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.
Here are the topics that will be covered in this post:
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 November 2022, the Biden Administration lengthened the emergency relief on federal loans until June 30, 2023. With payments to resume 60 days after that date, roughly September 1, 2023. 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 are working at a qualifying institution. Yes, $0 monthly payments count towards the 120 required for PSLF. This program not only increased cash flow, but also moved you closer to forgiveness while making $0 payments.
For those not going for PSLF or taxable forgiveness this is a great time to chip away at your outstanding interest and principal or at least set aside the money you would be paying on your loans in a savings account. 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. President Joe Biden issued an executive order to forgive up to $20,000 in federal student loans. Borrowers who are eligible for this forgiveness make less than 125k if single or 250k if married. After several lawsuits were filed to block the action, it is going to the Supreme Court in February. With a decision likely to be made early summer 2023.
For most of you, $10,000- $20,000 of forgiveness is not going to significantly impact your student loan plan. And, even if this forgiveness goes through, it doesn’t impact your ability to receive existing federal student loan forgiveness programs such as PSLF or taxable forgiveness.
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, the Department of Education and others in higher education are trying to simplify the complex federal student loan system by creating an income-driven repayment (IDR) plan that is superior to the existing plans. Currently, there are five IDR plans. Each has different rules across how they calculate payments. Payments are usually calculated a 10-20% of discretionary income. Due to the nuances to each IDR plan, it can be difficult to decide which is best to optimize repayment.
The new IDR plan is currently in a proposal state, awaiting public comment. The rollout is anticipated to be summer 2023. Which means, borrowers could have this as a repayment option by then. This newly proposed IDR plan would become the sixth IDR option for borrowers, which may simplify the process to select repayment programs.
Monthly payments will be calculated as 5% of discretionary income on undergraduate loans and 10% on graduate loans. Borrowers with both undergraduate and graduate loans will have a prorated payment percentage based upon the percentage of their outstanding debt of undergraduate vs. graduate.
The poverty line deduction used to calculate discretionary income will be raised from 150% of the federal poverty level to 225%. A household size of 1 deduction (in the lower 48 states) would increase from $20,385 to $30,578.
Federal loan forgiveness will occur after 10 years of payments if you have loan balances of $12,000 or less.
If monthly interest isn’t covered by your monthly payment, it will be covered by the government. Loan balances will not increase while in this IDR plan when payments are less than interest. This applies to undergraduate and graduate loans. This could be a huge benefit for borrowers.
There is no mention of how spousal income will be treated, if there will be a payment cap, or if you have to qualify for a partial financial hardship to enroll in it. After the proposal process, some of the details could change for this program. We’ll update this article as we know more.
If you need help calculating your payment, check out our federal student loan calculator.
4. Improvements to Public Service Loan Forgiveness
President Joe Biden has made significant changes and improvements to the federal student loan forgiveness program named, public service loan forgiveness or PSLF. There have been a number of waivers passed in 2021 and 2022 that allowed for temporary rule changes to help borrowers advance their progress or even reach loan forgiveness.
The public service loan forgiveness program has five requirements.
- Make 120 on-time qualifying monthly payments.
- Enroll and make payments in a qualifying repayment program – IBR, PAYE, REPAYE, ICR or standard 10 year repayment plan.
- Work full-time at a non-profit or 501(c)(3) or part-time at multiple qualifying employers (as long as you work at least 30 hours p/week).
- Have direct federal student loans.
- Complete a public service loan forgiveness certification form. We usually recommend you complete this annually.
Beginning July 1, 2023 there are a couple of changes to the existing requirements.
- Allow borrowers to receive PSLF credit on late payments, installments or in a lump sum. Currently, the rule requires you to make the required payment for that month or a lump sum up to your next recertification date. This resolves the issue for those who receive some type of loan repayment assistance program from your employer or supporting entity like NIH, VA, NHSC, etc.
- “Borrowers will be able to access a hold harmless option to have other periods of deferment and forbearance potentially counted toward PSLF if they make payments equivalent to what they would have owed at the time. This includes getting credit for periods during which the borrower would have had a $0 payment.” My first thought, if your loans were in grace period right out of school (your default status unless you consolidate your loans right after graduation) you’d likely get credit for those months as forgiveness.
- Count certain forbearance or deferment periods. The majority of these relate to military service and administrative or mandatory forbearances (like the COVID pause).
- Adopt a 30-hour work requirement as qualifying employment. Currently, the rule is 30 hours per week at multiple jobs or whatever your employer categorizes as full-time (down to 30 hours).
PSLF had a pretty poor track record the first four years borrowers were eligible for forgiveness. From October 2017-September 2021, about 16,000 borrowers received forgiveness via PSLF. As of November 2022, now more than 350,000 public servants have had their loan forgiven from the program.
Bottom line, if you’re going for PSLF or even considering your eligibility you should check it out. The recent program success and proposed rule changes to simply the program should help borrowers pursuing careers in public service to have their loans forgiven.
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 no secret that interest rates have increased significantly from the all time lows we experienced in 2021 and early 2022. 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.
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