The calls for $50,000 worth of federal student loan forgiveness or cancellation continue to grow louder… borrowers should plan accordingly.
Democrats have put forward resolutions in both the House and the Senate calling on President Biden to cancel up to $50,000 of federal student loans per borrower.
Earlier this year, I predicted that this sort of forgiveness was unlikely. While my opinion hasn’t changed with the latest developments, there is no doubt that some form of federal student loan cancellation is possible. Given this possibility, there are several steps borrowers should take to maximize any potential forgiveness.
Converting Private Student Debt into Federal Student Loans Eligible for Forgiveness
Sadly, most private loans cannot be converted into federal loans. While there are limited circumstances where converting the debt is possible, most private loan borrowers are stuck with private debt.
The one big exception would be the borrowers who have federal loans that are not “federally held.” These are the federal student loans that are notably not eligible for the current federal interest rate and payment freeze. However, federal direct consolidation offers an opportunity to convert these loans into federally held loans.
Borrowers with loans that are federal but not federally held should consider the possibility that forgiveness may only apply to federally held loans. These borrowers conceivably could go through federal student loan consolidation to gain eligibility for future debt cancellation.
Maximizing Any Potential Forgiveness
It is estimated that approximately 80% of borrowers have $50,000 or less in federal student loans.
To maximize the benefit of future forgiveness, these borrowers should seek out options to lower their monthly student loan payments. Right now, minimizing payments is easy. The federal interest rate freeze and payment suspension mean borrowers owe nothing and don’t have to worry about the accumulation of interest.
Once repayment begins, Income-Drive Repayment (IDR) plans enable borrowers to keep payments low. The Department of Education Loan Simulator is a helpful resource for comparing payments across the various repayment plans.
Sherpa Tip:One way to lower IDR payments is to make retirement plan contributions. Borrowers can save for the future, reduce their tax bills, lower monthly student loan payments, and maximize forgiveness.
Ask for a Refund on Previous Payments
If you think $50,000 of student loan forgiveness is on the horizon, getting a refund on previous payments is a smart move.
During the Covid-19 interest and payment freeze, some borrowers elected to continue making payments. The idea behind this strategy was to knock down loan balances so that repayment is more manageable once the freeze ends.
Borrowers that made optional payments are eligible to get a refund on these payments. A larger balance potentially means more debt to cancel.
Helping the Cause
Those passionate about the importance of debt cancellation and forgiveness policies can take steps to support the cause.
- Call your leaders in Congress. The more people calling about student loan forgiveness, the more likely it is to happen.
- Speak up on social media. Right or wrong, many Americans form their opinions on public policy based upon what they read on social media. As more people get behind debt cancellation, polling numbers will move and increase the odds that Congress makes a move.
- Support free community college and/or free undergraduate programs. One of the big roadblocks in forgiving debt is the knowledge that it will be back as more students graduate. A one-time debt-cancellation is easier to swallow. If we fix the ridiculous price of higher education, canceling out student loans becomes more palatable to Congress.
Have a Backup Plan
Student loan forgiveness or cancellation is far from a certainty… so borrowers should have a backup plan.
One of the best ways to protect yourself is to start saving to pay off your student loans. Instead of making extra payments on the loan, you put the money in a bank account. That Plan B bank account can also serve as a large emergency fund.
If forgiveness happens, you have a chunk of money that can be a down payment on a house or set aside for retirement. If the $50,000 of student loan forgiveness doesn’t happen, you have money to knock off a huge portion of your balance.