Date: 28-Sep-2022
There is still a lot of uncertainty around the Biden administration’s student loan forgiveness program, but many Americans are already considering how it will affect their financial planning. As details emerge, borrowers are looking to understand more about their options to pay off additional debt, make major life changes and find additional investment opportunities.
The new initiative is expected to help an estimated 43 million borrowers. To qualify, they must have earned under $125,000 per year, or $250,000 if married, in either 2021 or 2020. Recipients of nearly all government-held federal student loans can qualify for up to $10,000 in loan forgiveness, while those who received Pell Grants may be eligible for up to $20,000. However, private student loans, even those that originated as federal loans, are not eligible for forgiveness under the plan. Borrowers who don’t qualify for forgiveness are encouraged to consider other options, such as consolidating FFELP loans into the Direct Loan Program for possible eligibility, or utilizing the Public Service Loan Forgiveness program.
The plan also contains the Department of Education’s proposal for income-driven repayment plans, which would reduce monthly payments and the length of repayment periods. There is also a proposal to forgive federal loans with a balance of $12,000 or less after 10 years of payments instead of the current 20 years, as well as an income-based payment formula that considers payments based on 5% of discretionary income rather than the current 10%.
A 2021 survey from the Social Policy Institute at Washington University in St. Louis projected widespread implications of potential student loan forgiveness. When asked about potential spending after hypothetical forgiveness scenarios, top survey responses included paying off other debts and saving for emergencies. In particular, respondents were most likely to increase retirement savings if all their student loan debt were forgiven. However, the percentage expected to save more for retirement increased in line with potential forgiveness amounts.
While this forgiveness plan comes as a relief to many, it’s also important to note that many borrowers have become accustomed to the pause in federal student loan payments, as loans have now been in forbearance for over two years. The recent Biden administration announcement also makes clear that the pause on repayments has been extended a final time. Payments are set to resume in 2023, meaning many people will be adding an extra expense to their monthly budgets.
According to Brianne C. Smith, CPA/ABV/PFS, Ph.D., and Alabama CPA firm owner, financial planners need to be prepared for clients who face a resumption in payments. Financial planners can help clients devise a strategy for these payments, take advantage of income-based repayment plans and, where applicable, utilize changes to the Public Service Loan Forgiveness program, Smith told the Journal of Accountancy.
A recent briefing from the White House showed that changes to the PSLF program last year increased the number of estimated borrowers who received forgiveness from 16,000 to 170,000. Borrowers who work full-time for a government agency or some nonprofits may be able to take advantage of the program, but they’ll need to determine their eligibility quickly. The deadline toapply is Oct. 31.
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