There are several outstanding proposals for the blanket cancellation of student loans. But, even if one of these proposals is implemented, many borrowers will not receive the full cancellation of all of their student loans. What are your options if your student loans aren’t completely wiped out?
Student loan forgiveness will be limited
President Biden has proposed a federal student loan cancellation of $ 10,000 per borrower, while Senate Majority Leader Chuck Schumer and Senator Elizabeth Warren have proposed $ 50,000.
Senators Schumer and Warren want President Biden to use executive action to cancel student loan debt, but President Biden does not believe he has the legal authority to cancel student loans with executive action. President Biden has asked the US Department of Justice and the US Department of Education to conduct a legal review of the case. This review is still pending.
If student loans are canceled by executive action, private student loans will not be eligible.
If Congress passes legislation to cancel student loans, the threat of a Senate filibuster can force Democrats to pass loan cancellation through a budget reconciliation bill. But budget reconciliation bills must reduce the budget deficit, so any increase in costs must be offset by savings or increases in revenue. President Biden has an ambitious and expensive legislative agenda, so the money available for student loan cancellation may be limited.
In particular, the loan forgiveness amount and loan forgiveness eligibility can be limited.
- A $ 10,000 loan forgiveness will wipe out federal student debt for one-third of borrowers (33%). This means that two-thirds of borrowers will still owe money.
- A $ 20,000 remission will wipe out federal student loan debt from about half of all borrowers (54%). This means that about half of borrowers will still owe money.
- A $ 50,000 remission will wipe out federal student loan debt for four-fifths of borrowers (80%). This means that a fifth of borrowers will still owe money.
So even if student loan debt is forgiven, most borrowers will not have their student loan debt completely wiped out.
Only borrowers with fully forgiven debt will have their monthly student loan repayments wiped out. Partial forgiveness of the student loan does not reduce the monthly payment, only the number of payments remaining. For example, monthly loan payments in an income-based repayment plan are based on the borrower’s income, not how much they owe. The monthly loan payments under the Standard Repayment and Extended Repayment will only change if the borrower amortizes or refinances their debt.
Other student loan forgiveness options
If a borrower does not get full cancellation of their federal student loans, there are other options for student loan cancellation. Review these options, in case you qualify for any of them.
There are several student loan forgiveness programs based on the profession of the borrower, such as Public Service Loan Forgiveness, Teacher Loan Forgiveness, and the National Health Service Corps Loan Repayment Program. There are also loan forgiveness programs for first responders, volunteers, lawyers, and members of the US military. Some states and cities offer their own loan forgiveness programs.
There are also student loan releases that cancel the borrower’s debt. These included the borrower’s defense against repayment, exit from school closed, discharge for total and permanent disability, false certification discharge, identity theft discharge, unpaid reimbursement discharge and the discharge of death. There is also the discharge from bankruptcy, which is very rare.
Borrowers who pay off their federal student loans under an income-driven repayment plan will have the rest of the debt canceled after 20 or 25 years of payments.
Many employers now offer student loan repayment assistance programs, or LRAPs, in which the employer helps their employees repay their student loans. These programs typically provide $ 100 per month with an aggregate limit of $ 10,000.
All of these options are tax exempt until at least the end of 2025.
Other financial relief options
There are several options for saving money on student loans.
- Most lenders offer a discount to borrowers who sign up for automatic payment, where monthly loan payments are automatically transferred from the borrower’s bank account to the lender. Typical discounts include an interest rate reduction of 0.25% or 0.50% percentage point.
- The student loan interest deduction allows borrowers to deduct up to $ 2,500 in interest paid on federal and private student loans each year on their federal income tax return. This is an above-line income exclusion, so the borrower does not need to itemize to claim the deduction.
- Borrowers can increase the monthly loan payments by choosing a shorter repayment plan. This will pay off the debt faster and save money on the borrower’s interest.
- Make additional payments on the loan with the higher interest rate. This will pay off that debt faster, lowering the average interest rate you pay. Student loans do not have prepayment penalties, so there is nothing wrong with doing so. But be sure to tell the lender which loan should receive the additional payment. Also tell them that this is an additional payment and not a prepayment of the next payment.
If you are having financial difficulty, ask the lender about financial relief options. (Look on the lender’s website first, to find out what they typically offer.) Federal student loans offer several financial relief options, including:
- Economic difficulties and unemployment postponements, and general tolerances. These suspend the repayment obligation for a maximum period of 3 years each. Interest may continue to accrue and, if unpaid, will be added to the loan balance at the end of the deferment or forbearance period.
- Income-based repayment plans, such as ICR, IBR, PAYE, and REPAYE. If your income is below 150% of the poverty line (IBR, PAYE and REFUND) or 100% of the poverty line (ICR), your loan repayment will be zero. Income is recertified each year and can be recertified early if it has changed or if you have lost your job.