Personal finance

Waiting for student loan forgiveness? Here’s what to do in the meantime

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Getting impatient waiting to hear if your student loans will be forgiven? Millions of other borrowers are in the same spot.

The topic of loan cancellation has been floated for years now. On the campaign trail, President Joe Biden promised to forgive at least $10,000 of the debt for all but other Democrats are pressuring him to raise that amount to $50,000.

Some experts suspect there could be action before the November mid-term elections, with Democrats hoping that delivering on loan cancellation could help them on the ballots.

Here’s what you can do while you wait for more news.

Can I count on forgiveness?

The odds of student loan borrowers getting their balances reduced or eliminated have never been greater, according to higher education expert Mark Kantrowitz.

In addition to the current president having vowed to cancel some of the loans, 60% of American voters now say they’re in support of debt forgiveness in one form or another.

Even so, Kantrowitz said, “until legislation is signed into law, you can’t count on anything.”

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Currently, there are pending reports from the U.S. Department of Education and the Justice Department on whether the president has the legal authority to implement loan forgiveness through executive action. It’s still unclear when the findings will be published.

In the meantime, Kantrowitz added, “borrowers should not take any precipitous action in anticipation of loan forgiveness.”

When could forgiveness happen?

If Biden decides to go ahead and forgive the loans without Congress, in theory borrowers could see their balances reduced or eliminated pretty quickly. But such a move may be met by court challenges, which could lead to delays.

If the White House opts to leave student loan forgiveness to legislators, Democrats may take action before the mid-term elections, experts say.

How much could be forgiven?

At the moment, the main point of contention among student loan forgiveness proponents is over how much debt should be scrapped: $10,000 or $50,000?

If all federal student loan borrowers got $10,000 of their debt forgiven, the outstanding education debt in the country would fall to around $1.3 trillion, from $1.7 trillion, according to Kantrowitz. And roughly one-third of federal student loan borrowers, or 15 million people, would see their balances reset to zero.

Canceling $50,000 for all borrowers, on the other hand, would shrink the country’s outstanding student loan debt balance to $700 billion, from $1.7 trillion. Meanwhile, the debt for 80% of federal student loan borrowers, or 36 million people, would be gone entirely.

Even under that more generous plan, not everyone would be entirely happy. One-fifth of federal student loan borrowers owe more than $50,000, and around 7% of borrowers have balances over six figures. (The average student loan debt is about $30,000 per borrower, according to Kantrowitz.)

Should I still make payments?

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Most federal student loan borrowers don’t have to pay their bills until May, and during that time interest is suspended, thanks to pandemic-era relief.

Since $10,000 in student loan forgiveness is the proposal most likely to turn into reality, Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit, said she sees nothing wrong with people who owe under that amount redirecting their usual payments to savings until we hear more about forgiveness.

Even if you owe more than $10,000, it can still be wise to take advantage of the government’s pause on student loan payments.

You can use the extra cash to wipe out high-interest credit card debt, for example, or to build up your emergency savings.

What about my private student loans?

“When it comes to private student loans, it seems highly unlikely that they would be included in the forgiveness plan,” said Elaine Rubin, senior contributor and communications specialist at Edvisors.

Anything else I should do?

There are some smart moves you can take in anticipation of student loan forgiveness, experts say.

Millions of people who took out student loans before 2010 under the Federal Family Education Loans program have been excluded from the government’s offer to pause their payments without interest accruing. There’s now some concern that these borrowers could also be left out of any student loan forgiveness.

As a result, holders of FFEL loans may want to contact their servicer and consolidate them into the main Direct Loan program, which will qualify for the forgiveness, Kantrowitz said. The main downside of doing so is that your repayment timeline will be reset; so, if you’re near the end, it may not make sense.

Until legislation is signed into law, you can’t count on anything.
Mark Kantrowitz
higher education expert

Meanwhile, borrowers thinking about refinancing their federal student loans into private loans for a lower interest rate may want to wait, Kantrowitz said. For one, the interest rate on most federal student loans is 0% for another four months.

What’s more, “they will feel foolish if they refinance only to have the federal government announce loan forgiveness,” Kantrowitz said.

Would my forgiven debt trigger a tax bill?

Student loan forgiveness is now tax-free, thanks to a provision included in the $1.9 trillion federal coronavirus stimulus package that became law in March 2021.

Formerly, any student loan debt canceled by the government was considered taxable and levied at the borrower’s normal income tax rate.

According to a rough estimate by Kantrowitz, $10,000 in cancellation would have triggered an extra $2,000 in taxes for the average borrower. If $50,000 per borrower was canceled, the average person would have to write the IRS a check for $10,000.

Borrowers would now be off the hook from these bills.

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