Student Loans In America: The Good, The Bad, And The Ugly
There’s lots of media talk about student loans, and many borrowers are left with more questions than answers. “Will my student loan debt be canceled?” “How long do I have before repayments are required?” “Will I ever be able to pay off the student loan debt that I owe?” “Should I make payments if the debt will eventually be forgiven?”
According to the Federal Student Aid Portfolio Summary published in March 2021, the total amount of outstanding student loan debt has hit $1.6 trillion. The total debt is distributed among 42.9 billion borrowers (average debt of $37k per borrower). Students loan debt is growing increasingly problematic when compared to the "mere" $848 billion outstanding total ten years ago, and it is becoming an issue that must be addressed. Are there any resolutions in sight, though? Are we just doomed to see continued increases in student loan debt for borrowers in the United States? Most importantly, what do you do if student loans have a direct impact on your financial life?
What are the current approaches to managing student loan debt?
COVID-19 Forbearance
Mass student loan forgiveness, cancellation, discharge, and forbearance are terms that have been popularly communicated as potential remedies for student loan debt; however, what exactly does that mean for the average borrower? In general, student loan forbearance is a temporary period in which payments are suspended or reduced. At the same time, forgiveness, cancellation, and discharge refer to various programs that eliminate all or a portion of the obligation. On March 13, 2020, the U.S. Department of Education automatically suspended all loan payments, set a 0% interest rate on all accounts, and stopped collections on defaulted loans. However, this temporary suspension (or COVID-19 forbearance) was only extended until January 31, 2022, and borrowers are facing the realities of the approaching requirement to make payments again after close to two years.
Student Loan Forgiveness and Cancellation
Many with outstanding student loan debt have held their hopes on the potential for widespread forgiveness and cancellation. One of the most vocal advocates for student loan cancellation is Massachusetts Senator Elizabeth Warren. Mrs. Warren proposed a debt cancellation of $50k per borrower. The Biden administration has also floated the idea of the potential cancellation of $10k of debt per borrower. While these proposals could sound like a home run for borrowers at all outstanding debt levels. One might begin to wonder how proposed debt cancellation would be treated for tax purposes. The Internal Revenue Service’s general rule for canceled debt is to include it as taxable income for tax purposes; however, the American Rescue Plan Act of 2021 modified tax treatment of any student loans forgiven beginning in 2021 and continuing until 2025 to exclude any forgiven student loan amounts from gross income. All attention is now placed on potential legislation that may provide for additional student loan forgiveness options.
Nonetheless, student loan forgiveness is not a new topic. The Public Service Loan Forgiveness (PSLF) program began in 2007 with a stringent set of requirements borrowers must complete to be eligible. The program is available to those with direct federal loans employed by the government or not-for-profit organizations. After ten years of qualifying payments and employment, borrowers are eligible for forgiveness of the outstanding balance. According to a report released by Federal Student Aid in June 2021, approximately 5,500 borrowers have received PSLF discharges totaling $453 million. Considering millions of borrowers employed in public services positions, it is pretty astonishing that less than 1% of borrowers have had their remaining debt discharged. In recent years, there have been attempts to streamline the PSLF process, such as through the Temporary Expanded PSLF (TEPSLF), which has discharged an extra $130 million in debt for 3,000 borrowers.
Additionally, the Department of Education announced a limited PSLF waiver for borrowers to expand the definition of eligible payments for the PSLF program in October 2021. These temporary changes are only in effect until October 31, 2022, allowing borrowers to receive credit for previously ineligible payments for PSLF requirements. A quick review of the limited PSLF waiver shows some of the following benefits:
The PLSF will now include all previous payments on federal student loans made while employed by a qualified employer, regardless of the kind of loan or repayment arrangement utilized. This is especially beneficial for borrowers with debt from the Federal Family Education Loan (FFEL) Program and other non-income-based repayment plans.
Reduction and/or elimination of issues borrowers faced with payment eligibility. Previously, borrowers have reported problems with payment ineligibility for only pennies less than the eligibility amount and/or 1-2 days late. The Department of Education will automatically qualify payments made before October 31, 2021, that may have previously been impacted by these issues.
The limited PSLF waiver allows borrowers who have not previously applied for the program to do so before October 31, 2022. Federal Student Aid has also pledged to streamline the application process opening up options for digital signatures of the applications, expanding the database of qualifying employers, and allowing qualifying employers to sign employment certification forms on behalf of their employees.
Teacher Loan Forgiveness is also an option for borrowers with Direct or Federal (Subsidized or Unsubsidized) Loans. Who teach full-time for five complete and consecutive academic years at a low-income school or educational support agency. Borrowers may qualify for up to $17.5k in forgiveness, depending on the subject area taught.
Student Loan Discharge
Throughout 2021, there have been additional actions to remediate the student loan epidemic through discharge programs. In 2018, the U.S. Department of Education created a process to automatically discharge/forgive loans for borrowers who attended schools that unexpectedly closed while they were enrolled. Over the next few years, the program went through various changes until August 2021, when the Department announced that it would discharge $1.1 billion in loans for ITT Technical Institute students.
Additionally, beginning in September 2021, borrowers identified as totally and permanently disabled (based on Social Security guidelines) are eligible for automatic federal loan discharge. This new program is estimated to discharge over $5.8 billion in student loans for 323,000 borrowers.
How have the current approaches impacted overall student loan debt?
With the latest cancellation and forgiveness efforts round, nearly $9.5 billion of student loan debt has been eliminated for about 563,000 borrowers. Though these programs are indeed helpful, they account for less than 1% of the overall outstanding debt, which isn’t very promising for the idea of mass student loan cancellation.
What actions can I take to manage my own student loans?
Suppose you don’t find yourself eligible for existing student loan forgiveness programs and have outstanding federal loans. In that case, staying informed about upcoming changes is the best course of action. With repayment timelines scheduled to restart in February 2022, there is no better time than now to begin planning how you will manage the transition. The following are best practices to adopt as federal loans enter their regular repayment phase:
Log into your student loan servicer’s website and ensure your contact information is up to date. Multiple student loan servicers have announced during 2021 that they will not extend their federal loan servicing contracts beyond December 2021. Find out if you are impacted by this change and ensure you receive the most up-to-date information.
Check the Federal Student Aid’s Loan Simulator to determine which repayment plan may be best for your financial situation.
Review your budget. Ensure that you have included a line item for your student loan monthly payments and that your income still adequately covers the amounts required. If you find that you are having trouble meeting the monthly obligation, explore other repayment structures that may make your payments affordable.
While there has been substantial progress in addressing the student loan debt issues in the United States, there is still a long road ahead to achieve significant strides that benefit the vast majority of borrowers. If you find yourself with a share of the $1.6 trillion in outstanding student loan debt, the best course of action is to begin planning your repayment choices now.
**Update: While originally only planned to be short term relief, the pause has now been extended until May 1, 2022 (a 90-day extension from the previous ending date).