Student Loan Cancellation Cancelled!

The Supreme Court has spoken and millions of federal student loan borrowers have heard the message, loud and clear: the Biden administration’s plan to cancel $430 billion of federal student loans is not going to happen. For the 26 million Americans who had already applied with the Department of Education for the one-time loan cancellation of $10,000 - $20,000, as well as for all of the 45 million federal borrowers, the repayment clock will start ticking again, after three years of relief.

For a bit more context, the Biden plan would have limited cancellation to any borrower who earns less than $125,000 annually ($250,000 for Married Filing Jointly or Head of Household). And while you may hear horror stories of six-figure loan balances, “most student loan borrowers with outstanding debt owed less than $25,000 on their own educational loans,” according to the Federal Reserve.

Here are the most common questions that I have fielded about student loans:

When Do My Payments Restart? October 1st is D-Day for student loan borrowers. If you have not heard from your loan servicer, get in touch with them right now to confirm your personal information, loan amounts, interest rates and payment plans. You should also confirm that you have auto-debit enrollment, as doing so will keep you on track for the resumption of payments and help avoid missed payments and penalties.

What if My Financial Situation Has Changed? You are not alone. According to the Consumer Financial Protection Board (CFPB), many student loan borrowers (especially younger ones) are now struggling with payments on their other debts, which are now piling up alongside their student loans. If your life has changed, whether due to more debt or a drop in earnings, check out the DOE Loan Simulator to determine if a different repayment plan better meets your needs or if consolidation might help.

Should I consider an Income-Driven Repayment Plan (IDR)? IDRs, which is geared towards borrowers who are unable to afford their previously scheduled repayment plans, is based on what you earn (currently 10 percent of your discretionary income.) Earlier this year, the Biden administration proposed changes to IDRs, which would cap payments at 5 percent 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. In remarks delivered at the end of the day that the decision was released, President Biden reiterated that these changes to the IDR plan would indeed go into effect.

Did the Supreme Court Rule on Public Service Loan Forgiveness? PSLF was not part of the decision, which means that those who work FULL TIME for government, the military or non-profit organizations may qualify for student loan forgiveness or cancellation. The Administration had previously eased some of the rules for PSLF, which means that if you thought that you did not qualify for the program, you should check-in again to see if you can do so now.

With Three Months Before Loans Restart, Should Borrowers Start Paying Now? If you have other, high interest debt, concentrate on that first. Additionally, if your job includes a retirement plan with a match, it’s probably more beneficial to do that before paying off student loans, so you don’t miss out on that free money. And if you have run down your pandemic savings, replenish your emergency reserve fund so you have six to 12 months of expenses. If you have checked all of those boxes, repaying student loans now, while there’s still no interest, will shorten the amount of time on your loan–and that can be an emotional relief and can also allow you to fund other priorities sooner.

What Is the Biden “Temporary On-Ramp”? While President Biden reiterated that student loan repayments will restart on October 1st, he said that those struggling borrowers who miss payments will receive a 12-month reprieve: the DOE will not report anything to credit agencies, preventing a hit to delinquent borrowers’ credit scores nor will they consider these loans delinquent, put them into default, or refer them to debt collection agencies.

How Could This Decision Impact the Economy? When borrowers start making payments, they may not be able to spend as freely as they were, when payments were frozen. That could negatively impact the economy, but then again, the Federal Reserve has been trying to slow down economic growth and inflation, this decision might help with that process.