As part of his plan to address rising college costs and student debt, President Joe Biden announced a proposal that will forgive some federal student loans while also permitting repayment by existing debt holders.
Recent graduates can take great advantage of this loan forgiveness program, but not everyone may qualify.
1. Determine your long-term goals
Planning long-term financial goals is an effective way to shape your future, from buying a house and paying off debt to retirement savings and debt reduction. Unfortunately, too often people overlook this aspect and focus instead on shorter-term goals, like building an emergency fund or saving enough to cover immediate expenses - leaving themselves unprepared for unexpected circumstances in life.
To create an effective plan for paying back student loans, the first step should be identifying how much debt you owe and reviewing its terms. Some loans may incur extra interest during deferment or forbearance periods - by prepaying, you can avoid extra charges added onto your balance.
Once you understand the size of your student loan debt, you can then develop a budget designed to keep monthly payments as low as possible. Tax season also presents an ideal time to assess your repayment strategy: perhaps increase or switch to an income-driven repayment plan which reduces payments while still counting toward forgiveness.
2. Set a time frame for accomplishing your goals
Goal setting with an anticipated timeline can help create a sense of achievement and achieve your long-term goal of finishing a degree in four years. Setting mid-term or short-term goals like arriving to work early every day or taking classes will support this long-term ambition while upholding values that matter to you.
Student loan forgiveness plans offer students a potential way to minimize the debt they accumulate upon graduating, though not all loans qualify for forgiveness and there may be other available solutions as well.
Some loans may only qualify for forgiveness if they meet certain conditions, such as fulfilling public service work or participating in an income-based repayment plan. Other loans do not qualify at all and you will likely remain responsible for paying interest on them.
Due to the collapse of for-profit colleges and widespread student debt during COVID-19 pandemic, public support for student loan forgiveness has grown. While its future remains unclear - perhaps being decided upon by the Supreme Court by 2022 - until then you can use an online calculator like Student Loan Forgiveness Calculator to see how much of your debt may be forgiven.
3. Create a budget
President Biden addressed student loan forgiveness plans by noting America has long invested in education; however, college costs have outstripped wages for decades now and left an entire generation with debt that prevents them from joining the middle class. His remarks specifically mentioned Black and Latino borrowers as particularly affected; many lack access to family wealth for repayment of their loans.
National data demonstrate that people of color are more likely to take out student loans and accrue interest on those loans than white borrowers, according to Olson's studies on how student debt impacts people's futures.
Once payments resume after years of hiatus, borrowers should enroll in income-driven repayment plans to reduce monthly payments to zero dollars per month. He noted that such plans typically reduce payments to around that figure.
4. Establish a savings account
Student loan forgiveness plans don't apply to everyone. First off, they only cover federal student loans and only apply to borrowers who complete and submit an FAFSA every year to verify their income with the Department of Education. But as per President Trump's announcements regarding enrollment in these programs, existing enrolled borrowers will automatically qualify for debt relief as long as they continue making qualifying payments on their student loans.
As is true for any plan to address rising college costs, the Biden administration's plan is just one component in its effort. They have also focused on discharging student loans taken out at for-profit colleges that were found defrauding students, with Black and Latino borrowers more likely than white borrowers to take out student loans with higher debt loads; although forgiveness plans will provide relief for some individuals; saving for your future should always be part of any plan.
5. Create a plan for retirement
Retirement planning is essential. It helps identify which expenses will remain unchanged when you retire, and which may change. Furthermore, it reveals how much income will be necessary to support that lifestyle; including essential costs like housing and utilities as well as non-essential items like entertainment and travel.
Consider inflation when setting aside money for retirement. Prices on everything - from large purchases like houses to smaller items like gum packs - tend to increase over time, meaning you will require additional savings each year just to maintain the same lifestyle.
Make a savings plan that meets your retirement needs, including paying down any outstanding debt (that is not considered "good" such as mortgages or student loans) as you save for retirement, contributing enough to take advantage of any company matches on employee retirement accounts and building up an emergency fund covering at least three to six months' living expenses.
Navigating the Process of Student Loan Forgiveness
The Education Department recently unveiled a program to bring borrowers closer to loan forgiveness through income-driven repayment plans. Depending on your repayment plan, 20-25 years could pass before your remaining balance is forgiven.
But the forgiveness program has already encountered obstacles; six states - Arkansas and Iowa among them - have filed lawsuits challenging it.
1. Know Your Options
If you're contemplating student loan forgiveness, there are various strategies to explore. Income-driven repayment plans offer one solution, capping monthly payments at a percentage of income and forgiving any remaining balance after 20-25 years of repayment - these options can apply both undergraduate and graduate loans.
Deferment or forbearance allows borrowers to temporarily postpone payments; however, interest continues accruing during this period and could eventually lead to defaulting once relief ends. Certain private lenders also offer this form of relief.
The Biden administration recently announced up to $20,000 in student-loan forgiveness for federal borrowers, providing temporary relief - so don't procrastinate if you want to take advantage of these opportunities. If that sounds appealing, act quickly!
Contact your lender or loan servicer. Explain the situation, provide proof of income (such as bank statements or pay stubs) and present proof that may help adjust or waive payments altogether or even transfer interest-only payments to lower the payments temporarily - though these arrangements should only be seen as temporary measures as they could damage your credit rating in the long run.
Income-driven repayment plans offer many borrowers a more permanent solution, limiting monthly payments to no more than five percent of discretionary income and covering any unpaid interest accumulated along the way. Unlike PSLF plans however, income-driven plans will leave a residual loan balance at the conclusion of your repayment period.
If you work in public service or for a nonprofit organization, the government offers additional student loan forgiveness programs. Often these will forgive any remaining balance of Direct Loan Program loans after 120 qualifying payments (roughly 10 years' worth).
Finally, keep in mind that certain states require borrowers to pay state income tax on any amount cancelled through forgiveness or discharge programs, according to the Tax Foundation. These states include Arkansas, California, Idaho, Kansas, Minnesota Montana North Carolina Wisconsin
2. Make Sure You’re Eligible
If you want your debt cancelled, you must meet specific criteria. There are various ways that student loan forgiveness could apply, including working in public service jobs and joining the military; total and permanent disability; school closure or fraud claims may also qualify you for student loan forgiveness.
Federal student loan borrowers with annual household income of less than $125,000 per year or individuals earning under $125.000, can qualify for up to $10,000 loan forgiveness through federal loan repayment plans. Pell grants provide even greater assistance in loan forgiveness - use this Forbes Advisor student loan forgiveness calculator to see how much relief might be available to you.
The federal government offers several income-driven repayment plans that cap monthly payments at a percentage of your discretionary income, such as Income-Contingent Repayment, Income-Based Repayment and Pay-As-You-Earn Repayment plans. By enrolling in one of these plans, your remaining loan balance could be forgiven after 20-25 years depending on which plan you select.
Public Service Loan Forgiveness (PSLF) program also offers student loan forgiveness options, and forgives your federal Direct Loan balance after 120 qualifying payments made while working full-time for government or not-for-profit organization. PSLF includes both Direct Loans and Federal Family Education Loans that have been consolidated into one Direct Loan loan account.
Plan ahead if you're hoping to take advantage of PSLF, as it takes 10 years to accrue 120 qualifying payments and see if you are eligible by logging in with the Department of Education and entering your information.
Once your payments resume, borrowers who can no longer afford their payments risk falling into default and damaging their credit score and accessing financial aid in the future. To prevent this from happening, log onto your student loan account and enroll in an income-driven repayment plan before beginning payments again.
3. Get Started Early
Start early if you want to accelerate the path towards loan forgiveness as quickly as possible - taking the steps required for employment certification and starting repayment is key to having enough time before April 2023 recertification deadline for making qualifying payments.
Though the administration has softened their stance on public service loan forgiveness (PSLF), it's essential that individuals understand its limitations. Under PSLF's original version, student debt would be forgiven after 10 years of qualifying payments to government or nonprofit organizations if working there - however this only covers federal Direct Loans, FFEL/Perkins loans that were converted to Direct Loans prior to September 29 and no private loans or Pell Grants qualify.
As the Supreme Court prepares to hear arguments regarding President Donald Trump's executive order on student loan forgiveness, it's wise to assess your options carefully. While waiting for its verdict, borrowers can still take advantage of a limited expansion of PSLF through October 31 and potentially receive refunds or loan forgiveness due to pandemic-era payment pauses.
Those seeking loan forgiveness should carefully consider an income-driven repayment plan, which tailors monthly payments based on income. After a set number of years, any remaining balance is forgiven. No matter which option you pursue for forgiveness, remember that your state may require you to pay taxes on forgiven student loan debt.
Borrowers must ensure their monthly payments count towards PSLF-qualified payments by checking their loan servicer's website or directly. Also, extra payments could reduce how much of their student loans will eventually qualify for forgiveness; alternatively they could use these extra funds for building an emergency fund or paying down debts. Ideally, it would be wiser to consult a Savant advisor regarding these options as part of an overall financial plan.
4. Don’t Make Extra Payments
Student loan forgiveness can be an exciting prospect, but borrowers should remember that loan forgiveness only applies if certain criteria are met. For loan forgiveness to be eligible, federal student loans must be in good standing. In other words, this means being up-to-date with payments, free from delinquency or default on their credit report. If you find yourself behind on payments or in default, the first thing to do is reach out to the Department of Education's Default Resolution Group via online or phone to request assistance through their Fresh Start policy. This will remove any record of default from your credit report while placing loans with loan servicers that offer income-driven repayment plans as well as Public Service Loan Forgiveness eligibility if applicable.
Borrowers applying for forgiveness should avoid making extra payments while their loans are on pause as this could reduce eligibility; such payments should instead go toward building up an emergency fund or making other wise financial decisions.
Income-driven loan borrowers should not make extra payments during a pandemic payment pause as these will not count toward forgiveness and may end up costing more in interest charges. Instead, this opportunity can help save money on interest charges by depositing this extra money into a savings account or other liquid investments with quick access.
The Biden Administration's plan to forgive up to $50,000 of student loan debt would save taxpayers millions while helping some of our nation's most struggling borrowers. Unfortunately, however, the Supreme Court decision striking down Biden-Harris student loan forgiveness policy will come as a blow for borrowers struggling to make ends meet. Borrowers should stay informed as to their loan forgiveness options and consult a Savant advisor on a repayment plan suitable for them.
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