Key takeaways:
- On April 16, the Department of Education published a first draft of the White House’s newest student debt relief plan rules.
- The administration’s latest student loan forgiveness plan could wipe out balances for 25 million borrowers.
- If passed, millions could see their debt automatically cancelled as soon as this fall. It’s unclear yet if others will need to apply for the program.
Last week, the White House announced a new student debt relief plan that would clear outstanding balances for 25 million people if enacted. And today, the Department of Education just released the first draft of the proposal rules, offering clarity on who might be eligible for debt cancellation.
The Biden administration has made several attempts to pass broad federal student loan forgiveness proposals over the past few years. And it’s been a challenging road.
After the White House’s first attempt at widespread loan relief was shot down in the Supreme Court last year, the administration implemented a new income-driven repayment plan, Saving on a Valuable Education or SAVE, that offers a chance at loan forgiveness after repaying your loans for 20 to 25 years. This plan has forgiven a total of $153 billion in student debt relief for nearly 4.3 million Americans to date, including another $7.4 billion in student loans canceled in April.
“The main risk with President Biden’s new proposal is that it is likely to be subject to legal challenges for the same reasons as the original proposal for broad student loan forgiveness.”
Its latest endeavor to help lower the student debt burden would erase balances for some borrowers and could decrease runaway interest charges for those who don’t qualify for full relief.
“The new student loan proposals will provide full or partial financial relief to tens of millions of borrowers, especially borrowers who are experiencing financial distress,” said Mark Kantrowitz, a student financial aid expert and member of our CNET Money Expert Review Board.
As someone still repaying student loans nearly ten years later, I wanted to find out the likelihood of this new plan being passed, who will qualify for forgiveness, and what steps (if any) borrowers should take now. I shared my burning questions with Kantrowitz, and here’s what I learned.
Who’s eligible for debt relief under the new plan?
If passed, the administration’s latest debt relief plan could wipe out balances for millions of student loan borrowers. Here’s who it could benefit:
- Borrowers with loan balances that have grown significantly due to interest could see up to $20,000 of their interest balances canceled. Those enrolled in an income-driven repayment plan making below $120,000 a year ($240,000 for those married, filing jointly) could receive automatic forgiveness for the full amount their balance has increased due to interest.
- Borrowers with undergraduate federal student loans who began repaying 20 years ago could have their remaining debt forgiven.
- Borrowers with graduate federal student loans who began repaying 25 years ago could have their remaining debt forgiven.
- Borrowers with federal student loans who are eligible for loan forgiveness under SAVE or other programs like Public Service Loan Forgiveness or Teacher Loan Forgiveness could see their balances canceled, even if they haven’t enrolled in the qualifying programs.
- Borrowers who experienced financial hardship or those who attended a school that lost federal funding might also be able to receive relief. The administration is drafting a rule for borrowers facing financial hardship in the coming months.
What are the challenges to implementing this new debt relief plan?
Since the Biden administration’s first attempt at sweeping loan forgiveness was blocked, I know it’s likely that the latest plan will also face resistance.
“The new regulations for targeted forgiveness will become final this summer,” said Kantrowitz. But he expects them to be blocked — maybe temporarily — by the courts.
“The main risk with President Biden’s new proposal is that it is likely to be subject to legal challenges for the same reasons as the original proposal for broad student loan forgiveness,” said Kantrowitz. The administration’s first attempt at widespread student debt relief was not authorized under the Higher Education Relief Opportunities for Students, or the HEROES Act.
And it could face other obstacles. “It may also be subject to challenges under the Administrative Procedures Act based on claims that it is arbitrary, capricious and vague and an abuse of discretion,” said Kantrowitz.
Even though some individual proposals have passed legal challenges, combining all of these proposals into a new plan could increase the chances that the courts will all block it, he added.
It’s too soon to tell what will happen, but expect a bumpy ride. The administration released its first draft of the rules today. The Department of Education will open a 30-day comment period tomorrow (April 17) to help finalize rules in time for relief in the fall. If the measure moves forward, the Biden administration expects more loan balances could be forgiven this fall.
Which loans are eligible for forgiveness?
Most federal student loans, including qualifying undergraduate, graduate, student and parent loans, will be eligible for forgiveness under the new plan, said Kantrowitz.
Some loans don’t qualify, like Federal Family Education Loans or FFEL. If you have one of these loans, you can consolidate them into a Direct loan to qualify for debt relief under an income-driven repayment plan or PSLF. You can do this by visiting Studentaid.gov and completing the steps for consolidation.
Private student loans from banks and online lenders are not eligible for debt relief.
How will forgiving interest help borrowers?
Many student loan borrowers have larger balances now than when they initially started repayment due to runaway interest. If this is the case for you, the new interest forgiveness plan could reduce your loan balance or eliminate it altogether.
According to the White House fact sheet, the plan could help create more financial stability for working families while addressing the debt that people of color face.
The plans could eliminate accrued interest for 23 million borrowers and cancel debt for four million. Additionally, over 10 million borrowers will see relief of $5,000 or more. Black and Latino borrowers, who are more likely to see their student loan balances grow due to interest accumulation, will benefit most from the administration’s new propositions.
What steps should student loan borrowers take in the meantime?
Whether this new student loan debt relief plan will be passed is unclear. Until then, Kantrowitz recommends signing up for autopay to ensure you don’t miss any payments. You may also qualify for a 0.25% interest rate reduction when you sign up for autopay.
Claim the student loan interest deduction on your federal income tax return. The deduction excludes up to $2,500 in interest paid on federal and private student loans and saves you money on taxes.
If you qualify for interest relief under the new plan, Kantrowitz said you can try to increase the amount of interest that will be forgiven by switching to an income-driven repayment plan. If you can’t afford payments, you can consider applying for deferment or forbearance if you meet the requirements.
Just make sure you understand how each of these steps could impact your existing loan balance. If you’re approved to make lower monthly payments or temporarily stop paying, your balance may increase due to interest. If the administration’s new debt relief isn’t successful, that could leave you with more to pay off.
If you can afford your current monthly payments but want to apply for an IDR to lower your payment and increase the interest that could be forgiven, it may make sense to contribute the difference to a high-yield savings account.
For example, if you pay $350 per month toward your student loans and an IDR lowers your payment to $150, you could contribute the extra $200 to your savings. Then, if the plan is passed, you could be eligible for more interest forgiven. If not, you can move the funds from your savings to your student loan balance. Either way, you’ve also earned interest on your money in the meantime.
Where can I apply for the new forgiveness plan?
There isn’t an application for the Biden administration’s new debt relief program yet. And it’s currently unclear if you’ll need to apply or if adjustments to your loan balances will be automatic.
“The goal of the new regulations is to make forgiveness automatic so that no application is necessary,” said Kantrowitz. “However, some of the proposals do not seem to be amenable to automatic forgiveness and may require an application.”
If I’m not eligible for this plan, what other options do I have?
If you’re not eligible for full forgiveness or don’t qualify for aid under this latest student loan relief plan, you still have options. “Borrowers who are ineligible may be able to get some financial relief through the SAVE repayment plan, deferments and forbearances,” said Kantrowitz.
Income-driven repayment plans, like SAVE, can help you lower your monthly student loan payment to a more affordable amount. If you still need to check to see if you’re eligible to save money with the SAVE program, you can explore different IDRs at StudentAid.gov.
If you can’t afford your monthly payment, whether you’re on an IDR or not, you can talk to your servicer about deferring your student loans. If you’re experiencing financial hardship, enrolling in school or enlisting in the military, deferring your loans allows you to stop paying your student loans. During deferment, interest will not continue accruing on qualifying loans like subsidized and Perkins loans.
If you don’t qualify for deferment, you may qualify for forbearance, which allows you to stop making payments temporarily. However, interest will accrue while you’re not making payments, so your loan balance will grow. When your forbearance ends, you’ll resume making payments.
