The student loan landscape has changed dramatically, thanks to the government’s August announcement of up to $20,000 in loan forgiveness. There’s also an extension of the ongoing repayment freeze, possibly through the middle 2023.
Specifically, those who received a Pell grant during college can qualify to have up to $20,000 of their current federal student loan balance canceled. Those who didn’t receive a Pell grant may be eligible for up to $10,000 in forgiveness.
In both cases, recipients’ incomes during the pandemic must have been less than $125,000 for individuals, and less than $250,000 for married couples. Applications are open now.
Note: As of Nov. 10, 2022, the government has temporarily stopped taking applications for this student loan forgiveness program until legal challenges to it have been resolved. See Federal Student Aid’s statement for more information.
Meanwhile, the current freeze (or forbearance) on repayment, interest and default for all federal student loans will be extended until 60 days after current legal challenges to the new forgiveness program are resolved. The Department of Education said the longest it will wait would be June 30, 2023, with payments then starting 60 days later.
Here’s a quick look at this and other new measures, including:
The application for the new student loan debt relief is available at the Federal Student Aid website, and requires only your name, Social Security number, date of birth, email and phone number. No documentation of income is required.
Meanwhile, in some cases, an application might not be necessary.
“Nearly 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available,” said the Department of Education.
As a result, anyone with federal student loans will want to monitor their balances — our guide to checking your balance has more information — and keep an eye out for more news.
As noted above, the level of forgiveness available will depend on whether or not you received a Pell Grant. Also be aware that loans not directly held by the federal government, such as Federal Family Education Loans (FFEL), are not currently eligible.
Under the relief action, all federally held student loans saw their interest waived, and the lifting of all delinquency or default status on those loans. As a result, the move halted the garnishment of wages or other income for those who had defaulted.
Likewise, eligible borrowers’ “nonpayments” during the repayment freeze still count toward requirements for forgiveness under income-driven repayment (IDR) plans and the Public Service Loan Forgiveness (PSLF) program, as well as part of loan rehabilitation agreements.
Note that the freeze applied only to student loans on the federal government’s balance sheet. Privately-held Federal Family Education Loans (FFEL), school-sourced Perkins loans and alternative loans lent by banks and other entities were excluded, so borrowers with those types of loans were required to roll them into a federal Direct consolidation loan in order to enjoy this relief.
In all, the COVID-19 pandemic relief measures — started during the Trump administration and continued under President Biden — were extended seven times.
|A Brief History of Student Loan Relief|
|2020||● July 30: President Trump said during his press briefing: “We also suspended student loan payments for six months, and we’re looking to do that additionally and for additional periods of time.”
● Aug. 8: Trump formally directed the Education Department to carry out an extension through Dec. 31, 2020 via executive order.
● Dec. 4: After hinting at the possibility before the November election, Trump directed Education Secretary DeVos to prolong the interest freeze through Jan. 31, 2021.
|2021||● Jan. 20: President Biden formally extended the freeze via one of a dozen-plus executive orders on day one of his presidency.
● Aug. 6: The Department of Education announces another extension until Jan. 31, 2022.
● Dec. 22: Another extension keeps the relief measures in place through May 1, 2002.
|2022||● April 6: Biden again extends the relief through Aug. 31, 2022, citing continuing economic disruption from the pandemic.
● Aug. 24: The relief measures are extended through Dec. 31, 2022, while forgiveness is announced for up to $20,000 worth of student loans per eligible borrower.
● Nov. 22: The government announces that forbearance will continue until legal challenges to the new forgiveness program are resolved, lasting possibly until June 30, 2023. Payments would resume 60 days later.
The government also said it was proposing a new income-driven repayment (IDR) plan with even friendlier terms for borrowers than in the current system.
The planned program would allow for full federal student loan forgiveness after only 10 years, down from the 20 to 25 years currently available (depending on which IDR plan you join).
It would also cut the minimum monthly student loan payment to 5% of a borrower’s discretionary income — down from 10% currently — and would alter the definition of discretionary income to protect more of the borrower’s earnings.
But perhaps most importantly, the loans would become interest-free, so long as the borrower remains current on their repayment.
As a result, “unlike with current income-driven repayment plans, a borrower’s loan balance will not grow so long as they are making their required monthly payments,” the Department of Education said.
It also noted that the proposal would be published “in the coming days on the Federal Register” to solicit public comment for 30 days.
The same announcement also indicated plans to make Public Service Loan Forgiveness (PSLF) easier to qualify for, building on changes to the program over the past year.
Specifically, the move would make permanent last year’s decision to greatly expand the list of which payments qualify for the program. (See our PSLF report for more details.)
In its release, the Department of Education noted that “since the start of the temporary changes [to PSLF], [it] has approved more than $10 billion in loan discharges for 175,000 public servants”
As a result, if you work for a government agency or nonprofit organization, you should check out the Federal Student Aid PSLF tool to see if you qualify for this program, which offers total forgiveness after 10 years.
Staying on top of the news is the first step in preparing for the resumption of your federal loan repayment. Staring at the screen, however, will only leave you waiting, hoping for good news.
To be more proactive — and prepared for not-so-good news — consider these seven steps:
1. Replenish your emergency fund
2. Rehabilitate any loans in default
3. Adjust your repayment plan
4. Review deferment and forbearance options
5. Explore non-federal government support
6. Touch base with your loan servicer
7. Consider student loan refinancing before 2023
If you’re wondering whether to save money or pay off debt, the answer is clear — but only through December. While the penalty-free student loan interest freeze remains in effect, refilling your rainy day fund should be a priority. This way, you’ll have a cushion in case you need to dip back into the fund to afford loan payments down the road.
Generally, it’s wise to carry three to six months’ worth of expenses in your accessible savings account. With the future of the unemployment rate uncertain, though, the more savings you sock away, the better off you’ll be.
The CARES Act promised an additional reprieve for federal student loan borrowers in default: a halt to collections and garnishments of wages and other monetary benefits. The Department of Education has also said it would refund $1.8 billion worth of recent seizures. (If you haven’t been made whole, learn about how this borrower retrieved her tax refund.)
To avoid such penalties in the future, strategize how to get your loans out of default. Your options for federally owned debt include the following:
|What to know||Pros and cons|
|Rehabilitation||● Make nine payments within 10 months, with the payment amount equal to 15% of your discretionary income||● Monthly payment amount could be as low as $5, depending on your income
● Collections could continue until you’ve made all nine payments
● Removes the record of your default from your credit history, likely boosting your credit score
● Rehabilitation is a one-time opportunity
|Direct loan consolidation||● Consolidate one or more federal loans into a new loan. You can agree to repay it on an income-driven repayment plan, or else make three straight, timely payments before consolidation occurs||● Consolidation not possible until wage garnishment is lifted
● Won’t immediately remove the default from your credit report
|Payment in full||● If you have the cash to do it, zero out your balance||● Not practical for most borrowers|
Enrolling in an income-driven repayment plan could make your payments more affordable once the student loan freeze ends. IDR plans limit your monthly dues to 10% to 20% of your discretionary income, also accounting for your family size.
And you don’t have to wait until January or February to enroll. In fact, you can review your IDR options at any time — the government’s loan simulator tool could help you decide. After choosing the best repayment option for your situation, you can apply in 10 minutes, free of charge.
If you’re already repaying your debt via an IDR plan but have seen a decrease in household earnings (or an increase in family size), you could recalculate your monthly dues via studentaid.gov.
The federal government’s special administrative forbearance isn’t the only way to press pause on your repayment. There are all sorts of deferment and forbearance options, including:
|Unemployment deferment||Up to three years||If you’re out of work|
|Economic hardship deferment||Up to three years||If you’re receiving welfare benefits, earning especially low income or serving in the Peace Corps|
|General forbearance||Up to 12 months at a time for a maximum of three years||Granted at your loan servicer’s discretion based on your financial challenges, medical expenses, employment or other factors|
|Student loan debt burden forbearance||Up to 12 months at a time for a maximum of three years||If your monthly federal loan dues are greater than 20% of your gross income|
Unlike the special administrative forbearance awarded to most federal loan borrowers in March, the above options…
- …must be applied for and are never automatically granted.
- …accrue and capitalize interest in most cases, except on subsidized loans and Perkins loans during a deferment.
- …can be reported to the credit bureaus and possibly affect your credit score.
When the federal loan suspension ends, other support options will still exist.
So, if IDR and interest-accruing postponements like deferment and forbearance aren’t enough — or if you have private student loans to tend to, as well — consider the following moves:
If you don’t remember the last time you checked in on your debt repayment options, track down your federal loan servicer, and ask for assistance when you need it.
And while you’re at it, ensure that your servicer has your most up-to-date contact information. With a first round of federal loan servicing contracts set to expire by the end of 2021 — and a host of new loan servicers coming aboard — your debt could be transferred.
With the federal government picking up the tab on your student loan interest (at least for now), it makes little sense to refinance your education debt to a lower interest rate. No bank can beat Uncle Sam’s current offering of 0%.
With that said, the student loan interest freeze isn’t forever. When your rates return to their normal levels, it could make sense to refinance federal loans if you can find interest rates below what you’re paying now.
Just be sure you won’t miss federal loan protections — like access to IDR, deferment and forbearance and forgiveness programs — before you make the irreversible decision to refinance.