The state of student loans: What borrowers and future borrowers want to know


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President Joe Biden ran his campaign on a platform that included strong student loan reform promises. After he was officially sworn in as the 46th President of the United States on Jan. 20, he signed an executive order that extended the pause on payment of federally-held student loans for nine months.

This is an extension of the original COVID-19 legislation under the CARES Act and means that borrowers who have federally held student loans do not need to pay these loans until at least Sept. 30 and that interest will not accrue on these loans during the pause. This includes parents and guardians who hold Direct PLUS loans. This executive order does not apply to private education loans.

Related: What student loan
borrowers want to know about Biden’s executive order

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Does Biden’s Recent Executive Order Address Student Loan Forgiveness?

Though President Biden has said that he supports student loan cancellation as an extension of COVID-19 relief, his recent executive action did not involve debt forgiveness.

Some Democrats in Congress are urging the president to cancel student loan debt via executive order. But it’s expected that he will not bypass Congress that way. Instead, he has made it known that he favors canceling up $10,000 in federal student loan debt through legislation.

One reason for taking the Congressional path: Some experts say that an executive order canceling student loans would run into legal challenges. On the other hand, student loan reform has become a bipartisan issue in the last several years, so a student-debt cancellation measure put forth in Congress may have support on both sides of the aisle.

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How Much Student Debt Forgiveness Does President Biden Support?

Two figures for student loan forgiveness have been bandied about: $10,000 and $50,000. Certain Democrats in the House (including Maxine Waters of California, Ilhan Omar of Minnesota and Alma Adams of North Carolina) and the Senate (including Elizabeth Warren of Massachusetts and now Majority Leader Chuck Schumer of New York) back the higher amount.

But President Biden endorsed $10,000 on the campaign trail, and more recently, his administration has repeated that amount when talking about student loan cancellation. The majority of Americans agree with him: 56% of adults polled by Morning Consult said they supported forgiving $10,000 in school debt while only 46% supported forgiving $50,000 (survey subjects could support both to explain why the two percentages don’t add up to 100).

Though forgiveness gets a lot of ink, Biden’s plan for student debt reform involves addressing more than current borrowers. It also seeks to help make college affordable to future generations. Here’s what students, past, present, and future — and their parents —  may expect in the upcoming administration and beyond.

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President Biden’s Student Loan Campaign Promises

In addition to canceling $10,000 of federal student loan debt, President Biden promised other student loan reform when he was on the campaign trail. Many of these promises would likely need to be brought before Congress and may face opposition.

Whether or not these campaign promises are enacted, student loan reform will likely be a continued topic of discussion and legislation for the next several years. Here are some highlights of Biden’s campaign proposals:

  • Public colleges and universities would be free to those who make under $125,000 a year.
  • Two years tuition-free at community colleges or accredited training programs
  • Eliminating loan payments and interest for people making under $25,000 a year
  • People making over $25,000 would pay 5% of discretionary after-tax income above $25,000 toward student loans. The debt would be forgiven after 20 years. Currently, Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE) plans are set at 10% discretionary after-tax income. This plan would also be automatic opt-in, which is different than what it is today. Biden also proposes that forgiven loans would not be treated as taxable income. Today, any forgiven debt is treated as taxable income.
  • Permitting student loan debt, including private student loan debt, to be discharged during bankruptcy.

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What President Biden’s Student Loan Plan Means for Graduates

Right now, borrowers who have federally-held student loans can still pay their loans and take advantage of 0% interest to pay down their loan principal. As noted earlier, payments aren’t due and interest won’t accrue through the end of September 2021.

Additionally, borrowers who are in default will not have their wages garnished during the pause. The Department of Education has also stopped the collection of defaulted loans from tax refunds and Social Security benefits.

If you are rehabilitating a defaulted loan, payments are not due during the pause.

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What to Know About Consolidating

People who have federal student loans may apply for a Direct Consolidation Loan. With consolidation, your interest rate would be the weighted average of current loan interest rates rounded up to the nearest one-eighth of a percentage point.

Of course, during the recently extended payment pause and waiver of interest, your interest rate is zero. So consolidating now will not affect your interest rate until the payment suspension ends.

So why consolidate? One advantage of a Direct Consolidation Loan is that it can make federal loans easier to manage as the borrower will have a single loan with one payment. Also, consolidating is one way to get out of default (if you missed payments before the pandemic-related payment freeze).

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What to Know About Refinancing

Borrowers may consider refinancing their student loans to take advantage of a low-interest-rate environment and potentially save money over the life of their loan.

Since refinancing involves taking out a new private loan, it may make sense for people who have private student loans. The federal payment holiday does not apply to them – and their original private loan did not have special benefits such as federal forbearance options and income-driven repayment plans.

On the other hand, people with federally-held student loans do not have to make payments until at least the beginning of October 2021 under the new action. Refinancing comes with the loss of certain federal benefits.

Plus, there is the possibility of having some of their loan forgiven, should Congress approve the legislation. (That said, it is not clear if forgiveness would apply to private loans, too.)

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What President Biden’s Student Loan Plan Means for Students Close to Graduating

If you are graduating this year, you will have a grace period (typically six months) before payments are due. Since the payment holiday is set to expire at the end of September 2021, it will not affect you unless President Biden extends it again.

As far as forgiveness goes, stay tuned! If the legislation does pass, it is not known yet whether it will apply to all federal loans or to private loans, too. It’s also not known if it will be limited to undergraduate school debt or possibly cover graduate school debt for certain public sector workers.

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What Biden’s Student Loan Plan Means for High Schoolers

As students plan for college, they may wonder how the Biden administration’s plans for student loans affect them. The answer: It’s too soon to tell.

Student loans now account for more than 40% of outstanding consumer debt in America, with student loan debt doubling in the past decade. Student loan debt is not just a personal issue that affects individuals, the impact of student loan debt has become a national issue that affects the country’s economy.

As you’re considering student loans to pay for school, it’s a good idea to inform yourself as much as possible: speak with your school’s financial aid office, understand the terms and conditions of any loans you take on, and have an idea of what repayment might look like in the future.

It may be helpful to understand federal loan forgiveness programs as they exist now, such as the Public Service Loan Forgiveness Program (PSLF), which provides loan forgiveness for people who work in qualifying public service jobs and meet additional criteria.

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What President Biden’s Student Loan Plan Means For Parents Saving for College

Student loan reform, coupled with the pressures the COVID-19 crisis put on educational institutions, may mean that undergraduate education looks different in the future. But it’s impossible to know what that new higher education world may look like.

Depending on how far away their children are from going to college, some parents may continue with their current savings plan or they may want to consider diversifying their savings vehicles.

For example, while a 529 savings plan is a tax-advantaged way to save for higher education, it specifies the educational expenses that the savings can cover (without incurring a penalty). On the other hand, a retail investing account or a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account does not have such tax benefits nor limitations.

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The Takeaway

School debt reform is on the horizon, though what shape it will take is far from clear, as is when it would materialize. So far, President Biden has signaled that he’d prefer any reform to be bipartisan and done through legislation.

When it comes to student loans, he used his executive powers on his first day in office only to extend the payment and interest holiday through the end of September 2021.

Staying on top of the news can help current and future student loan borrowers make the right choices for them. For graduates, informing themselves about refinancing student loan options can help, too.

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