President Joe Biden tweeted on Wednesday what many have anticipated for months: a plan to forgive or reduce student loan debt for millions of debt-burdened borrowers.
If he earns less than $125,000 a year, he said he is eligible to receive cancellation of up to $10,000 in student loans. If he received a Pell Grant, he can receive up to $20,000 in forgiveness. If you are not eligible for any student debt forgiveness, your payment pause continues until the end of the year. The Department of Education is also working on a proposal that introduces a new payment plan to ease the burden on borrowers.
Since the start of the pandemic in 2020, borrowers have not had to pay a dime on their student loans. During this time, pressure has grown for the president to simply write off the debt. It was one of the platforms on which Biden ran for president in 2020.
Although the plan will be welcomed by many, it is likely that it will still receive criticism. Many had sought higher forgiveness amounts: $50,000 or even all amounts, no matter how large. The total outstanding balance of federally owned student loans (including those in default) as of December 2021 was $1.38 trillion, the New York Federal Reserve said in April.
What’s Biden’s student loan forgiveness plan?
Each person with an annual income of less than $125,000 (or less than $250,000 for married couples or heads of households) is entitled to have up to $10,000 in federal student loans canceled. Private loans will not be forgiven.
Those who received a Pell Grant in college will also be eligible for up to $20,000 in debt cancellation.
For those who still have student debt, the payment pause from March 2020 will be extended through the end of the year. Borrowers will resume payments in January 2023.
What is a Pell Grant?
Federal funding is generally awarded only to college students who show exceptional financial need and have not earned a bachelor’s, graduate, or professional degree. Sometimes a student enrolled in a graduate teacher certification program can receive a Pell Grant.
Unlike a loan, a Pell Grant does not have to be repaid, except under certain circumstances where some or all of it may need to be repaid. Some circumstances include a change in enrollment status or if you received outside scholarships or grants that reduced your need for federal student aid.
How do people claim student debt forgiveness?
The Department of Education will announce the details at 2:15 p.m. EDT. and in the coming weeks. The application will be available no later than December 31, when the pause on federal student loan payments ends.
Nearly 8 million borrowers may be automatically eligible for relief because the relevant income data is now available to the Department of Education.
What’s the cost of student loan forgiveness?
The maximum one-time debt forgiveness of $10,000 per borrower will cost about $300 billion for borrowers with incomes below $125,000, according to an analysis published Tuesday by Junlei Chen and Kent Smetters in Penn Wharton Budget Model, based at the University of Pennsylvania. This cost increases to $330 billion if the program continues through the standard 10-year budget window.
Before the announcement, the Government Accountability Office estimated that the payment pause since the start of the COVID-19 pandemic alone cost the government $102 billion. That amount included suspension of all overdue payments, interest accrual, and involuntary collections on delinquent loans from March 13, 2020, through August 31.
Who benefits most from the student debt forgiveness plan?
Mostly higher-income households. Between 69% and 73% of the debt forgiven corresponds to households in the top 60% of the income distribution, Chen and Smetters said.
However, a New York Federal Reserve study in April said the income limit for forgiveness “substantially lowers the cost of student loan forgiveness and increases the portion of the benefit that goes to borrowers who are more likely to of having difficulty paying their debts.
For example, an income cap of $75,000 for a $10,000 payoff increases the proportion of forgiven loan dollars that go to borrowers in low-income neighborhoods from 25% to 35% and the proportion that goes to borrowers with higher credit scores. dropped from 37% to 42%, he said. Income limits also increase the proportion of forgiven loans that were in default before the pandemic from 34% to 60%.
I’m still a student. Do I qualify?
Yes, but if someone else claims you as a dependent when filing their tax return, your eligibility will be based on that person’s income and not yours.
I didn’t finish my degree. Does that disqualify me?
What’s the first thing I need to do if I qualify?
Start by making sure your loan servicer knows how to find you so you can take any guidance they provide and follow any instructions they issue. Verify that your postal address, email address, and mobile phone number appear correctly.
Will the $10,000 in cancellation happen automatically, or do I need to submit a tax return or do something else to prove that I qualify?
It depends. If you’re already enrolled in some type of income-driven repayment plan and have filed your most recent tax return to certify that income, your administrator and the Department of Education know how much you earn and you shouldn’t need to do anything else. Still, keep an eye out for your administrator’s guidance.
The department said Wednesday that about eight million borrowers “may” be eligible for this automatic relief.
For everyone else, there will be some kind of app available by the end of the year. “The Department of Education will work quickly and efficiently to establish a simple application process for borrowers to claim relief,” according to a White House statement.
How can I be sure that the cancellation has really happened?
Watch for messages from your loan servicer and be careful. Given the number of millions of people involved and billions of dollars at stake, there are likely to be setbacks. If you get a message that you suddenly have a zero balance or that your balance has dropped by $10,000 or $20,000, please take a screenshot and print it in case it changes in any way later.
And if your debt hits zero, monitor your credit report in the months afterward to make sure your loan servicer is reporting that fact correctly. For example, there should be no late payment notices posted after your balance shows zero.
Will I have to pay taxes on the canceled debt?
My debt exceeds the amount I am eligible to have canceled, and my loans have been on pause since that relief began in March 2020. Will payments start again on my remaining balance?
Not until at least January.
You should receive a billing notice at least three weeks before your first payment is due, but you can contact your loan servicer before then (online is more efficient) for details on what you owe and when it’s due the pay.
I have more than $10,000 in debt. When and how will my monthly payment amount be adjusted?
The Department for Education has not yet provided any details on how this will work, but we can make an educated guess based on what is possible now.
When a borrower pays off a solid chunk of debt and their balance goes down, they can ask their servicer to recalculate their payments for the remaining term of the loan, resulting in a lower monthly payment, according to Scott Buchanan, CEO of Student Loan Servicing Alliance, an industry trade group. But if the $10,000 forgiveness doesn’t put a dent in the borrower’s balance, the servicers may not even be told to recalculate the payments, which may remain the same.
Mr. Buchanan said administrators had not yet received any guidance on when or how payments should be recalculated.
Borrowers enrolled in income-based plans make payments based on their discretionary income and household size. Mr. Biden has proposed a rule to create a new plan that would limit those payments to 5 percent of income, a reduction from 10 to 15 percent in most existing plans.
What if I want to keep paying the same amount and have it applied to the principal?
Send the extra money with your payment on time each month.
Let’s say your payment drops to $200 a month after forgiveness, but you had been paying $300. If you choose to continue paying $300, the first $200 will be applied to the payment that is due and the additional $100 will be applied immediately to the principal (and not to the next payment). “Every additional dollar you send over and above your payment amount goes into principal,” said Mr. Buchanan of the trade group.
But if there is any accrued interest, for example, because the previous payment was late, the additional money will be applied first.
Given the propensity of loan, servicers to screw things up, be sure to log into your account to ensure the extra money is applied to the principal and not to next month’s statement.
What if I still can’t afford to pay my loans? What are my options?
There are several to consider, each with different eligibility rules, conditions, and tedious details. In many cases, struggling borrowers will likely want to opt for an income-based repayment plan, where the payment amount is tied to your income and can be as low as $0. After making payments over a set period of years, usually 20, sometimes 25, the federal government forgives the remaining balance.
Other payment plans may be better suited to your circumstances and may sometimes result in lower payment amounts. These include standard (with fixed payments), graduated (your payments go up), and extended (you pay over time) payment plans.
Options that pause payments entirely should generally be used only as a last resort: requesting a deferment or forbearance will temporarily suspend payments, but there may be significant additional costs in the long run.
With leniency, payments stop but interest still accrues. If interest is not paid, it is added to the principal balance of the loan. Deferment is similar, but subsidized loans, which generally have slightly better terms, won’t accrue interest while they’re on hold.
Could you remind me how income-driven repayment, or I.D.R., works?
There is a confusing variety of plans available, and now there may be a new one coming your way. President Biden is proposing a rule to create a new plan that will substantially lower future monthly payments for low- and middle-income borrowers.
For now, the alphabet soup includes PAYE, REPAYE, I.C.R., and I.B.R. (which come in two versions; the latter has slightly better terms for new borrowers).
The rules are complicated, but the gist is simple: payouts are calculated based on your earnings and reset each year.
After making monthly payments for a set number of years, usually 20, any remaining balance is forgiven. (The balance is taxed as income, although a temporary tax rule exempts forgiven balances through 2025 from federal income taxes.)
Monthly payments are often calculated as 10 or 15 percent of discretionary income, but one plan is 20 percent. Discretionary income is generally defined as the amount earned above 150 percent of the poverty level, adjusted for household size. PAYE generally has the lowest payment, followed by I.B.R. or REPAYE, depending on the borrower’s specific circumstances, said Mark Kantrowitz, a student aid expert.
There is a dizzying array of rules, and the existing plans are not a panacea. Although some borrowers may be eligible for a $0 payment, the plans are not always affordable for everyone. The formulas do not adjust for local cost of living, private student loans, or medical bills, among other things.
Where can I get help choosing the best repayment plan?
Analyzing plans can be overwhelming, but there are tools and services that can help. The loan simulator tool at StudentAid.gov will guide you through the options and help you decide which plan best suits your goals, such as finding the lowest repayment plan instead of paying off loans as soon as possible.
It’s easy to use. When you log in, it should automatically use your loans in your calculations. (You can manually add other federal loans if any are missing.) You can also compare plans side by side: how much they will cost over time, both monthly and in total, and whether any debt will be forgiven.
In addition to your servicer, groups like the Institute of Student Loan Counselors, known as TISLA, can provide free guidance on what options might work best for you. For New York State residents, EDCAP, a nonprofit organization focused on student loans, also offers help. And some employers and other organizations have contracted with companies like Summer, which helps borrowers sort through options.
Is anything changing with other forms of debt cancellation, like the existing income-driven repayment programs?
Yes. In April, the Department of Education said it would make corrections to address past inaccuracies that would help borrowers enrolled in I.D.R. plans, including a one-time revision that would make more payments count toward loan forgiveness. That includes:
Any months in which borrowers made payments will count toward I.D.R., regardless of the repayment plan.
All payments made on loans that were later consolidated will count.
Months spent in deferment before 2013 (with the exception of in-school deferment) will count.
Forbearances of more than 12 consecutive months and 36 cumulative months will also count toward forgiveness, under both I.D.R. and P.S.L.F.
In 2023, the government will begin showing payment counts on StudentAid.gov so borrowers can see their progress in their own accounts.
How does this overlap with the recent changes to eligibility for public service loan forgiveness?
The discharge must occur regardless of any process you may already be going through to obtain a partial or full discharge through PSLF.
There is currently a time-limited exemption for public servants that will allow a number of individuals to obtain credit toward loan repayment for prior payments that they otherwise would not have qualified for. You can obtain more information on this by consulting the “P.S.L.F. Waiver” on the Department of Education website.
The deadline to apply for the waiver is Oct. 31, though lawmakers are pushing for it to be extended.
How much will this cost the federal government — and taxpayers?
Based on one estimate using a model the Wharton School developed at the University of Pennsylvania, the cost of the $10,000 cancellation initiative alone could range from $300 billion to $980 billion.
Is there any chance that a lawsuit reverses the order?
A small one, but it’s hard to say how small. It is not clear who would have the standing to sue, although there may be attempts nonetheless.
Any elected official suing would risk infuriating voters by adding five figures to their loan balances, but could also excite others who find debt cancellation offensive.
Will debt relief become a regular thing?
Don’t count on it.
Critics of any kind of blanket loan forgiveness argue that it will create a moral hazard, as future borrowers will take out more loans with the expectation that debts will be erased over and over again. But repeated instances of cancellation are unlikely and would eventually destroy the show.
The federal government has done little to make college more affordable (or even less subject to fraud). There is a variety of Band-Aids that can be applied after students have racked up more debt than they can handle, including the alphabet soup of income-driven repayment plans that help an estimated nine million borrowers, but little preventive medicine. This latest move is no exception and, without serious reform, will do little to prevent future borrowers from leaving campus with a pile of debt to cover rising costs.
A Guide to Student Loans
Are you a new graduate or a family starting to think about how to pay for college? These tips can help you navigate student finances.
Before College Starts
- This introduction to student loans can help you understand what you might be signing up for.
- Consider the “return on investment”: Will that college degree pays itself off?
- Think twice before taking a private student loan. They carry fewer protections than federal loans and tend to be more expensive.
- Colleges’ financial aid offers are not always easy to decipher. These tips can help you make sense of the jargon.
- Could the government’s Public Service Loan Forgiveness Program be the right fit for you? Here is what you should know about it.
- Beware of the repayment traps you might incur, and learn how to avoid them.
- Are you a recent graduate about to make your first repayment? Make sure you know how much you owe, and to whom.
Source: USA Today & The New York Time