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Jill On Money: Loan forgiveness update

Jill Schlesinger on

The Biden administration’s plan to cancel billions of dollars of student loans is in jeopardy, due to a series of legal challenges. That means more than 40 million Americans who expected student debt relief could start getting billed again in January, when a pandemic-era moratorium is set to expire. Here is a Q&A to help those in limbo create a plan of action.

Loan forgiveness ONLY APPLIES to federal loans, not 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). Pell Grant recipients (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 only cover 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 who are claimed as a dependent would have their eligibility determined based on their parents’ or guardians’ income.

Given that federal loan payments are on pause through the end of the year 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 also 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 if a different repayment plan better meets your needs or if consolidation might help.

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.

 

IDR plans are for borrowers who can’t afford the scheduled loan repayments. The repayment is based on what you earn, which 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.

The Administration had previously eased some of the rules for PSLF, which means more people who work FULL TIME for government, the military or non-profit organizations may qualify for loan forgiveness or cancellation.

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, costs could swell to $1 trillion.

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(Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com)

©2022 Tribune Content Agency, LLC

 

 

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