What’s the Current State of Student Loan Forgiveness?

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Mark Kantrowitz

By Mark Kantrowitz

October 22, 2021

While campaigning for President, Joe Biden promised $10,000 in student loan forgiveness per borrower, so naturally borrowers want to know what’s the latest news on President Biden’s student loan forgiveness plan. Here’s a roundup of recent developments and what might happen next.

Latest Updates

As the Biden Administration continues to pursue its agenda with narrow majorities in Congress, it has taken a piecemeal approach to student debt relief while it explores its legal authority to pursue wider loan forgiveness programs without congressional support.

Most recently, an overhaul of the Public Service Loan Forgiveness program was announced to “restore the promise of PSLF,” according to the Education Department factsheet. A key aspect of the development is a one-time waiver that will allow payments from all federal student loan programs, including those not previously eligible, to be counted toward progress for Public Service Loan Forgiveness.

The Department of Education announced on August 19 that over 300,000 borrowers who have a total or permanent disability will receive $5.8 billion in forgiveness. The Department of Education would begin identifying borrowers eligible for the automatic discharge by matching data from the Social Security Administration.

The Biden Administration also announced in August that it would extend the federal student loan payment pause and interest waiver, which was set to expire in October, through January 2022. The Administration did express in that announcement that this would be the final extension of the student loan interest waiver that was instituted in March 2020 as part of the CARES Act.

Other Recent Student Loan Forgiveness Developments

The U.S. Department of Education and the Justice Department are reviewing whether the President has the legal authority to cancel up to $50,000 in federal student loan debt through executive action. There is no timetable on when these reports will be issued. There may be delays because Congress has not yet confirmed key policy advisors in both departments.

The White House’s Domestic Policy Council will consider how student loan forgiveness should be targeted, regardless of whether it is implemented through executive action or legislation.

Borrowers should beware of student loan scams that promise debt forgiveness, in exchange for a fee. When student loan forgiveness is implemented, it will most likely be automatic and free. The U.S. Department of Education will publish an update on the StudentAid.gov web site.

The U.S. Department of Education has recently taken a few steps toward providing student debt relief for which they have clear legal authority:

Restoration of Total and Permanent Disability Discharges

Some disabled borrowers who qualified for a Total and Permanent Disability Discharge had their repayment obligation reinstated because they failed to submit the annual earnings paperwork during the pandemic. The U.S. Department of Education will reverse the reinstatements and provide other student loan debt relief for 230,000 borrowers with Total and Permanent Disability Discharges.

Expansion to the Payment Pause and Interest Waiver

Borrowers with a federally-held federal education loan are eligible for administrative forbearance and an interest waiver through January 31, 2022. Unfortunately, borrowers with defaulted loans in the Federal Family Education Loan Program (FFELP) were not eligible because those loans were held by guarantee agencies on behalf of the U.S. Department of Education. The U.S. Department of Education has decided to make these borrowers eligible for the federal student loan payment pause and interest waiver, affecting more than one million FFELP borrowers. FFELP borrowers who defaulted during the pandemic will also have their loans returned to good standing and the defaults removed from their credit histories.

Full Debt Forgiveness for Approved Borrower Defense to Repayment Discharge Claims

The Trump administration implemented a scheme in which defrauded borrowers received only partial forgiveness of their loans. The partial relief methodology was flawed. The U.S. Department of Education has decided that all borrowers whose borrower defense claims were approved will receive a full discharge of their loans. This will affect 72,000 borrowers who were subject to predatory student lending.

Tax-free Student Loan Forgiveness

Congress also took action concerning the tax treatment of student loan debt forgiveness. The American Rescue Plan Act of 2021 included tax-free status for all student loan forgiveness and debt cancellation through December 31, 2025. This primarily affects the forgiveness after 20 or 25 years in an income-driven repayment plan, since most other forms of student loan cancellation already had tax-free status. However, it sets the stage for future student debt forgiveness, whether implemented by executive action or new legislation.

Congress previously provided employer-paid student loan repayment assistance programs, or LRAPs, with tax-free status through December 31, 2025 in the Consolidated Appropriations Act, 2021.

The Biden administration and Congress have not yet taken any action concerning the bankruptcy discharge of student loans.

Likely Future Student Loan Forgiveness Developments

The next event will occur when the U.S. Department of Education and Justice Department issue reports concerning the executive branch’s legal authority to implement broad loan forgiveness without Congress.

These reports will likely conclude that the President does not have the legal authority to implement broad student loan forgiveness through executive action. This will force Congress to act. Congress might consider legislation to forgive student loans in the fall, as part of a budget reconciliation bill.

The timing of loan forgiveness will also depend on which loans are eligible.

  • If student loan forgiveness is limited to federally-held loans, the process will be automatic and will happen within a month or two of the President signing the bill into law, assuming that there aren’t complicated eligibility restrictions. If there are limits based on income or other information not immediately available to the U.S. Department of Education, that may make the process more complicated and add months.
  • If commercially-held federal loans are eligible, it will take a little longer for those loans, since the U.S. Department of Education would have to make payments to the FFELP lenders to pay off the balances.
  • If private student loans are eligible, it will take even longer, because borrowers will have to submit an application that lists the loans, the loan id numbers, and the name and payment address of the lender. The U.S. Department of Education does not have any records of loans made through purely private student loan programs.

What Should Borrowers Do?

Borrowers should not take any precipitous action in anticipation of loan forgiveness. Wide-scale student debt forgiveness doesn’t seem likely at this point. Even if Biden or Congress were to enact a plan, eligibility and the amount of loan forgiveness are likely to be limited.

Consolidation

Borrowers with FFELP loans might consider consolidating them into a Federal Direct Consolidation Loan, in case the loan forgiveness is limited to student loans that are held by the federal government. Consolidating FFELP loans can also make them eligible for the payment pause and interest waiver, which runs through September 30, 2021.

The main risk associated with consolidation is that it resets the monthly payment clock for qualifying for 25-year forgiveness in an income-based repayment plan. Also, if a student borrower is receiving discounts from the FFELP lender, they will lose that benefit if they consolidate. Direct Loans offer a 0.25% interest rate reduction for borrowers who sign up for AutoPay, and no other discounts. Otherwise, there’s no significant downside to consolidation.

Refinance

Borrowers who are thinking about refinancing federal loans into a private loan to lock in current low interest rates may want to wait. Loans that are eligible for the payment pause and interest waiver effectively have a 0% interest rate through September 30, 2021. So, refinancing will increase the borrower’s costs in the short term. Plus, interest rates are likely to remain low through the end of the year, so there’s no rush to refinance federal loans. Borrowers have time to wait and see what happens with loan forgiveness before refinancing their federal loans. On the other hand, borrowers with private student loans do not risk losing forgiveness if they refinance their private student loans into a new private loan.

Borrowers who still have jobs and are able to continue making payments on their student loans should bank the money or pay down other debt, instead of making extra payments on their loans. It’s a good opportunity to build or bulk up your emergency fund. Generally, any borrower who expects to receive loan forgiveness should not make extra payments when they are not required to do so, as that just reduces the amount of forgiveness they will eventually receive. After the details of student loan forgiveness are announced, borrowers can use the banked money to pay down debt as appropriate.

Existing federal student loan forgiveness programs

If a borrower expects to receive loan forgiveness under President Biden, they can stop making federal student loan payments during the payment pause and interest waiver period, which was extended through January 31, 2022. However, given the uncertainties around student debt cancellation, borrowers may want to continue making payments.

But, some borrowers may be eligible for an existing student loan forgiveness program. For example, Public Service Loan Forgiveness (PSLF) is available to borrowers who work full-time in a qualifying public service job. A borrower is eligible for loan forgiveness after making 120 qualifying payments.

During the payment pause, borrowers can still earn credit toward PSLF. As long as they continue to meet the eligibility requirements and submit the PSLF form, they will receive qualifying payment credit.

Borrowers who will not qualify for loan forgiveness when the relief period ends can also consider an income-driven repayment plan. With an income driven repayment plan, monthly payments are adjusted based on the borrower’s annual income. After a specified period of time (20 or 25 years) the debt is forgiven.

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