Biden could cancel student loan debt: Should you still pay now?
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The student loan crisis was a hot topic during the 2020 presidential campaign, and many Democratic politicians are now pushing President Biden to cancel a portion of federal student loan debt for Americans.
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In response to the coronavirus pandemic, Biden has proposed forgiving $10,000 in federal student loans for all borrowers, regardless of their income. Additionally, the president has said he will cancel student loans that are tuition-related for people who graduated from public colleges, historically black colleges and universities, or minority-serving institutions, and who earn less than $125,000 per year.
While nothing is set in stone, it’s natural for graduates who believe they qualify to wonder if they should continue making payments or simply wait for forgiveness.
What is student loan forgiveness?
Student loan forgiveness, or student loan debt cancellation, involves the lender — in this case, the U.S. Department of Education — canceling some or all of your debt. The federal government already has a few student loan forgiveness programs in place.
However, the new proposals from Biden and fellow Democratic politicians would be much more impactful than what’s currently available.
If you qualify for forgiveness, regardless of the amount, you’ll no longer be responsible for paying that portion of your balance. And if you’re eligible for full forgiveness, your student loan debt slate will be wiped completely clean.
The federal government only has the power to cancel student loans that it owns as a lender. This means that if you have private student loans, you don’t qualify. Even some older federal student loans held by private lenders won’t be eligible — these loans make up 12% of the federal loan portfolio in dollar terms, according to the Institute for College Access & Success.
If you have private student loans and don’t qualify for student loan forgiveness, then refinancing your loans might be your best option. Head to multi-lender marketplace Credible to compare rates and lenders and find the best course of action for you.
The more sweeping proposal from Biden only applies to undergraduate loans. That said, graduate borrowers may still benefit from the $10,000 coronavirus forgiveness proposal.
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Why you should continue paying your student loans
If student loan forgiveness is on the horizon, it may be tempting to stop making payments to maximize your forgiveness. But there are a couple of reasons to reconsider that approach.
First, though the Democratic Party now controls the House of Representatives, Senate, and presidency, it’s still unclear exactly what the details of a student loan forgiveness program would entail, including the amount and timing of forgiveness. If you stop making payments and find out you don’t qualify — or you don’t qualify to get your full balance forgiven — you’ll need to catch up.
Second, missing payments on a loan can damage your credit. What’s more, a late payment will remain on your credit report for seven years, hurting your chances of getting access to financing in the future. Also, if you stop paying long enough, your lender may send your debt to collections, and you may even be sued for payment.
If you have a private student loan or don’t qualify for forgiveness right now, you may want to consider refinancing your student loans to ease the financial burden. To see if a refinance fits into your personal finance plans, head to the online marketplace Credible and crunch the numbers. Credible allows you to compare rates and lenders free of charge!
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Which one should I pay off first — federal or private loans?
If you have qualifying federal loans, it’s important to keep making payments, but consider avoiding adding extra payments until you know more about the cancellation proposals. If you have private loans, however, there’s no reason not to work to pay them down as quickly as possible.
One way to potentially save money in the process is to refinance private student loans with a private lender. If you’re eligible, you may be able to get lower interest rates than what you’re currently paying, and you can also make some changes to your repayment term in case you want to pay off the debt faster or reduce your monthly payment.
To start the process, visit an online marketplace like Credible to compare student loan refinancing rates. Also, use an online student loan refinancing calculator to get an idea of how much you can save and what your monthly payment would be on the new loan.
WILL STUDENT LOANS BE FORGIVEN IN 2021?
Just be sure to avoid refinancing federal student loans if they might be eligible for forgiveness. Otherwise, you’ll no longer qualify for that benefit.
The bottom line
While there has been pressure in the Democratic Party to provide some form of student loan forgiveness and also some plans, it’s still uncertain exactly what’s going to happen with student loan forgiveness in 2021.
As a result, it’s crucial that you continue making your monthly payments. However, it may be a good idea to avoid adding extra payments on federal loans that might qualify for cancellation. If you have private loans or ineligible federal loans, take the time to shop around and compare refinancing lenders to see if you can save.
STUDENT LOAN DEFERMENT VS. FORBEARANCE: WHAT’S THE DIFFERENCE?
Push grows for Biden Administration to cancel student loan debt
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“If you’re in a financial position to continue to make those federal loan payments, I would say continue to make them,” he said, “because once you have paid your, you know any interest that was owed, prior to March 2020 everything you make payment wise is going to go to the principle of that loan.”
How Biden’s student loan forgiveness could throw you a big tax bomb
How Biden’s student loan forgiveness could throw you a big tax bomb
Even if your student loan debt is on an extended pause thanks to COVID aid, you’re probably dreading the day when it eventually returns. What if someone could give you a special eraser to make that red ink of yours go away?
That’s not quite the plan endorsed by President Joe Biden, but he and a vocal group of backers have floated the idea of canceling thousands of dollars in student debt per person.
With both the U.S. House and Senate now run by Biden’s Democratic party, the chances for broad student loan relief seem stronger.
But even if the current plans do become reality, they won’t completely wipe out student loan balances — and they may come with a gargantuan “tax bomb” for you. Here’s what you need to know.
How much debt could be forgiven?
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Americans currently hold more than $1.7 trillion in student debt, according to the Federal Reserve. The new president has already extended the pandemic moratorium on student loan payments and interest, at least through September.
But Biden wants to go further. He has said he supports legislation that would “immediately” forgive $10,000 in federal student loan debt per person.
Borrowers are in “real trouble,” Biden said during a briefing in mid-November. “They’re having to make choices between paying their student loans and paying their rent, those kinds of decisions.”
A group of prominent Democrats, led by Sen. Elizabeth Warren and new Senate Majority Leader Chuck Schumer, say $10,000 isn’t enough.
They want the Biden administration to cancel up to $50,000 in debt as a form of economic stimulus — to give borrowers room in their budgets to take out mortgages and invest for retirement.
What might actually happen?
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Besides widescale loan forgiveness, several other measures are being talked about to reduce Americans’ student debt, including improvements to the government’s income-based repayment program and the current Public Service Loan Forgiveness Program.
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The big problem is that these measures would be extremely expensive. Biden may fail to pass them if he encounters objections from conservative Democratic senators, because the Senate’s new Democratic majority is razor-thin.
Some backers argue that the president can use an executive order to cancel debt under the 1965 Higher Education Act, but that could lead to a major legal battle for the new administration.
Or, Biden could try to pass a watered-down plan that might have wider appeal in Congress. A compromise could target only borrowers who are in serious economic distress — and it may not be tax-free.
Tax bomb on the way?
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Normally, you need to pay income taxes on the balance of canceled debt, as if you “earned” it in cash. That means Americans benefiting from tens of thousands in loan forgiveness could face an enormous bill at tax time.
Goldman Sachs suggests borrowers may be on the hook for as much as 20% of the amount forgiven, Forbes reports.
In his campaign platform, Biden vowed to amend the tax code to make forgiveness through the existing income-based repayment program tax-free, saying “Americans shouldn’t have to take out a loan to pay their taxes when they finally are free from their student loans.”
While Schumer is calling for any and all student loan forgiveness to be tax-free, you’ll definitely want to start putting some money aside for taxes, just in case. If some of your debt is forgiven and you can’t afford your tax bill right away, the IRS will begin charging you interest and fees.
What are your other options?
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It’s crucial to recognize that the $10,000 and $50,000 loan forgiveness proposals apply only to federal student loans, not the private loans obtained from banks and other nongovernment lenders.
So if you have a private loan — or if you don’t think Biden and his supporters will get their way — you’ll have to pursue other options.
Interest rates on private student loans have dropped big-time during the pandemic. So, borrowers with either private or federal loans might want to consider refinancing — that is, trading an old loan for a new one at a much lower interest rate and with lower monthly payments.
Switching from a federal student loan to a private one would make you ineligible for any government relief in the coming months. That could be a tough call to make.
But there’s no downside if you already have a private loan. Refinancing now while rates are cheap could significantly reduce your payments, saving you thousands over time and allowing you to pay off the balance years sooner.