It was long expected that President Biden would act on student loan debt – but no one knew quite what to expect before his plan was announced last week. What do we know, and how will it affect borrowers, investors, and their families?
Which loans are subject to forgiveness?
For loans held by the Department of Education1:
- Borrowers with annual income of under $125,000 (for individuals) or under $250,000 (for married couples or heads of households) will be eligible for up to $10,000 in relief.
- Those who meet the financial criteria above, and also received a Pell Grant in college will be eligible for up to $20,000 in debt cancellation.
What other changes can we expect?
Income-driven repayment plans – aimed at helping lower- and middle-income borrowers, will also be revised and expanded. Borrowers paying off undergraduate loans in these plans currently pay 10% of their discretionary income- that will be cut to 5%. Both undergraduate and graduate loans will pay a weighted average rate. There will be other changes to this program, likely released in the next month for public comment. 1
How will this affect inflation and the economy?
“Under Biden's plan, 43 million people stand to have their loan payments reduced, while 20 million would have their debt forgiven altogether.”2 That means a lot of consumers will have a different personal finance picture, starting right now. Fewer bills to pay may mean more money to spend elsewhere – will that push the cost of goods higher?
Experts disagree on the result – will the extra money every month go into consumer goods and act as “gasoline on the inflationary fire”3 ? Or will the pace of money be released so slowly (small loan payments spread out over years) that it’s “largely a wash”4 from an economic perspective? It remains to be seen.
Expansion Likely for Public Service Loan Forgiveness (PSLF)
Additionally- changes to Public Service Loan Forgiveness (PSLF) may be coming, likely in the fall of this year. Specifically, the proposal allows more types of payments to qualify for PSLF, like partial, lump sum, and late payments. There also may be an allowance for more deferments and forbearances, similar to those which for the Peace Corps, National Guard, and military service already qualify. 1
Payment Pause Comes to an End
Finally, student loan payments were paused for a seventh- and final- time, through December 31 of this year. Borrowers should plan to resume payments in January 2023.1
Be ready to include your student loan payments back into your monthly budget. If you’re not sure how to balance other financial goals while paying down student loan debt, a financial planner can help.
What does this mean for future borrowers?
For years, the cost of a college education has risen much faster than inflation. This hurts a lot of borrowers and their families, and there’s huge pressure on our politicians and policymakers to reduce the cost of a college education. But there is no guarantee future debt will be canceled – or that tuition prices will go down. That’s why it’s important to create a wise college strategy.
Working with a financial planner can help you develop a clear picture of your financial situation by reviewing your income, assets, and liabilities, while also evaluating your insurance coverage, investment portfolio, and tax exposure. Then, together you can create a plan to establish and prioritize financial goals and implement strategies to work towards these goals.
If you’d like to get started on your own financial plan or discuss how these changes may impact your current plan, contact me today.