Financial Fitness


Hoping for student loan forgiveness won't pay the bills

Student Loan Forgiveness
Posted at 5:44 PM, Jan 13, 2021

Federal student loan borrowers are waiting with bated breath to see whether loan forgiveness — which President-elect Joe Biden says he’ll make a priority — becomes a reality.

Industry experts say borrowers shouldn’t count on it.

“I think we’re closer to loan forgiveness than we’ve ever been before, but that doesn’t mean I think we’re close,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, a nonprofit group. Mayotte says other priorities such as the pandemic and its accompanying recession are likely to delay possible forgiveness.

Biden’s transition team on Jan. 8 reaffirmed his support for $10,000 in student loan forgiveness for each federal student loan borrower as part of additional coronavirus relief, but only through congressional action — quashing speculation about quick forgiveness via an executive order.

Currently, 45.3 million Americans — about 13.7% of the total U.S. population — hold federal student loans. Approximately 15 million borrowers would see their student loan debt wiped clean with $10,000 of broad loan forgiveness per borrower, according to a NerdWallet analysis of federal student loan data.

Is forgiveness still possible?

Crucial details around any potential forgiveness proposal remain unclear. The decision to go through Congress rather than use executive action means every facet is up for debate.

For example, it’s unclear if there will be an income threshold to qualify or if it would be a blanket forgiveness. There’s also no plan for what borrowing qualifies: Would parent or graduate PLUS loans get forgiveness — or commercially held FFEL or Perkins loans, for that matter? It appears that private student loans are off the table.

Even the amount of forgiveness could change: Soon-to-be Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Elizabeth Warren, D-Mass., proposed a more ambitious $50,000 blanket forgiveness last fall. But this seems less likely to pass in a divided Senate.

“It doesn’t seem like there will be massive forgiveness given concern among the more conservative Democrats in the Senate,” says Robert Kelchen, associate professor of higher education at Seton Hall University in South Orange, New Jersey.

“Modest forgiveness could happen,” he says.

Federal payment pause likely to be extended

Right now, federal student loan borrowers don’t have to make payments due to an interest-free pause, called forbearance, that’s been in effect since March 13 and extended twice by President Donald Trump. It is set to expire Jan. 31, but Biden’s transition team says he intends to extend the current federal student loan forbearance on day one.

It’s unclear how long this extension would last. For now, experts say it’s smarter to concentrate on a strategy for the day payments restart rather than to plan for forgiveness.

Repayment is expected to be messy when it starts again since the system wasn’t designed to turn on and off, according to Scott Buchanan, executive director of the Student Loan Servicing Alliance, a nonprofit trade association representing student loan servicers.

Kelchen agrees: “Whenever [payment] restarts there will be a large increase in delinquencies and defaults — some people may be hard to contact, some people may not be able to pay, some people may not want to pay. Starting this all at once is just an administrative nightmare.”

While the pause continues, here’s what you can do to prepare.

If you’re experiencing financial hardship

Those who are out of work or have experienced other financial difficulties due to the coronavirus should use the pause as a time to focus on paying for essentials like rent, groceries or utility bills.

Before repayment restarts, plan to contact your servicer to enroll in one of the following:

  • An income-driven repayment plan will set your payment amount to a portion of your income and extend how long you’ll repay the debt. If you don’t have a job, your payments could be as low as zero.
  • An unemployment deferment will allow you to defer payments for up to 36 months, but interest will accrue and be added to the loan total when you start making payments.

If you defaulted on your student loans before the pandemic, contact your servicer about loan rehabilitation. Each month you spent in forbearance counts toward the nine needed for rehabilitation.

If your finances are in OK shape

During the pause, if you haven’t experienced job loss or other financial insecurities, prioritize paying down any high-interest debt, such as a credit card. You could also pad your emergency fund with enough money to cover three to six months of expenses.

If you want to repay your loans

Mayotte encourages borrowers whose finances are in good shape to take advantage of this zero interest period by making extra payments.

“That’s an unheard-of opportunity that we’ve never seen before and we may never see again,” Mayotte says.

You can still repay your loans during the pause, but you’ll have to contact your servicer to do it.

Or consider setting aside the money you would otherwise spend on student loans and make a lump-sum payment on your highest-interest loan just before repayment and interest accrual resumes. You’ll preserve financial flexibility and get the same result.

If you prefer to wait and see whether forgiveness happens, make your required payments, but don’t pay extra until any amount of relief is firm.

If you have private student loans

Private student loan borrowers aren’t expected to receive federal relief, experts say. If you’re experiencing financial hardship, contact your lender about options for relief, such as a short-term forbearance (with interest accruing) or a temporarily lowered payment.

If you have private student loans and your finances are solid, you could consider refinancing to take advantage of historically low interest rates. Federal student loan borrowers shouldn’t refinance privately right now to ensure they don’t miss out on any potential future forgiveness.

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Anna Helhoski writes for NerdWallet. Email: Twitter: @AnnaHelhoski.