Canceling a student loan doesn’t mean what you think it means.
Here’s what you need to know.
Will President Joe Biden Forgive Your Student Loans? White House Chief of Staff Ron Klain said Biden could make a decision on whether to cancel the student loan before student loan payments restart on May 1, 2022, or Biden could extend the student loan payment pause. student loan. It’s possible that this year Biden could both cancel student loans and extend the student loan payment break. It would be a double win for student borrowers seeking major student loan relief in the wake of the Covid-19 pandemic.
However, canceling a student loan may not mean what you think it means. (6 major changes to student loan relief). For example, there is no universal definition for “cancellation of a student loan”. This can be confusing for student borrowers, especially if you expect your student loans to be forgiven. Here’s how it could impact your student loans.
(Biden to Forgive $6.2 Billion in Student Loans)
1. Private student loans will not be canceled
Sen. Bernie Sanders (I-VT) has offered to forgive all of the $1.7 trillion student loan debt. This includes all private and federal student loans. However, if there is large-scale student loan forgiveness, it would only be for federal student loans that belong to the US Department of Education. Private student loans are owned by financial institutions such as banks as well as investors. Since these companies make money from interest payments, they do not plan to cancel your private student loans. Nor can the federal government force these institutions to cancel their student loan debt. Therefore, if you have private student loan debt, do not expect student loan forgiveness.
(Student loan cancellation reduced to $25,000 for student loan borrowers with a new application)
2. Only federal student loans held by the government would be canceled
When it comes to canceling a student loan, it’s important to read the fine print. This includes the types of federal student loans that would be forgiven. Only federal student loans held by the federal government would likely be forgiven. For example, this includes direct loans. However, FFELP loans are mainly held by financial institutions and third-party investors. FFELP loans are guaranteed by the federal government, but were issued by banks prior to 2010. Since the federal government generally does not own these student loans, they are unlikely to be forgiven. Similarly, Perkins loans are issued by colleges and universities. They too will not be eligible for federal student loan forgiveness.
(3 ways to get student loan forgiveness now)
3. Student loan cancellation will not be available to everyone
Even if you have government-held federal student loans, over 40 million student borrowers are unlikely to qualify for student loan forgiveness. Expect there to be limits on who is eligible. For example, the most likely limitation is income. Sen. Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) have proposed that federal student loan forgiveness be limited to student borrowers earning up to $125,000. It is possible that Congress or the President will set an even lower income threshold. For example, the Covid-19 pandemic stimulus checks had an income threshold of $75,000. It is also possible that student loan forgiveness will be targeted at student borrowers who are in default or in default.
(What to do if you don’t qualify for student loan forgiveness)
4. Student Loan Forgiveness Isn’t Free
Canceling student loans would be a big win for student borrowers. With zero student debt, student borrowers could save for retirement, build their financial future, and buy a home. However, this does not mean that student loan cancellation is free. Although student borrowers would benefit, there are still substantial costs to the federal government. If there is $50,000 in student loan forgiveness for borrowers, the cost could be $1 trillion. If there is $10,000 in student loan forgiveness, the cost could be less than $400 million. In either case, the federal government would absorb these losses. Why? The federal government would not be able to collect principal or interest on these student loans.
(Where Biden stands on student loan relief)
5. Canceling the student loan does not solve the cost of higher education
It’s no secret that the cost of higher education is the underlying issue for many Americans. Student loan forgiveness, if passed, would be a one-time mechanism to erase student loan debt from current student borrowers. If you are a current student borrower, “Student Loan Cancellation Day” would be a day to remember. If you borrow student loans the day after “student loan cancellation day”, that day will also be memorable, but for the wrong reasons. Student borrowers will continue to borrow student loans, but they will not benefit from any future student loan forgiveness. Congress should provide a long-term solution to the cost of higher education that helps current and future generations and their families.
It is important to understand what student loan forgiveness means and if you qualify. Importantly, student loan relief is scheduled to end on May 1, 2022. This means federal student loan payments will resume unless Biden extends the student loan payment pause. It is best to plan for the restart of student loan repayments so that you are fully prepared. This means learning all of your student loan repayment options.
Here are some smart options for paying off student debt: