief for which it has clear legal authority:
Discharges for Total and Permanent Disability are being restored.
Because they neglected to file the yearly earnings documentation during the pandemic, several handicapped borrowers who qualified for a Total and Permanent Disability Discharge had their payback obligation revived. For 230,000 borrowers with Total and Permanent Disability Discharges, the US Department of Education will reverse the reinstatements and give other student loan debt relief.
Payment Pause and Interest Waiver Expansion
Borrowers who have a federally owned education loan are eligible for administrative forbearance and an interest remission until January 31, 2022. Borrowers with defaulted Federal Family Education Loan Program (FFELP) loans were not eligible since they were held by guarantee agencies on behalf of the US Department of Education. The United States Department of Education has agreed to make these borrowers eligible for the federal student loan payment delay and interest waiver, which will affect over one million FFELP borrowers. Borrowers who defaulted on their FFELP loans during the epidemic will also have their loans reinstated and the defaults erased from their credit reports.
For Approved Borrowers, Full Debt Forgiveness Defense to Repayment Discharge Claims
The Trump administration created a plan in which fraudulent debtors got only partial loan forgiveness. The mechanism for partial alleviation was incorrect. The United States Department of Education has ruled that all borrowers whose borrower defense cases were granted would have their loans fully discharged. This will have an impact on 72,000 borrowers who were victims of predatory student financing.
Student Loan Forgiveness Is Tax-Free
In addition, Congress acted on the tax treatment of student loan debt forgiveness. The American Rescue Plan Act of 2021 provided for tax-free student loan forgiveness and debt elimination until December 31, 2025. This mostly impacts forgiveness after 20 or 25 years under an income-driven repayment plan, as most other types of student loan cancellation were previously tax-free. However, it lays the groundwork for future student debt forgiveness, whether by presidential action or new legislation.
In the Consolidated Appropriations Act of 2021, Congress previously gave tax-free status to employer-paid student loan repayment assistance programs, or LRAPs, until December 31, 2025.
The Biden administration and Congress have failed to take any action on student loan discharge in bankruptcy.
Future Prospects for Student Loan Forgiveness
The next event will be the release of studies by the US Departments of Education and Justice on the executive branch’s legal ability to execute extensive debt forgiveness without the approval of Congress.
These analyses will almost certainly find that the President lacks the legal power to enact extensive student loan forgiveness through executive action. This will compel Congress to take action. In the fall, Congress may examine legislation to cancel student loans as part of a budget reconciliation measure.
The timeframe of debt forgiveness will also be determined by the loans that are eligible.
- If student debt forgiveness is confined to federally owned loans, the procedure will be automated and will take place within a month or two of the President signing the measure into law, providing there aren’t any difficult qualifying requirements. If there are income constraints or other information that the US Department of Education does not have right away, the procedure may become more difficult and take longer.
- If commercially held federal loans are eligible, it will take a bit longer to pay off the sums since the US Department of Education would have to make payments to the FFELP lenders.
- If private student loans are available, it will take even longer since applicants must submit an application listing the loans, loan id numbers, and the lender’s name and payment address. The United States Department of Education has no records of loans provided through entirely private student loan schemes.
What Can Borrowers Do?
Borrowers should avoid taking any hasty actions in expectation of debt forgiveness. Student debt forgiveness on a large scale does not appear to be a realistic option at this time. Even if Biden or Congress pass a plan, eligibility and loan forgiveness are likely to be restricted.
Consolidation
Borrowers with FFELP loans may want to consider merging them into a Federal Direct Consolidation Loan if loan forgiveness is restricted to federal student loans. Consolidating FFELP loans may also qualify them for the payment halt and interest waiver, which is valid through September 30, 2021.
The biggest danger of consolidation is that it resets the monthly payment clock in order to qualify for 25-year forgiveness under an income-based repayment plan. Furthermore, if a student borrower receives discounts from the FFELP lender, they would forfeit those benefits if they combine. Direct Loans provide a 0.25 percent interest rate decrease for borrowers who enroll in AutoPay, but no further reductions are available. Otherwise, there are no notable disadvantages to consolidation.
Refinance
Borrowers considering refinancing federal loans into private loans to lock in current low interest rates may want to hold off. Loans that are qualified for the payment halt and interest waiver have a 0% interest rate until September 30, 2021. As a result, refinancing raises the borrower’s costs in the near term. Furthermore, interest rates are expected to continue low until the end of the year, so there’s no reason to hurry into refinancing federal loans. Borrowers might wait to see what happens with loan forgiveness before refinancing their federal loans. Borrowers with private student loans, on the other hand, do not risk losing forgiveness if they refinance their private student loans into a new private loan.
Borrowers who still have employment and are able to make student loan payments should save the money or pay down other debt instead of making extra payments on their loans. It’s a wonderful time to start or add to your emergency fund. In general, any borrower who expects to earn debt forgiveness should not make extra payments when they are not compelled to do so, as this minimizes the amount of forgiveness they will receive in the end. After the terms of student loan forgiveness are disclosed, borrowers can utilize the money they have saved to pay down debt as needed.
There are currently no federal student loan forgiveness schemes in place.
Borrowers who expect loan forgiveness under President Biden can cease making federal student loan payments during the payment pause and interest waiver period, which has been extended until January 31, 2022. Borrowers may choose to continue making payments, however, given the uncertainty surrounding student debt cancellation.
Some debtors, however, may be qualified for a pre-existing student loan forgiveness program. Borrowers who work full-time in a qualifying public service employment, for example, are eligible for Public Service Loan Forgiveness (PSLF). After completing 120 qualifying payments, a borrower is eligible for loan forgiveness.
Borrowers can still earn credit toward PSLF during the payment halt. They will earn qualifying payment credit as long as they continue to fulfill the eligibility standards and submit the PSLF form.
Borrowers who will not be eligible for loan forgiveness when the relief period expires might seek an income-driven repayment plan. Monthly payments under an income-driven repayment plan are modified based on the borrower’s annual income. The loan is canceled after a set amount of time (20 or 25 years).