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Student Loan Forgiveness is Probably Happening: What to do Right Now

Now is the time to tweak your federal loans to make sure you maximize any upcoming student loan forgiveness.

Written By: Michael P. Lux, Esq.

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The chances of student loan forgiveness happening in the next six months have gone up dramatically.

The Biden administration is ironing out the details, but a significant announcement on federal student loan cancellation could be coming very soon.

Even though nothing is set in stone, the discussion around student loan forgiveness has changed. We now have a pretty good idea of how and when borrowers will see their federal loans forgiven.

It is time for borrowers to get their loans in order.

Smart moves today could be worth thousands in the coming months.

How Student Loan Forgiveness went from Unlikely to a Probability

As a candidate, Joe Biden argued for $10,000 of federal student loan forgiveness for all borrowers, but he wanted it to come from Congressional legislation. At the time, he believed the President didn’t have the authority to issue forgiveness through an executive order.

As President, Biden initially stuck to this position. As time passed and pressure mounted for him to take action, he requested a memo from the Secretary of Education on the President’s authority to forgive student debt. The resulting memo was publicly released last fall but almost completely redacted.

Over the past month, the discussion took a dramatic turn. The debate is no longer if the President can forgive the loans. The discussion is on how the President should forgive the loans. Some members of the Biden administration want to put income caps on the forgiveness, while others suggest a need-based approach is unnecessarily complicated.

In another revealing development, Senators Elizabeth Warren and Chuck Schumer have requested that Biden hold off on a major student loan forgiveness announcement. They want to push for $50,000 of loan cancellation, and they suspect that Biden will only forgive $10,000 per borrower.

How and When Student Loan Forgiveness Will Happen

For a policy that hasn’t been officially announced, there are a lot of details already available.

The amount of forgiveness will probably be $10,000. Biden has consistently called for $10,000 and voiced opposition to $50,000 on numerous occasions.

Why $10,000 of student loan forgiveness? More than a third of federal borrowers owe less than $10,000. These smaller balance borrowers are among the most likely to fall into default.

The big question at this point seems to circle around whether there will be an income limit for the borrowers that receive forgiveness. Putting an income cap on forgiveness is a huge challenge because federal law restricts the ability of the IRS to share tax records with other federal departments. Borrowers would have to manually authorize the IRS to disclose tax information to the Department of Education. Alternatively, Biden could erase $10k for all borrowers. This route, however, has the potential to open the door to Republicans arguing that it’s a handout to the rich.

The income-cap issue appears to be the final big question for the administration to answer.

As for the timing of a forgiveness announcement, look for something to happen before the 2022 midterm elections. Biden’s approval ratings have taken a hit due to inflation and many other issues. Forgiveness is one way he can help millions of Americans.

Additionally, the federal student loan interest freeze is scheduled to expire in August. Announcing the end of the student loan Covid relief and the forgiveness executive order at the same time might make sense.

Steps to Take Right Now

Even though there hasn’t been an official announcement on forgiveness, there are a few things that borrowers should do right now.

The strategy behind these moves is to maximize any potential forgiveness.

Ask for a Refund of Previous Payments

During the Covid-19 payment and interest freeze, borrowers haven’t been required to make student loan payments. However, many borrowers chose to make payments to lower their student loan balance.

If you have made any payments since March 2020, now is the time to ask for a refund.

All borrowers can request a refund for extra payments made during the Covid relief. If you lowered your balance from $12,000 to $8,000 over the past couple of years, it might limit your potential loan cancellation. By requesting a refund now, you maximize your possible forgiveness.

You can always repay the refunded amount if the forgiveness doesn’t happen. With interest rates at 0%, having the money sit in your bank account while you wait for an announcement is a reasonable option.

Consolidate FFEL Student Loans

FFEL student loans are notoriously complicated. A third party technically owns the debt, but repayment is federally guaranteed. FFEL loans are still federal student loans, but they are not federally-held.

Borrowers with FFEL loans may not be eligible for the $10,000 of federal loan forgiveness.

However, borrowers with FFEL loans can consolidate their loans into a federal direct loan. These direct consolidation loans are far more likely to be forgiven.

Historically speaking, consolidating FFEL loans was somewhat risky because a borrower would reset their progress towards PSLF or IDR forgiveness. Fortunately, this risk does not apply today. Last month, the Department of Education announced a temporary policy that would allow FFEL borrowers to consolidate without losing their progress towards IDR forgiveness.

Don’t Refinance Federal Student Loans

Now is a terrible time to refinance your federal student loans.

Refinancing federal loans eliminates valuable federal perks like Income-Driven Repayment Plans and Public Service Loan Forgiveness.

Refinancing would also pretty much eliminate the chance to get your debt forgiven as part of an executive order.

Options for Private Student Loans

If your student debt is with a private lender, options to convert the debt into federal loans are extremely limited.

At this point, the best thing you can do for any private student loan is to make sure you have a fixed-rate loan instead of a variable-rate loan. Inflation is a major concern for student loan borrowers. Locking in a fixed-rate loan is the best way to ensure that inflation doesn’t mean a bigger monthly payment.

Making Forgiveness a Certainty

Things are definitely trending in the right direction for borrowers.

However, nothing is set in stone, and taking action now may help ensure our desired outcome.

A call to your elected officials or a quick email can help move the needle. A few minutes of your time could be worth $10,000 of student loan forgiveness.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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