Up in the Air – One-Time Student Loan Forgiveness Program
In March of 2020, I was in my final semester of graduate school, preparing for midterms and anticipating what I had hoped to be a relaxing spring break. At this point, there were only small rumblings about the Coronavirus disease. I left campus for spring break, eager to return in a week to finish my graduate courses, walk the stage in May, and receive my diploma. My spring break was extended for a week, then my classes transitioned to fully remote, and I never returned to university again.
As a result of the COVID-19 pandemic and the undoubtedly strange, unpredictable times it brought, President Trump ordered that federal student loans were to be placed in forbearance as of March 2020. Meaning, federal student loan borrowers were permitted to skip payments, and the interest rates on the loans were adjusted to zero percent. More recently, President Biden announced a federal student loan forgiveness program that allows individuals up to $10,000 in forgiveness on federally owned student debt (up to $20,000 for those with a Pell Grant), provided individuals meet the income requirements. Consequentially, lawsuits have been filed that threaten to block the forgiveness program, and as a result, the White House has further extended the loan payment pause. Meanwhile, the lawsuits head to the Supreme Court.
The Biden Administration is set to duke out the legality of the student loan forgiveness program in court in early 2023. Over the last three years, many borrowers have halted payments on their student loans and have become acclimated to not making the payment, while a reality check looms on the horizon. Loan repayment is scheduled to resume this year. It has been announced that borrowers can expect to resume payments 60 days after a Supreme Court ruling or June 30, 2023 – whichever comes first.
During the forbearance period, borrowers can choose to make voluntary payments towards their student loan balance in an effort to directly reduce the principal and take advantage of zero percent interest. A lower principal balance means less interest will accrue, providing significant cost savings and the ability to pay off the student loan faster. If borrowers have not been making payments on their student loans during the forbearance period, it is not too late to start fitting it back into the budget to avoid financial stress later.
Borrowers can also review their repayment plan options. Federal student loans have several options for income-driven repayment (IDR) plans. IDR plans fix monthly student payments at an amount that is intended to be affordable based on borrowers income and family size. This repayment option typically requires borrowers to pay 10% of their discretionary income each month towards their loan. Discretionary income is the amount left over after paying for vital life needs, such as housing and groceries. In the details of President Biden’s loan forgiveness program (not so headline-worthy when directly compared to loan forgiveness) is the proposed changes to the IDR calculation that could potentially reduce repayment terms and lower the 10% discretionary income threshold; however, final regulations that provide thorough details on the IDR calculation have yet to be released.
COVID-19 brought uncertain times for those with student debt. It still remains unclear how President Biden’s loan forgiveness plan will impact borrowers’ wallets, as the proposal remains in legal limbo. Borrowers should remain diligent by staying up-to-date on developments, budgeting for resuming payments, and reviewing their repayment options, like IDR plans.
Published in the Victoria Advocate
Carlee H. Gibbs, CPA is a staff accountant for Keller & Associates CPAs, PLLC.