Student loan forgiveness may be underway. What to do while waiting
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If Biden chooses to write off the debt through executive action, in theory borrowers could see their balances reduced or eliminated fairly quickly. But such a development can be thwarted by legal challenges, which could lead to delays.
A clearer picture may soon emerge.
“If Biden decides he can do it by executive order, I think we’ll hear about it by June or July,” said Betsy Mayotte, president of the Institute of Student Loan Advisors.
If the White House chooses to leave the cancellation of student loans to Congress, Democrats would likely use the budget reconciliation process to do it.
That’s because this process allows them to pass laws by simple majority, which is all they have. Other bills generally require 60 votes to be advanced, thanks to Senate rules of procedure. Republicans are largely hostile to the idea of a student debt jubilee.
The next budget reconciliation process will likely take place in the fall.
While the chances of student borrowers getting their balances reduced or eliminated has never been greater, “until the legislation is enacted, you can’t count on anything,” Kantrowitz said.
Currently, there are pending reports from the US Department of Education and the Department of Justice on whether the President has the legal authority to implement the loan cancellation by action of the executive, Kantrowitz said. It is still unclear when the results will be released.
In the meantime, he added, “borrowers should not take any hasty action in anticipation of their loan cancellation.”
The main point of contention among supporters of student loan forgiveness today is how much debt to eliminate: $ 10,000 or $ 50,000.
If all federal student loan borrowers got $ 10,000 off their debt, the country’s outstanding education debt would drop to about $ 1.3 trillion, from $ 1.7 trillion, according to Kantrowitz . And about a third of federal student loan borrowers, or 15 million people, would have their balances reset to zero.
In contrast, canceling $ 50,000 for all borrowers would reduce the country’s student debt balance to $ 700 billion from $ 1.7 trillion. Meanwhile, the debt of 80% of federal borrowers, or 36 million people, would disappear entirely.
Even under this more generous plan, not everyone would be entirely happy. One-fifth of federal student loan borrowers owe more than $ 50,000, and about 7% of borrowers owe more than six figures.
Most federal student loan borrowers don’t have to pay their bills until October, and during that time interest is suspended.
Since the $ 10,000 student loan forgiveness proposal is the proposal most likely to come to fruition, Mayotte said it sees nothing wrong with people who owe less than that amount redirecting their usual payments to savings, “gaining a little interest in them, then seeing which way the wind blows in August.”
“If it looks like we’re not any closer to forgiveness, pay the funds then,” she said.
Even if you owe more than $ 10,000, it may be a good idea to take advantage of the government’s break on student loan repayments. You can use the extra cash to wipe off high interest credit card debt, for example, or to build up your emergency savings.
According to experts, there are smart steps you can take in anticipation of forgiving your student loan.
Millions of people having taken out student loans before 2010 under the Federal loan for family education were excluded from the government’s offer to suspend their payments without accruing interest.
There is now concern that these borrowers may also be excluded from any student loan cancellations.
As a result, these borrowers might want to consolidate their FFEL loans in the Direct loan program, which will qualify for pardon, Kantrowitz said. The main downside is that your repayment schedule will be reset; so if you are nearing the end it may not make sense.
Meanwhile, borrowers who plan to refinance their federal student loans to private loans at a lower interest rate may want to wait, Kantrowitz said. For one thing, the interest rate on most federal student loans is 0% for another five months.
Plus, “they’ll feel stupid if they refinance just for the federal government to announce loan cancellations,” Kantrowitz said.
“When it comes to private student loans, it seems highly unlikely that they will be included in the forgiveness plan,” said Elaine Rubin, senior contributor and communications specialist at Edvisors.
Would my canceled debt trigger a tax bill?
The student loan forgiveness is now tax-exempt, thanks to a provision included in the The $ 1.9 trillion federal coronavirus stimulus package that became law in March.
Previously, any student loan debt canceled by the government was considered taxable and levied at the standard rate of tax on the borrower’s income.
According to a rough estimate from Kantrowitz, a $ 10,000 write-off would have triggered an additional $ 2,000 tax for the average borrower. If $ 50,000 per borrower were set aside, the average person would have to write the IRS a check for $ 10,000.
Borrowers would now be released from these bills.