After multiple extensions of the suspension on federal student loan payments that started in 2020, on August 24, President Joe Biden announced a plan that both canceled some debt for certain borrowers and extended the payment moratorium for a seventh time until December 31, 2022.
The plan forgives up to $10,000 in federal student loan debt for borrowers who make less than $125,000 per year (for individuals) or $250,000 (for married couples or heads of households), based on either 2020 or 2021 income. Pell Grant recipients who meet those income standards are eligible to have up to $20,000 in debt forgiven.
”If you’re one of the 43 million Americans with federal student loan debt, now’s a good time to determine if you’re eligible for forgiveness,” said Rick Hu, Northwestern Mutual Wealth Management Advisor based in New York, NY. “Start thinking about how you will add your student loan payment back into your budget come January 2023, as most borrowers will still have remaining balances to pay down.”
Which loan qualifies for the payment pause?
The federal student loans eligible for suspended repayment include:
- Direct Loans
- Federal Family Education Loan (FFEL) Program Loans owned by the Department of Education
- Federal Perkins Loans owned by the Department of Education
- Defaulted Health Education Assistance (HEAL) Loans
However, FFEL Program Loans owned by private lenders, Perkins Loans owned by individual colleges, HEAL loans owned by commercial lenders and any private student loans didn’t qualify for the suspension. If you’re not sure whether your loan qualified, there’s no need to worry — if it did, you would have been automatically opted into the pause, with no action required on your part. During the repayment suspension, your loans have not been accruing interest.
Which loans qualify for forgiveness?
If your federal student loan qualifies for the payment pause, it likely qualifies for forgiveness as well. Federal parent PLUS loans also qualify. However, only loans awarded by June 30, 2022, are eligible.
What you can do now?
For loan forgiveness— the Department of Education has recently released an online application to help borrowers determine if they are eligible at StudentAid.gov, so make sure your loan servicer has all your most up-to-date information.
Here are a few ideas for how to start preparing your finances:
Determine how much room you might need to make in your budget
If you haven’t been making loan payments, it’s possible you’ve found other uses for that money, whether you’ve saved it or spent it. In preparation to start making loan payments again, revisit your budget, particularly if a lot has changed in your life that has impacted your finances.
If you’re not in a situation where you’re able to start making payments, this is a good time to start researching other options such as deferment, forbearance, or an income-driven repayment plan.
Take your loan payment for a ‘test drive’
“Try setting aside your student loan payment amount early to get used to the idea of not having that cash in your bank account,” said Hu. Before your payments officially start up again, you could use that money to pad your emergency fund or pay down some credit card debt. Not only are you preparing your budget for the repayment, but you’re also helping yourself get ahead on some financial goals.
Start paying your loans back early
Remember, you don’t have to wait until January to start paying your loans back, especially if you know you’re not eligible for forgiveness under the new plan. The fact that your student loans are not accruing interest right now means that any payment you do make will go directly toward reducing your loan’s principal, helping you pay your loan down faster.