On Wednesday, the White House and the Department of Education announced the Student Loan Debt Relief Plan. This will significantly affect individuals and families with federal student loans.
This program affects student borrowers that have government sponsored loans, but would not apply to Parent PLUS loans, loans originated through private lenders and loans refinanced or consolidated through private lenders.
There are Three key parts of the program:
- Final Pause through 12/31/2022
In March of 2020, due to the economic challenges created by the pandemic, the prior administration directed the Department of Education to implement a reduction of federal student loan interest rate to zero and allowed automatic deferment of loan payments. This pause has been extended several times by both the prior and current administrations.
As part of the Student Loan Debt Relief Plan, the administration has extended the payment pause a final time through December 31st, 2022. This will allow the Department of Education to ensure a smooth transition to repayment and prevent unnecessary defaults.
The White House announced that borrowers should not expect a further extension and they should plan on resuming payments in January 2023.
Borrowers should plan on resuming payments in January 2023.
What does this mean for you and what should you do next?
Although the extended pause will occur automatically, you may want to continue paying some or all your monthly payments. Why? Since the Department of Education is not requiring payments and has reduced interest rates to zero, any payment you make will apply directly to principal and speed up the time that it will take to pay off your loans.
Alternatively, you may want to use the monthly amount you would otherwise be using to repay your student loans towards other goals such as increasing your emergency fund or paying down other debts.
- Loan Forgiveness – Up to $10K for borrowers making less than $125k ($250K for married couples), and up to $20K for Pell grant recipients
The Department of Education will provide up to $10,000 in debt cancellation with loans held by the Department of Education. Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for households. Pell Grant recipients are eligible for up to $20,000 in debt cancellation.
Your relief is capped at the amount of your outstanding debt. For example: If you are eligible for $20,000 in debt relief, but have a balance of $15,000 remaining, you will only receive $15,000 in relief.
Debt relief will not be treated as taxable income for federal income tax purposes.
What does this mean for you and what should you do next?
Nearly 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available to the U.S. Department of Education (DoE). If the U.S. Department of Education doesn’t have your income data, the Administration will launch a simple application which will be available by early October.
- Sign up to be notified of when the application is open at the Department of Education’s subscription page. https://www.ed.gov/subscriptions
- If the DoE does not have your income information, you should apply before November 15thto receive relief before the payment pause expires on December 31, 2022. Once a borrower completes the application, they can expect relief within 4-6 weeks.
- Even if you wait, the Department of Education will continue to process applications as they are received, even after the pause expires on December 31, 2022.
- Reduced Income Driven Repayment Programs in half – from 10% to 5%.
Income-based repayment plans have long existed within the U.S. Department of Education. The administration is proposing a rule to create a new income-driven repayment plan that will substantially reduce future monthly payments. The rule would:
- Require borrowers to pay no more than 5% of their monthly discretionary income monthly on undergraduate loans. This is down from the 10% available under the most recent income-driven repayment plan.
- Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, this guarantees that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment.
- Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with loan balances of $12,000 or less.
- Cover the borrower’s unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower’s loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low.
What does this mean for you and what should you do next?
If you are in an income driven repayment program, once the amounts are adjusted, use the additional income that is freed up to work on other financial goals such as increasing savings, reducing debt, saving towards retirement, or funding your children’s college education.
Special situation:
Borrowers who are employed by non-profits, the military, or federal, state, Tribal, or local government may be eligible to have all of their student loans forgiven through the Public Service Loan Forgiveness (PSLF) program. There is a time-limited change that waives certain eligibility criteria in the PSLF program that expires on October 31, 2022. More information on eligibility and requirements is available at PSLF.gov.
