President Joe Biden announced historic student debt forgiveness of up to $10,000 for federal student loan borrowers earning less than $125,000 per year (or $250,000 for households). Pell Grant recipients are eligible for up to an additional $10,000 in debt cancellation. And monthly payments for income driven repayment plans will be capped at 5% of a borrower’s discretionary income —half of the previous 10% cap.
Reminder: federal student loan debt totals $1.7 trillion. Erasing it all, or just part of it, would help lessen that burden for 43.2 million Americans. Even if that doesn't include you, here’s what forgiveness could mean.
If you have federal student loans…
You win. Here are your next steps:
Get ready for more space in your budget. Make a plan for what you'll do with the extra money. Some ideas: paying down other debts, investing, or saving more. (Psst...science says treating yourself a little can help you save more faster.)
Keep an eye on your credit score. Lenders like to see that you can manage different types of debt. So if your student debt is your only installment loan, wiping it all away could lower your score. Still worth it. But if you do lose a few points, here are a few tips for getting them back.
Watch your state tax bill. The third pandemic stimulus included a tax law change that would make any forgiven debt tax-free through 2025. Read: no longer counted as taxable income (Aka easier on your wallet). But it’s still unclear whether states plan to tax the forgiveness next April.
If you have private student loans…
Sorry, forgiveness generally only applies to federal student loans. But keep an eye out for settlements. One of the largest student loan servicers, Navient, will cancel balances for 66,000 borrowers to settle lawsuits accusing the company of deceptive lending practices. And you still have options to make debt repayment more manageable:
Look into refinancing, which might get you a lower interest rate on your loans and shrink your monthly bill. Especially if you have good credit.
Get creative to speed up repayment. Pro tip: pay half the bill every other week. That adds up to 26 half payments (or 13 full payments) a year.
Donate your time to nonprofits like AmeriCorps, Shared Harvest Fund, or the National Health Service Corps. They might help repay your loan.
If you don’t have any student debt…
Forgiveness could still mean big things for the whole country.
The economy could get a boost. Because mass cancellation of student debt = more money flowing through the economy. Up to an average $108 billion a year more, by one estimate.
Higher education costs could continue to rise. If students take out loans expecting debt forgiveness, colleges would have no reason to bring costs down.
Student loan forgiveness may have seemed like a far-out concept a few years ago. But the Biden administration wants to make it a reality. While the gov sorts out the details, make sure your wallet is ready for whatever comes next — whether you have federal, private or even no student loans.
Updated Aug. 24 to include President Biden’s student loan debt cancellation announcement.
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