08/25/2022
As many of you all know I have been practicing student loan law for 10 years. In that time, I’ve advised hundreds of clients on their student loan situations. Yesterday was a momentous day for student loans, as President Biden announced sweeping programs to deal with the student loan problem, handcuffing millions each year. Here are the highlights of the student loan forgiveness plan announced yesterday, with my commentary afterward. Note that many of the details are forthcoming, so we only know the broad strokes of the plan, and the nuts and bolts of it will be revealed at a later date (I’m guessing several months or more).
1) Federal Loans Only - Most importantly, this whole forgiveness program applies to federal loans only. It does not apply to private loans. Private loans remain their own vicious diseased animal. If you are not sure as to whether your loan is held by the federal government or not, check your account at studentaid.gov. If your loan is not on the list, it is a private loan and none of this applies to that loan.
2) Forbearance Ends - The CARES Act pandemic forbearance is extended to the end of the year. This will be the last time it will be extended, so plan your finances accordingly. Thus, NOW is the time to reassess your options with repayment plans and get out of default. Even though this has been extended numerous times, I advise you take them at their word here and treat this as if there will be no further extensions.
3) Balance Reduction - As has been much reported, you get a $10,000.00 reduction in your loans if you made less than $125,000.00 per year during the pandemic and/or $225,000 per married couple. How you get it is still to be revealed. Do you need to apply for it or is it automatically granted? I’m guessing the former, so this will be something to keep an eye on. If you have Pell grants, the forgiveness amount is $20,000.00. As of now, it appears the reduction will not come with an IRS tax bill either.
4) New Repayment Plan - There is a new repayment plan. It appears that borrowers will be able to pay no more than 5% or their discretionary income (an amount calculated by formula). The previous amount was 10%. This is significant in that it will result in lower payments. Details as to how one qualifies for this plan are unknown at this time. The problem is that it applies to undergraduate loans only. If you have both, it sounds like they will pro rata the amount with the other income based repayment plans. On the face of it, it appears that Parent Plus loans will be included (but again, details are scarce at this point). Also, the amount of time you will have to pay them off under this plan will be cut in half, from 20 years to 10 years. So, if you qualify, you would pay less for a shorter amount of time before loan discharge. There is a lot that has to happen for this to be a reality, so don’t wait for this to happen.
5) Interest Forbearance – In perhaps the most underreported aspect of yesterday’s announcement, it was revealed that, so long as the borrower makes their payment, the Dept of Education will cover the unpaid interest. In other words, so long as you are making payments, your loan will not continue to grow. This is huge. No more ballooning of interest fed loan balances, making your loan much bigger than the actual dollar amount you took out.
6) If you think you may qualify for Public Service Loan Forgiveness, NOW NOW NOW is the time to act. There is a waiver that allows borrowers to receive credit for past periods of repayments that would otherwise not qualify for loan forgiveness. This waiver opportunity expires on October 31, 2022 so do not delay!
My Take:
1) With so many details yet to be revealed, it’s hard to fully assess everything. When the details come out, we will know more.
2) If your loan is currently in default, take action now to get it out of default as soon as possible. When the new rules come out, we don’t know for sure how they will be treating default loans. Call me to help you out with that.
3) Take advantage of the free four months you have left in the CARES Act forbearance and get on an IDR plan, especially if you had a down year for income in 2021. Again, if you need help, let me know.
4) If you have FFEL loans, consolidate now. Get them out of your account to take full advantage of these programs.
I will let the partisan wacko talking heads on TV argue about the fairness of the righteousness and consequences of loan forgiveness. The bottom line is, these programs have the look and feel of something that will help borrowers. As to how much it helps depends on the individual’s situation.
If you have any questions about this program or other student loan issues, contact me at [email protected] or 586-979-5000.
