When the CARES Act was passed in March, payments were suspended and the interest rate was temporarily set to 0% for federal student loans. It was just announced that the student loan relief has been extended and is now set to expire on Jan. 31, 2021. Will the president-elect, Joe Biden, extend the temporary relief? No one knows.
While there is uncertainty about what will happen between now and Jan. 20, 2021, we have an idea of the long-term changes that might be coming to student loans when Biden takes office.
These proposals will have to be approved by Congress to become law, but here is a summary of what Biden has proposed so far with regards to student loans.
On March 22, 2020, Biden tweeted that he would cancel up to $10,000 for each borrower of federal student loans. This cancellation was originally proposed by the Democrats to be included in the CARES Act. It did not make it into the act, but it is possible that the Biden administration will include the $10,000 cancellation as part of a future stimulus package .
The Biden Plan for Education Beyond High School includes changes to the current repayment and forgiveness programs for federal loans. Currently, borrowers in Income-Driven Repayment (IDR) plans are required to pay 10%-20% of their income over the federal poverty line toward their student loans. The Biden Plan would limit that to 5% of income over $25,000. Also, there would be no monthly payments required and no interest accrual for individuals making less than $25,000 a year.
New and existing federal student loans will be automatically enrolled in the IDR plan. Borrowers have the choice to opt-out. This is a major change to the current complex system. Under the current federal system, borrowers pick and enroll in one of many available plans, which can be confusing. According to the proposed plan, the remaining balance of the loan will also be forgiven automatically after 20 years of payments are made. There would be no income tax on the forgiven amount in this new long-term forgiveness program.
Biden’s proposal suggests putting a cap on the amount of forgiveness a borrower can get in the Public Service Loan Forgiveness (PSLF) program. Again, the enrollment in the PSLF is automatic for “individuals working in schools, government, and other non-profit settings”. However, the amount of PSLF forgiveness is $10,000 of undergraduate or graduate debt for every year of qualifying service, for up to five years, which means that the maximum amount of forgiveness would be $50,000, in contrast to the unlimited amount under the current rules. Although this may be bad news for borrowers who were hoping to get more than $50,000 forgiven tax-free, the proposed plan allows up to five years of prior national or community service to count towards PSLF.
It has generally been very difficult to get student loans discharged in bankruptcy.
Biden has promised to enact legislation from the Obama-Biden administration to permit the discharge of private student loans in bankruptcy.
The Biden Plan also includes ideas for reducing the need for some students to take out student loans in the first place. The plan proposes making public colleges and universities tuition-free for all families with incomes below $125,000. These tuition-free colleges and universities would include community colleges and state colleges and no private colleges, except for private Historically Black Colleges and Universities (HBCU) or Minority-Serving Institutions (MSI). Only tuition and related expenses would be free. Students and their families would still pay for other expenses, such as room and board.
Again, these plans will not become law unless approved by Congress. But it’s good to keep track of the changes in the law that may affect your student loans and repayment strategy. Contact us if you need help coming up with a strategy!