Waiting for a student loan forgiveness? What to do while waiting
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Eager to find out if your student loans will be canceled? Millions of other borrowers are in one place.
The subject of loan cancellation has been raised for years. During the election campaign, President Joe Biden promised to write off at least $ 10,000 in debt for everyone, but other Democrats are pressuring him to increase that amount to $ 50,000.
Some pundits suspect there could be action ahead of the November midterm elections, with Democrats hoping the loan cancellation might help them on the ballots.
Here’s what you can do while you wait for more news.
Can I count on forgiveness?
According to higher education expert Mark Kantrowitz, the chances that student loan borrowers will have their balances reduced or eliminated has never been greater.
In addition to the fact that the current president has pledged to cancel some of the loans, 60% of American voters now say they are in favor of debt cancellation in one form or another.
Even so, Kantrowitz said, “until the legislation is enacted, you can’t count on anything.”
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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 through action. of the executive. It is still unclear when the results will be released.
In the meantime, Kantrowitz added, “borrowers should not take any hasty action in anticipation of a loan forgiveness.”
When can forgiveness come?
If Biden decides to go ahead and cancel the loans without Congress, in theory borrowers could have their balances reduced or eliminated fairly quickly. But such a decision can face legal challenges, which could lead to delays.
If the White House chooses to leave the cancellation of student loans to lawmakers, Democrats could take action ahead of the midterm election, experts say.
How much could we forgive?
The main point of contention among supporters of student loan cancellation today is how much debt to remove: $ 10,000 or $ 50,000?
If all federal student loan borrowers got $ 10,000 of their debt forgiven, the nation’s outstanding school 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.
Canceling $ 50,000 for all borrowers, by contrast, would reduce the country’s student debt balance to $ 700 billion, from $ 1.7 trillion. Meanwhile, the debt of 80% of federal student loan borrowers, or 36 million people, is said to have disappeared completely.
Even with 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 have balances above six digits. (The average student loan debt is around $ 30,000 per borrower, according to Kantrowitz.)
Do I still have to make payments?
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Most federal student loan borrowers don’t have to pay their bills until May, and during that time interest is suspended, thanks to pandemic relief.
Since $ 10,000 for student loan cancellation is the proposition most likely to come true, Betsy Mayotte, president of the Institute of Student Loan Advisors, a non-profit organization, said she saw nothing It’s hard for people who owe less than that to redirect their usual payments to savings until we hear more about forgiveness.
Even if you owe more than $ 10,000, it may still be a good idea to take advantage of the government’s break on student loan repayments.
You can use the extra money to eliminate high interest credit card debt, for example, or to build up your emergency savings.
What about my private student loans?
“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.
Anything else I should do?
According to experts, there are smart steps you can take in anticipation of student loan cancellation.
Millions of people who took out student loans before 2010 under the federal Family Education Loans program have been excluded from the government’s offer to suspend their payments without accrued interest. There is now concern that these borrowers may also be excluded from any student loan forgiveness.
As a result, FFEL loan holders may want to contact their service agent and group them into the main direct loan program, which will be eligible for the rebate, Kantrowitz said. The main downside is that your repayment schedule will be reset; so if you are near 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 four months.
Plus, “they’ll feel stupid if they only refinance to have the federal government announce the loan cancellation,” Kantrowitz said.
Would my canceled debt trigger a tax bill?
Cancellation of student loans is now tax-free, thanks to a provision included in the federal $ 1.9 trillion coronavirus stimulus package that became law in March 2021.
Previously, any student loan debt canceled by the government was considered taxable and withheld at the borrower’s normal tax rate.
According to a rough estimate from Kantrowitz, a $ 10,000 write-off would have triggered $ 2,000 in additional taxes for the average borrower. If $ 50,000 per borrower were set aside, the average person would have to write a check for $ 10,000 to the IRS.
Borrowers would now be released from these bills.