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  • Writer's pictureNate Baim, MBA, CFP®

How Student Loan Changes Impact You

How Student Loan Changes Impact You

Many early-and-mid career professionals are navigating the cost of student loans. And a recent announcement regarding student loans from the Biden administration will impact many Millennials and their student loan obligations.

Millions of U.S. college graduates have begun their careers with a crushing student loan debt balance. Forty million Americans owe more than $1.7 trillion in total loan debt. This means more than 50% of students graduate with significant debt. The vast majority of this student debt is federal student loans, with the remaining amount owed to private lenders.

Several existing programs lessen the burden of student loans but require decades of repayment. And the recent announcement will impact borrowers' options. In this blog post, we will explore recent statements regarding:

  • Payment moratorium

  • Debt Forgiveness

  • Notification of proposed new income-driven repayment plan

  • Temporary changes to PSLF

Relief for Borrowers

In the past two years, student loan borrowers enjoyed some relief as monthly payments were paused during the pandemic. In late August, the Biden Administration extended this hiatus on student loan payments until December 31, 2022.

In addition to the extended pause, President Biden announced that the government would forgive federal direct loans up to $10,000 for graduates with annual salaries below $125,000 or $250,000 for married couples or heads of households. Biden will also cancel up to $20,000 for borrowers who met those requirements and were Pell Grant recipients in college. The initiative caps the relief at the amount of a borrower's outstanding eligible debt.

Borrowers in school are eligible to have debt canceled, and the income cap will apply to their parents' income. Parents who took out Parent PLUS loans are also eligible. For many borrowers, the debt cancellation will be automatic as their information is already on file. If information is not on file, borrowers must verify income with the Department of Education.

Income-Driven Loans

Currently, the federal government has four income-driven payment (IDR) plans, enabling borrowers to cap loan payments at a percentage of monthly income. These repayment plans include:

  • Revised Paye as You Earn (REPAYE)

  • Pay as You Earn (PAYE)

  • Income Contingent Repayment (ICR)

  • Income Based Repayment

If accepted into one of these programs, the remaining loan balance will be eligible for forgiveness after 20 or 25 years, depending on the plan. Careful tax planning must be considered if pursuing forgiveness under any of these repayment plans. Forgiveness awarded under these plans can result in the amount of debt forgiven being seen as income, thus exposing borrowers to a hefty tax bill upon forgiveness.

The Biden administration announced the framework for a new income-driven repayment plan for undergraduate loans. The administration outlined the provisions they seek to include in this new IDR. Those provisions include

  • Payments to be capped at 5% of borrower's discretionary income

  • Increase the amount of income that is considered non-discretionary

  • Forgive loan balances after ten years of payments for original loan balances below $12k

  • Cover the borrower's interest costs so long as payments are made on time.

This proposed IDR still faces many hurdles before becoming an option for borrowers. But if offered in the future, this new IDR could significantly help those with undergraduate loans.

Other repayment plans currently in place include:

  • Teacher loan forgiveness.

  • State-sponsored repayment assistance programs.

  • Military student loan forgiveness and assistance.

PSLF Temporary Changes

The Public Service Loan Forgiveness plan is available to federal, state, local, and Tribal governments and qualifying nonprofit employees with federal student loans.

The government will forgive the remaining loan balances for eligible borrowers who complete 120 qualifying loan payments, i.e., ten years of work before being eligible for loan forgiveness.

Since its inception, the program suffered from being difficult to navigate for many borrowers, and the type of eligible loans was narrow.

However, in October 2021, temporary changes were made to the PSLF program to simplify the debt cancellation process for borrowers who completed ten years of on-time payments. A retroactive waiver broadened the types of loans that are eligible for forgiveness, and automatic certifying of payments for federal employees and military members was introduced. In addition to having debts canceled, more than one million borrowers have used the waiver to receive additional credit toward forgiveness.

The temporary changes allow student borrowers to get credit for payments made on loans from the Federal Family Education Loan (FFEL) Program, Perkins Loan Program, and other federal student loans. To qualify for the program under the temporary changes, these borrowers must apply to consolidate their loans into a Direct Consolidation Loan before October 31. Borrowers can also combine multiple sources of part-time employment to qualify, and months in service do not have to be consecutive.

The changes were necessary and overdue. Over its history up to October 2021, the program discharged debt for only 7,000 borrowers, according to the Department of Education. The temporary changes resulted in 175,000 borrowers having $10 billion in debt canceled in the last ten months. However, the waiver of qualifying payment rules ends on October 31, 2022.

The Takeaway

For borrowers with lower balances, the $10,000 or $20,000 student loan forgiveness program will mean an immediate, tangible difference in income and standard of living. Borrowers with larger loans that have made payments but were having difficulty getting debts discharged will – until October 31, 2022 – have a chance to cut through the red tape and get relief.

Paying down student debt should start with your goals in mind. Everything else should be in service to those goals. Good planning can help you monitor and change course so that you can continually work to increase your confidence in attaining your goals. Working with a financial advisor to get your ducks in order can help you better manage your goals, income, and wealth.

I work with early and mid-career individuals from Gen X or Y. If you are navigating your finances and trying to understand how your business can enable you to achieve your goals, feel free to place a complimentary 30-minute meeting on my calendar. In that meeting, we can discuss your objectives and situation.

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