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What Changes Could Be Coming for Your Student Loans?

Student loan changes being discussed in Washington could have major implications for borrowers. Find out more about President Biden's plans now.

Student loans are a dark cloud hanging over many of us. In fact, Americans collectively owe over $1.7 trillion in student debt. One bright spot for the 44 million borrowers across the country is the possibility of broad-reaching debt forgiveness. As the Biden administration and Democratic members of Congress push for some form of student loan debt cancellation, there are still many unanswered questions around precisely what form this student loan debt help will take. Here's what we know—and don't know—so far about student loan forgiveness.

What types of loans will be forgiven—and how much?

We know that any student loan forgiveness plan will cover federal loans, but not private loans. The plan is also likely to only cover loans used for undergraduate study. Whether Parent PLUS loans will be covered is still unknown.

President Biden has spoken about $10,000 in student loan debt forgiveness, but Senator Chuck Schumer, the Democratic leader of the Senate, and others in Congress have suggested the amount should be $50,000. For context, roughly 67% of federal student loan borrowers have more than $10,000 in debt, and a $50,000 debt forgiveness plan would wipe out debt for approximately 80% of borrowers.

When would the debt be forgiven?

The question of when this might happen is closely tied to how it might happen. If President Biden were to use executive action to forgive the debt, it could happen very soon. But there are some questions around the legality of using executive action in this manner. If Biden decides the forgiveness should be done through legislative action, there could be a lengthy process to get a bill passed by both congressional houses.

Who will be eligible?

There will likely be income limits on who will receive loan forgiveness. Some argue there should be no income constraints because even higher-income borrowers may struggle with student debt. But Biden and Schumer have both talked recently about an income limit of $125,000. 

Related: What to Know About Student Loans and the Pandemic 

Other changes on the horizon

Clearly, there are a lot of unknowns still about what (if any) student loan forgiveness borrowers should expect. But there’s more potential good news: In addition to this plan, other programs that could help borrowers are also being considered.

Making it easier to discharge student loans in bankruptcy

Current student loan bankruptcy laws make it nearly impossible to discharge student loans. Though private student loans might not be included in a forgiveness plan, Biden has indicated he'd like to make these loans easier to discharge in bankruptcy. 

Expanding and improving public service forgiveness programs

President Biden has also expressed interest in expanding opportunities for debt forgiveness in exchange for public service. Currently, the Public Student Loan Forgiveness (PSLF) program offers loan forgiveness to those who work at a not-for-profit or government organization while making eligible loan payments for 120 months. Proposed plans include improving the PSLF program and making it easier for borrowers to use. (It's estimated that 97% of those who've applied for PSLF have been rejected to date.) Biden has proposed a program that would forgive $10,000 in debt for every year you perform eligible service, up to $50,000.

Simplifying the income-based repayment plan

Income-based repayment plans can be a good option if you're having trouble making your monthly student loan payments. Under these plans, you pay a percentage of your income each month. Sounds simple, but as with most things related to student loans, the plans are unnecessarily complicated. There are several options, all with different repayment terms. Biden's plan proposes simplifying the repayment system so that anyone who makes over $25,000 a year would pay a set 5% of their discretionary income toward their loans each month. Make these payments for 20 years, and any remaining balance would be forgiven.

Not taxing forgiveness

The joy of having your loans forgiven can be short lived when you open the hefty tax bill. Currently, borrowers owe taxes on the amount of student loans forgiven, putting some borrowers in a jam. While they no longer have to worry about paying their student loans, they now need to figure out how to pay this tax. Biden favors a plan to remove taxation on student loan forgiveness.

Related: 4 Ways to Pay for College in the Face of COVID–19 

What's next?

While we wait to see what programs become a reality, current borrowers can take advantage of an extended forbearance period. Due to the economic hardship caused by the pandemic, all federal student loan borrowers are automatically in forbearance until September 30, 2021. Forbearance means you don't owe payments and your loans won't accumulate interest, as if your payments are paused.

Suppose you're a betting person and think some form of loan cancellation will be enacted this year. If that’s the case, you may want to consider putting the money you'd typically pay toward your loans into an interest-bearing account or investing that money. That way, you aren't paying down a loan that could be forgiven, but you're still saving for future payments or other financial goals. On the other hand, if you're not as optimistic about forgiveness or you have a high loan amount, you could use the forbearance period to pay your loans off faster while there's no interest accumulating. 

Looking for more advice on paying for college? Check out our Financial Aid section.

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About Tracy Odell

Tracy Odell is the VP of Content at FinanceBuzz.com.


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