Potential student loan cancellation has been an area of much speculation with the new Biden administration. So far, not much has changed, but there are a lot of misconceptions out there. Here are the 4 most common questions I get (and what you should do with your student loans in 2021):
1. Will $10,000 of my student loans be cancelled?
- $10,000 is a number President Biden has said he would support cancelling per person of federal student loans. The only action that has been taken so far is President Biden has asked the Secretary of Education Miguel Cardona to draft a legal opinion on whether or not the president has the authority to cancel federal student loan debt through executive action.
- If the opinion is that the president does have the authority for widespread student loan cancellation, President Biden would still need to take the action – which he has given differing signals on. President Biden initially indicated he would support cancellation only though legislation and not executive action. However, given that he has asked to check his authority to be able to cancel loans, perhaps he has changed his mind.
- If after legal review, the finding is that President Biden does not have the authority for widespread student loan forgiveness, it would need to be done through congress. This would be difficult to achieve given the 50/50 split in the Senate. If something gets to President Biden’s desk though, he has indicated he would sign it.
- If widespread loan cancellation does get through these hurdles, I would still expect to see legal challenges by conservatives.
2. My student loans would qualify for cancellation, right?
- Just because you have student loans does not necessarily mean that they would be cancelled even if widespread cancellation occurs through executive or legislative action.
- The department of education would only have the ability to cancel student loans that it owns, which would be federal direct student loans.
- If you have private student loans you would likely be out of luck. These are loans that were acquired through a private lender when you attended college, or were since refinanced after graduation. However, it is impossible to say exactly what loans would qualify since no action has been taken yet.
- A good litmus test to see if your student loans might qualify for cancellation would be if your student loans received 0% interest and a pause on payments in 2020 (and extended through September 2021 by President Biden). These are loans that are owned by the Department of Education that the government has the ability to take action on.
3. Is Public Service Loan Forgiveness (PSLF) even worth pursuing?
- There were lots of headlines when PSLF first became available that 99% of applications were rejected, therefore the program isn’t real and not worth pursuing. The truth is that when the Department of Education first began accepting applications in November 2017, very few borrowers were going to be able to meet all the criteria to qualify for loan forgiveness. Many borrowers submitted applications for PSLF anyways. As time goes on, we continue to see more and more borrowers qualify and receive PSLF, which proves it is real if you follow the requirements. If you work at an eligible non-profit and have a large federal student debt burden you should absolutely be taking the necessary steps to qualify for PSLF.
- After 120 qualifying payments, your remaining student loan balance will be forgiven. The key here is that you:
- Have direct federal student loans
- Work at a qualifying employer (Eligible nonprofit or government organization)
- Are enrolled in an Income Driven Repayment (IDR) plan
- Annually certify your employment and keep track of your qualifying payments
- The pause on required student loan payments has made PSLF even more attractive than it previously was. While you are not making payments, these months still count towards the required 120 of qualified payments. Essentially, you are getting free credit for 18 months (March 2020 to September 2021) as if you had made payments. Because of this, it is important that you do not make payments towards your paused federal student loans during this period if you are eligible for PSLF.
- Now may be a good time to certify your employment due to faster processing times. When the pause on payments stops, loan servicers will likely be backed up due to increases in call and service volume. You can jump the line and get this done now while volumes are low and response times are faster than usual. Remember, you can still get credit for past payments if you are just now pursuing PSLF for the first time but your past payments would have qualified. FedLoan Servicing is notorious for making mistakes when tracking your qualifying payments, so begin certifying employment as soon as you possible and keep your own records.
- If you are eligible for PSLF but are worried about not receiving forgiveness, consider pursuing it but also save in a side fund as you work towards your 120 payments. If something happens resulting in not getting your loans forgiven, you can use your side fund to pay your student loans. If you take the required steps and end up getting PSLF, you will have a bucket of money you can use for other goals once you know your loans are forgiven.
4. What should I do now with my student loans now?
- I generally recommend holding off on making any changes to federal direct student loans until we know more in September (or sooner). If you refinance federal direct loans to a private lender now, you may no longer be eligible for:
- 0% interest through September, 2021
- Student loan forgiveness programs
- Income Driven Repayment Plans
- Discharge of debt due to death or disability
- If you have other debt, I would consider focusing what would be your student loan payment towards your debt that is currently being charged interest.
- When we have more clarity on the fate of federal student loans, you can still refinance to a private loan when federal student loans begin charging interest again.
- If your loans are already private, it doesn’t hurt to refinance whenever you can get a lower interest rate. Rates are incredibly low right now, so it is worth checking if you haven’t done so recently. Since you don’t qualify for federal loan programs, your goal should be keep your interest low and pay off the loan.
- Have a plan on how you will pay your student loans back or qualify for an existing student loan forgiveness program. Crossing your fingers that your debt will be wiped away is not a great plan. Widespread student loan cancellation should be viewed as a bonus if it happens, rather than counting on it as your ‘Plan A’.
If you need help navigating the complexities of your student loans, you can schedule a complimentary 30 minute student loan consultation on my calendar to get your questions answered.