In the current political climate, student loans have been a hot topic. President Joe Biden ran on a platform that included student loan reform. Many borrowers are waiting and hoping for student loan forgiveness, but the chance of 1.7 Trillion in student loans being wiped away looks unlikely. 

Truthfully, we don’t exactly know how things will play out and we are scouring our sources to provide you with timely content relevant to your loans. In this article, we’ll address important information that you need to understand. If you aren’t sure what to do with your loans, book a consult today.

1. Payment cessation and the interest rate freeze

In March 2020 the Trump Administration enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Effectively, it suspended federal student loan payments and halted interest to provide relief to student loan borrowers across the nation. In January 2021, the Biden Administration lengthened the emergency relief on federal loans until Sept 30, 2021. This is a unique benefit to federal student loan holders. 

This payment cessation is a large benefit for those going for PSLF. Qualifying payments continue as long as you’re enrolled in an income-driven repayment plan and during this 18 month period of $0 payments, the counter has continued to record payments as made, even if they are $0. This program not only increased cash flow, but also moved you closer to forgiveness while making $0 payments. Payments are set to begin again in October 2021.

For those not going for PSLF and currently in IDR this is a great time to chip away at your outstanding interest and principal. A lower loan balance when payments are reinstated means less student loan payments overall. For those finishing your training program or anticipating a jump in income check out our refinancing partners and see if you can get a better rate.

2. Immediate student loan debt cancellation

The conversation up on Capitol Hill has flip-flopped from complete loan forgiveness to $10,000 of forgiveness. Progressives like Senators Elizabeth Warren and Chuck Schumer would like to see $50,000 forgiven in an executive order. But, President Joe Biden rejected using an executive order. However, he supports $10,000 of forgiveness if received through the legislative process. This legislation is likely to see opposition from senate republicans.

For many of you, $10,000 of forgiveness is not going to significantly impact your student loan plan. $50,000 would be a different story, but is unlikely. Regardless of the path forward, don’t assume all your debt will be forgiven.

3. Modifications to Income Driven Repayment plans

President Joe Biden ran on a platform promising to shake up existing student loan payments and forgiveness. He hopes to propose an IDR plan that will cap your monthly payments at 5% of your income if you make above $25,000 and have undergraduate federal student loans. Under this proposal, those making under $25,000 wouldn’t need to make monthly payments. This plan could save you 5-15% monthly on your loan payments. In addition, any remaining undergraduate loan balance after 20 years of payments would be forgiven tax-free. Graduate loans (like medical school loans) would not be eligible.

This is another false alarm for those who’ve completed graduate school or a professional program.  For most people, the majority of loans come from graduate programs and would not be eligible.  StudentLoanAdvice.com will monitor how this would affect your undergraduate loans and will incorporate this into your consultation if it would provide you more cost savings in the long run.

4. Expansion of student loan forgiveness programs

Joe Biden is expected to introduce a new student loan forgiveness program similar to Public Service Loan Forgiveness. The proposed program would require employment in national or community service. Borrowers in this program would be eligible to receive $10,000 in student loan forgiveness annually for up to 5 years. For a maximum of $50,000 forgiven.

Public Service Loan Forgiveness is also being reviewed due to the inability of borrowers to achieve forgiveness. Initial proposals would allow additional federal loans and repayment options to be eligible for PSLF. 50% of your student loan balance would be forgiven after 5 years of qualifying payments.

Bottom line, if you’re going for PSLF you may be able to have 50% of your loans forgiven after 5 years of qualifying monthly payments. And, for those who don’t qualify for PSLF but work in some type of public service, you may qualify for the other proposed loan forgiveness program.

5. Elimination of the tax bomb on student loan forgiveness

A recent senate covid relief bill is temporarily providing tax-free forgiveness on the commonly known tax bomb which occurs after making monthly payments in IDR for 20-25 years. This will be a huge plus for you out there who will hit 20/25 years before January 1, 2026. Lawmakers see this as momentum for the future of permanently eliminating long-term IDR taxable forgiveness and other loan forgiveness to come.

Relief will expire on January 1, 2026 unless more legislation is passed to extend it. With the political uncertainty around elimination or extension of this bill, we recommend maintaining a side fund. A side fund is money you put aside monthly and invest which you could access to pay off this tax liability when your loans are forgiven. If the forgiveness became tax-free, then I’m sure you could find another appropriate use for the savings.

6. Private refinancing in a rising interest rate environment

A rising rate environment is also referred to as inflation. During inflationary periods prices of goods and services increase. $1 today is worth less than $1 tomorrow. Student loan rates tend to rise during inflation, which means that it costs borrowers more money to pay off their loans.

It’s not a secret that interest rates are at all time lows and don’t have much lower to fall. Federal rates are set by federal law and fluctuate based on market and economic performance. According to CBO, rates are set as follows:

  • Subsidized and Unsubsidized Loans to Undergraduate Students = 10-year Treasury + 2.05%,  Capped at 8.25%
  • Unsubsidized Loans to Graduate Students = 10-year Treasury + 3.60%, Capped at 9.50%
  • PLUS Loans to Graduate Students and Parents = 10-year Treasury + 4.60%, Capped at 10.50% 

Market watchers out there, you can follow the 10 year Treasury to determine what rate you will receive if you take out more federal loans. Don’t be surprised if rates keep going up. For those of you who want to lock in a low interest rate, here is our approach to private refinancing in our current environment:

Federal loans – wait until payment and interest suspension is over to review refinancing options. If your financial situation is stable, go ahead and apply to refinance your federal loans (if not going for loan forgiveness). If your debt to income ratio is high, it will be difficult to receive a better rate than what you’re currently paying.

Private loans – if you haven’t refinanced recently, it’s time to shop around and apply with our negotiated low rates and refinancing bonuses. Carefully consider each offer and select the lowest rate and shortest payment term. Keep in mind, lenders take a number of financial factors into account to determine your rate.

Refinancing offers usually have a 30 day window in which you can make decisions, so one month before the rate freeze ends, you may want to apply to refinance your loans and lock in a low interest rate. For more information on the right time to refinance, book a consult or review our refinancing page.

Summary

Student loan legislation is constantly changing and can be difficult to navigate.  For those borrowers with a solid plan, stick with it. If you want to make sure your plan will still work or are unsure of how to proceed, book a consult with StudentLoanAdvice.com today.