Find out what President Biden’s proposed student loan relief means for borrowers and tips for managing federal and private education debt to eliminate it faster.
If you're one of the 45 million Americans with outstanding federal student loans, you know there have been many changes to the program since the start of the pandemic. Now, there's a new plan for student loan forgiveness that you may have heard about. We'll review that in today's episode.
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If you're one of 45 million Americans with outstanding federal student loans, you know there have been many changes to the program since the start of the pandemic. Now, there's a new plan for student loan forgiveness that you may have heard about. We'll review that in today's episode, number 743, What Is the New Student Loan Relief Plan?
I'll cover what you or a student loan borrower in your life needs to know, including tips to pay off education debt faster, even if you don't qualify for financial assistance.
Hello, friends, and welcome back to the Money Girl podcast! If you're a new listener, thanks so much for downloading the show. I'm Laura Adams, an award-winning finance author who's hosted Money Girl since 2008. I also work with select brands doing on-camera and voice-over work as a PR spokesperson, consumer advocate, and multimedia content creator.
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Before we dive into the new student loan relief plan, let's briefly review what's happened since the pandemic began. As stay-at-home mandates rolled out and the unemployment rate spiked, it became clear that borrowers would need immediate financial assistance.
So, in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law. It suspended payments, stopped collections on defaulted loans, and set the interest rate to 0% for loans owned by the U.S. Education Department through September 30, 2020.
The forbearance deadline got extended multiple times, and now, under the latest relief plan, it's set to expire at the end of 2022. That means borrowers must prepare to start making payments in January 2023—unless your entire loan balance gets forgiven. And I'll tell you more about who qualifies in a moment.
To qualify for relief, you must have one of the following federal loans:
However, private student loans and Perkins loans issued by your school (instead of the federal government) don't qualify for forbearance or forgiveness under the new plan.
If your student loan qualifies for federal relief, you should have seen your automatic payments stop or been contacted by your lender back in March 2020. And by the way, if you continued making payments, it should have gotten applied to your principal loan balance, helping you whittle it down faster.
But note that if you made payments during the CARES forbearance but now wish you hadn't, you can contact your loan servicer and apply for a payment refund. Any skipped payments during the relief period still count toward loan forgiveness programs you qualify for. And they get reported to the credit agencies as an on-time payment.
I want to be clear that President Biden's student loan forgiveness plan is still just a proposal by executive order. Some of the plan's critics say he doesn't have the authority to cancel a federal debt, and it could face legal challenges.
However, if the plan does get implemented through executive action or legislation, it applies to federal student loan borrowers based on income in 2020 or 2021. Single taxpayers who earned less than $125,000 or married, joint filers who earned $250,000 or less will be eligible for up to $10,000 in forgiveness.
If you received a Pell Grant in college and meet the income requirements, you can get a cancelation of up to $20,000. Note that if your debt is less than the relief amount, such as owing $3,000 in federal loans, you only receive $3,000.
What's important to remember about the plan is that most borrowers must apply for relief because you must prove your income for 2020 or 2021. The exception is for student loan borrowers already in an income-based repayment plan because, in that case, the Department of Education is already aware of your income and eligibility.
Discharged or canceled debt typically gets taxed as income; however, student loans forgiven from 2021 through 2025 won't be taxable under the new plan. But depending on where you live, you may owe state income taxes.
The new forgiveness plan also proposes other benefits for federal student loan borrowers, including lower payments for income-based repayment plans. It would reduce payments from 10% to 5% of monthly discretionary income on undergraduate loans.
Plus, the plan would guarantee that no borrower earning under 225% of the federal poverty level would have to make a monthly payment. Student loan balances would also be automatically forgiven after 10 years of payments, instead of 20 years, for borrowers with loan balances of $12,000 or less.
If you're worried you won't be able to afford to make loan payments starting in 2023, investigate options, such as an income-driven repayment plan. Use the federal government's Loan Simulator tool or contact your loan servicer to discover options based on your income and family size.
Also, if you're already on an income-based repayment plan and your income has dropped, update your information to get a new payment based on your current financial situation.
I mentioned that Direct Consolidation Loans are eligible for relief. The government offers them when you have more than one federal student loan. The interest rate becomes a weighted average of your loan rates—so you don't save interest. However, it could allow you to turn a non-qualifying loan into one that qualifies for relief. Always speak with your loan servicer to learn more about the pros and cons of student loan consolidation.
If you have multiple private student loans, you may qualify to refinance them for a lower interest rate, cutting your monthly payment. Some student loan lenders may refinance federal and private student loans together.
However, a private lender will evaluate your current financial information for a new loan or refinance, so you may not get approval if you're in financial hardship. Every lender's underwriting requirements for refinancing are different, so you shop and compare offers from several companies to ensure you get the best deal.
If your finances are in good shape and you want to pay off your federal or private student loans faster, consider the following options.
Before we go, I want to invite you to connect with me on Twitter @lauraadams or Instagram @lauradadams. And LauraDAdams.com is my personal site where you can use my contact page and learn more about my work, books, and money courses.
That's all for now. I'll talk to you next week. Until then, here's to living a richer life.