You’re likely aware that payments and interest on federal direct education loans have been suspended. The suspension began last March and has been extended several times since then, both through the CARES Act and subsequent administrative orders. The most recent extension runs through September 30, 2021. The suspension includes the following provisions:
- All federal direct loans including direct student loans, direct PLUS loans for parents or grad students, and direct consolidation loans have a 0% interest rate and no payments due during the suspension period.
- Those enrolled in Public Service Loan Forgiveness or an Income Driven Repayment plan will get credit for payments as though they had been making the payments monthly during the suspension period.
- Those in IDR do not need to recertify income for this year at this point. Typically this is required by Jan. 31; anyone in IDR will be notified by their loan servicer when they need to recertify.
There’s also been a good deal of chatter about loan forgiveness. There are several reasons to believe that Biden’s proposal to cancel $10,000 of student debt per borrower could actually happen, especially:
- Removing a large number of small borrowers from the system would reduce systemic burdens related to the Herculean task of restarting loan payments once the suspension ends. There are about 45 million total borrowers in the federal loan system; about 1/3 owe $10,000 or less. Thus canceling $10,000 of debt for each borrower would dramatically reduce the number of borrowers for whom payments need to be restarted.
- Late in 2020, the Department of Education wrote off $435bn of existing student loans in its portfolio. This is largely related to income-based repayment, but one side effect of this write-down is that based on accounting rules, there would be no impact to the federal budget of canceling that much student debt.
Besides newsworthiness, there’s a reason to look at these two issues together. First, the payment suspension on direct student loans has created a temporary interest-free borrowing opportunity. Students and their families have an opportunity to borrow at zero cost for at least the next 8 months. This can be a great cash flow tool, especially for families who have a student graduating this year: taking out a loan now allows you to defer the expense for at least the next 8 months with the option of repaying the loan at that time or paying it off over time at this year’s low interest rates. (Bonus: 2019’s changes to 529 rules mean that even if you have enough in your 529 to cover your remaining costs, you could simply use your 529 to pay off the loan when the suspension period ends.) Not only that but those who either haven’t borrowed federal education loans or who currently owe less than $10,000 might find themselves benefiting from loan forgiveness before making a payment.
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If Loan Forgiveness Package is passed would it only be applied to past loans or would it also include a new loan for school year 2021-2022 for a student who never had any loans so far? Thank you.
At this point it’s hard to say. There isn’t a specific proposal on the table for loan forgiveness, although in yesterday’s town hall Biden said he supports $10,000 of forgiveness but not $50,000. My guess is that we might get some additional clarity next month when the current version of pandemic unemployment insurance runs out. As it stands the pause on student loan payments runs through 9/30/2020 and it’s likely that some form of relief will be passed before payments restart. If that’s not extended, it seems unlikely that loans disbursed for next school year would be eligible for forgiveness because most will not have been disbursed.
Thank you for your reply. I am a little confused with this part of your response- Do you mean previous student loan payments have been paused and that before they must be repaid there could be some form of relief provided for those students with these loans? Is 9/30/20 when the pause started? 2. ” if they don’t extend the pause” for these previous loans then student payments would be due? Could you help understand this process? Thanks.
As it stands the pause on student loan payments runs through 9/30/2020 and it’s likely that some form of relief will be passed before payments restart. If that’s not extended, it seems unlikely that loans disbursed for next school year would be eligible for forgiveness because most will not have been disbursed.
Last March, all payments on federal direct student loans were suspended with no interest accruing. That suspension has been extended several times, most recently through 9/30/2021. It is very likely that if there is to be any loan forgiveness, it will be passed before payments restart. That is based simply on the monumental logistical effort that will be involved in restarting payments for 34.5 million borrowers. It’s not just starting to collect money again; since we’re in a new year everyone in an income-driven repayment program needs to have their payment recalculated before it restarts, plus there are many people who will have graduated from college since the suspension went into effect and thus will need to have their loans transitioned to repayment. Forgiving $10,000 per borrower would eliminate approximately 10 million borrowers from the system, since about 1/3 of borrowers owe less than $10,000. Students who take out loans for next school year will either not yet have had the loan disbursed or only have a very small loan balance since each year’s loan is allocated across academic terms. Does that answer your question?
Thank you so much for the explanation. Seems like it all depends on the timing of when this might be passed.
So it sounds like a very small loan balance would not qualify?
It probably would insofar as the plans all seem to have a threshold amount that if you’re below it, it would be forgiven. But again, you’d have to actually have the loan. And there could be qualifications such as for example “undergraduate only” or “must already be in repayment.” If you’re wondering whether or not to take out loans because they might be forgiven, I think doing so is perfectly reasonable. I expect next year’s direct student loans to have similarly low interest rates so worst case, you’ve taken out a low interest rate loan.