The Status of the Student Loan Forgiveness Program
Student loan forgiveness in the U.S. is up in the air. Currently, federal student loan payments are on pause until The Supreme Court hears arguments on the COVID-19 Emergency Relief and Federal Student Aid in February 2023. How might the proposed student debt relief legislation affect your education clients when the matter is settled?
Note: At the time of this publication, the Biden Administration’s student forgiveness plan has been blocked by some judges on lower courts. The fate will rely on the Supreme Court, which is going to hear oral arguments in two main cases that are challenging the proposed plan.
Read on to learn more about how student debt relief works and what you should know about student loan forgiveness in 2023.
Student loans in America
Education is considered a human right in this country. However, how one pays for that education is becoming a more difficult choice to make. The cost of a college education has nearly tripled since 1980, by the College Board’s data analysis. Federal student loan debt numbers presented by the White House Fact Sheet on August 24, 2022 paint a somber picture.
- Federal student loan debt total: $1.6 trillion.
- Borrowers: 45 million.
- Borrowers in default: 16%.
- Average debt: $25,000.
- Black Americans who started school in 1995-96 have 95% of their debt today.
As the pandemic unfolded, lawmakers used American debt relief to buffer the blow of a global economic slowdown. Case in point, we saw educators buckling under student loan debt, and leaving the profession. Furthermore, 56% of black educators with loans drowned financially under piling interest on their unpaid principle. Too often, debt financing is the only option for college students.
Financial aid is a primary way to pay for a college education. Its affordable rates and reasonable repayment terms, along with protections like forbearance on payments and deferring the start of paying off loans, make subsidized and unsubsidized direct loans attractive. A less attractive side is paying down student debt, which is critical to maintaining a solid credit score. What’s more, reducing the overall U.S. student loan debt ensures borrowers realize the benefits of a college education: home ownership, economic stability, and providing for a family.
Let’s move on to the Biden Administration’s plan (‘The Plan’) for student loan relief.
What is The Plan for student loan forgiveness?
The White House Fact Sheet released on August 24, 2022 summarizes the key objectives of The Plan. Keep in mind, The Plan is not yet law. Here are some key features to remember.
Who is eligible for forgiveness under the Plan?
If all eligible student loan borrowers take advantage of The Plan, 43 million could benefit, including 20 million borrowers benefitting from total debt cancellation.
The Department of Education could provide:
- $20,000 in debt cancellation to Pell Grant participants.
- $10,000 in debt cancellation to non-Pell Grant borrowers.
What is the taxable income threshold?
The Plan focuses on individuals with incomes less than $125,000 and couples filing jointly for less than $250,000.
How will The Plan improve financial aid?
A new income-driven repayment plan “caps monthly payments for undergraduate loans at 5% of a borrower’s discretionary income” for current and future direct loan borrowers. Going forward, the non-discretionary income level could be raised; therefore, anyone making a $15 hourly wage wouldn’t have to make monthly repayments or see their balance grow due to interest. In addition, the education department could forgive original loan balances of $12,000 and less after 10 years of payments.
Generally speaking, student loan forgiveness means a borrower is no longer obligated to repay a student loan. In forgiveness, the principle, interest, and any fees are no longer debts. Although the IRS considers forgiven loans income, The Plan wouldn’t count a forgiven loan as income for tax years 2021 through 2025.
Things to know about federal student loan forgiveness programs
Understanding how forgiveness programs work is key for college students and their parents considering their options. For instance, a borrower has to use the right repayment plan to apply for forgiveness. Do they know the difference between discharged debt and a forgiven loan? Does consolidating loans affect forgiveness?
Students and parents can make better decisions with the following section’s information on federal student loan debt forgiveness.
Is The Plan the only way to get student loan forgiveness?
The Plan isn’t the only option for federal student loan forgiveness. Public servants who’ve made 120 qualifying payments on a federal direct student loan could be forgiven under the Public Service Loan Forgiveness (PSLF). Also, the borrower needs at least 10 years of employment in the public sector including the military, government, and qualified nonprofits. Qualifying payments are 12 full payments a year, not partial, lump sum, or late payments.
However, under the PSLF, only a direct loan or direct consolidation loan can be forgiven. To apply for forgiveness of a Federal Family Education Loan (FEEL) or Perkins loan, eligible borrowers would have to consolidate those loans. And — this is critical — the count to 120 qualifying payments starts all over again.
How many people have benefited from debt cancellation through PSLF in the U.S.?
According to the U.S. Government Accountability Office, as of June 2022, 165,000 public servants’ debt was canceled by the PSLF. Thanks to a limited waiver (ended in October 2022), the numbers eligible increased considerably. However, the total forgiven is a far cry from the 26 million who have applied for forgiveness according to the Department of Education press release in November 2022.
Does a repayment plan mean you’re less likely to receive loan forgiveness?
Student loan repayment assistance plans outline the terms of repayment. Some repayment plans are tied to specific loan types.
When it’s time to begin paying off your loan, everyone starts on a standard repayment program but, as their situations change, repayers can switch to other plans as allowed. The Department of Education offers eight repayment plans:
- Standard Repayment Plan (for direct, stafford, Direct PLUS, and consolidation loans).
- Graduated Repayment Plan.
- Extended Repayment Plan.
- Revised Pay As You Earn Repayment Plan (REPAYE).
- Pay As You Earn Repayment Plan (PAYE).
- Income-Based Repayment Plan.
- Income-Contingent Repayment Plan (ICR).
- Income-Sensitive Repayment Plan (only for FEEL program loans).
Currently, PSLF only considers forgiveness of student loans repaid using either the REPAYE, PAYE, or ICR plans. The PSLF does not accept loan repayments made under the graduated repayment plan or the standard plan for consolidation loans as qualifying payments for forgiveness. So, knowing what’s considered a qualifying payment is critical for student loan forgiveness.
Is loan consolidation helpful or harmful to loan forgiveness?
Consolidating can simplify a busy borrower’s monthly bills, but it’s not going to reduce your annual percentage rate or reduce your payment period; that’s refinancing. Unlike private loan refinancing, through the Department of Education, loan consolidation can be accomplished for free.
People may want to consolidate multiple student loans into one loan with a fixed-rate payment. The Standard Repayment Plan for Consolidation Loans offers 10 to 30 years terms. However, sometimes the terms make loan forgiveness unnecessary or impossible. For instance, the PSLF isn’t helpful to borrowers with a 10-year repayment term. Also, a factor of eligibility is using an income-driven repayment plan, which eliminates certain consolidated loans. So, forgiveness is generally neutral toward consolidation; so long as it’s the right loans and consolidation terms.
What is discharged debt?
There’s only one way to stop student debt repayment immediately: discharged student debt. Typically, a person continues loan repayment until debt forgiveness is approved. However, in certain cases, a loan is discharged rather than forgiven. Immediate cancellation of a loan can be applied in circumstances such as bankruptcy, school closure or fraud, and identity theft. In cases where bankruptcy doesn’t eliminate obligation, repayment plans are available for certain loans, and terms vary.
The Total and Permanent Disability (TPD) program is a pathway to discharged debt that applies to certain borrowers unable to work. These people could have their Direct loan, Perkins, or FEEL loans forgiven but have to meet eligibility requirements and apply for discharge. The Department of Education does reserve the right to reinstate the loan if the TPD-eligible person’s income rises above predetermined levels for their state.
Pro tip: Speaking with a loan servicer for the most up-to-date information is always recommended.
Student loan forgiveness projections
The Biden administration intends to provide student loan debt relief and improve the terms of federal student loans for low-to-moderate-income borrowers. Let’s consider what these two goals mean for millions of eligible borrowers.
The main ways The Plan intends to tackle the national student loan crisis include:
- Targeted debt relief.
- Streamlining loan programs.
- Reducing the cost of higher education.
According to the July 2022 Federal Student Aid Quarterly Report, the approximate number of direct loan borrowers in default is 7.5 million. Looking deeper into the problem, researchers at Pew Charitable Trust found that higher rates lead to “negative financial outcomes.” Even people who pay on time struggle to keep pace when unpaid interest is added to the principal balance (capitalization), the study found. The student loan forgiveness program on the Supreme Court’s docket should significantly reduce unpaid interest accumulation.
According to the U.S. Department of Education, changes will impact borrowers such as
- The over 40 million eligible recipients of a federal student loan.
- REPAYE participants whose total payments per dollar borrowed would decrease by 40%.
- A graduate of a four-year university who’d save $2,000 a year with The Plan.
- 85% of community college borrowers whose debt would be erased in 10 years.
Unfortunately, public student loan forgiveness won’t improve everyone’s loan debt equally.
Loan forgiveness for seniors
The Plan’s fact sheet estimates that more than a third of borrowers are aged 40 and up, including 5% who are senior citizens. Public student loan forgiveness isn’t based on age. However, the path to student loan forgiveness for the 65 and older set is complicated.
Seniors who rely on social security may not have heard that The U.S. Treasury can garnish up to 15% of your social security benefits to repay student loans. The Social Security Administration made an average monthly payment of $1,825.14 to retired workers in December 2022. Imagine what 15% means to retirees paying off Pell Grants and PLUS loans they took out on behalf of their children. This group needs solutions and education on their options, including paths to dissolve student debt obligation.
The refinance option
People refinance for better terms on their repayment loans. The drawback is a refinanced loan won’t be eligible for The Plan or other federal forgiveness programs. Why? You can’t refinance a loan with the U.S. Department or Education. Borrowers who choose refinancing over repayment will turn their loans private and become ineligible for public program forbearance, repayment, and cancellation of student debt.
Here are some numbers to keep in mind when discussing the refinance option.
Who is looking to refinance their federal loans?
Teachers, engineers, accountants, attorneys, and physicians are interested in student loan refinancing. According to the student loan platform Purefy, those who refinanced their loans between September 2020 and January 2021, on average, are aged 35-years old, making $98,000 with 4.6 years of work and $63,880 in student debt to refinance. These numbers come from participating lenders offering fixed rates between 3.88%-11.58% APR, and variable rates ranging from 3.99%-9.35% APR.
How many borrowers may need to consider refinancing this year?
There are about 25.6 million federal loan borrowers in forbearance. Many, if not all, of these people will be in repayment sometime in 2023. For instance, refinancing may be the best option for those who aren’t eligible for the PSLF or TPD forgiveness plans.
In order to better serve your clients, keep your finger on the pulse of how student loan forgiveness legislation may impact them. Agile Education Marketing connects you with the world of education.
Are you ready to provide data-driven solutions for your education clients grappling with student loan forgiveness? Reach out to Agile Education Marketing today.