25th March 2022
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 . 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.
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 Biden Administration has repeatedly reiterated that the President would sign a bill offering $10,000 in federal student loan forgiveness to all borrowers.
- 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 bad credit loans in Louisiana 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.
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 .
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.
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 . 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 with high interest rates may wish to start considering student loan refinancing options. 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.