By Ryan Brady
If you are paying for college, you might have a few questions surrounding recent changes in student loan forgiveness policies. Most importantly, what do these changes mean to you when you are trying to pay for school now?
There have been two main reforms recently:
Department of Education Relief Act
American Rescue Plan Act
We’ve taken the time to review these pieces of legislation and outline the key details that may benefit or impact you (below). You should note that other plans are still in the works and we expect additional updates coming out of Washington D.C. over coming weeks.
Department of Education Relief
The automatic, interest-free repayment pause on Department of Education student loans that was implemented at the start of the pandemic will last through at least September 30th of this year (2021).
These changes extend to parent loans held by the Department of Education, but do not include private student loans or other commercially owned loans, including some Federal Family Education Loans (FEEL) and Perkins loans owned by colleges. The easiest way to determine if your loan is federally owned is by checking Studentaid.gov.
Even if you suspend your loan payments, the time can still be counted towards requirements under Public Service Loan Forgiveness and other federal forgiveness programs.
If you are a borrower with a private student loan, these reforms do not directly affect you, however, you should check with the institution you are borrowing from, as many are making similar policy changes for COVID relief, including repayment freezes.
American Rescue Plan Act
The American Rescue Plan Act is $1.9 trillion COVID-19 relief legislation and the most substantial federal pandemic relief for higher-education institutions. Amongst other non-education related relief, the ARPA classifies all types of student loan forgiveness as tax-free through December 31, 2025--meaning any potentially forgiven student debt will not be taxed until then. To be clear, this legislation does NOT grant any forgiveness of student loans, rather it sets up a structure that allows for any possible relief that could come over the next few years to be done without tax implications on forgiven borrowers.
The ARPA also provides $40 billion to higher education institutions in relief with specific details about how each state and school will use such funds varying. At least half of the funds that institutions receive must be used for emergency financial aid for students, however, each institution can determine how to distribute the aid, so check with your university to see if you qualify for assistance!
Potential Future Reforms
President Biden supports cancelling $10k federal student debt per person. This would remove the debt of almost ⅓ of borrowers (15 million) who owe $10k or less. Other democratic leaders are supporting a debt cancellation of $50k.
President Biden also has a new Income-Driven Repayment plan for undergraduate federal student loans in the works. Borrowers would pay 5% of discretionary income, whereas current options set payments between 10% and 20%. Monthly payments would be voided if borrowers make less than $25,000, or due to other factors such as family size or poverty status. After 20 years, the remaining debt balance would be forgiven tax-free. Current plans forgive the debt balance after 20-25 years but tax the forgiven amount. Finally, federal borrowers would be automatically enrolled into this plan and would have to opt out.
We will continue to keep students posted on what legislative changes mean for them throughout this year!