Student loan cancellation doesn’t mean what you think it does.
Here’s what you need to know.
Will President Joe Biden Call Your Student Loans? White House Chief of Staff Ron Klain says Biden could make a decision about canceling student loans before student loan payments resume on May 1, 2022, or Biden could extend the student loan payment pause. It’s possible that Biden could both call in student loans and extend the student loan payment pause this year. That would be a double win for student loan borrowers seeking greater student loan relief in the wake of the Covid-19 pandemic.
However, student loan cancellation may not mean what you think it does. (6 Major Changes in Student Loan Forgiveness). For example, there is no universally accepted definition of “foreclosure on student loans.” This can cause confusion for student loan borrowers, especially if you expect your student loans to be forfeited. Here’s how this could affect your student loans.
(Biden to call $6.2 billion in student loans)
1. Private student loans are not cancelled
Senator Bernie Sanders (I-VT) has proposed eliminating all $1.7 trillion in student loan debt. This includes all private and federal student loans. However, if there is a large-scale cancellation of student loans, it will only be for federal student loans owned by the US Department of Education. Private student loans are owned by financial institutions such as banks and investors. Because these companies make money from interest payments, they don’t plan on foreclosure on your personal student loan. Even the federal government cannot force these institutions to cancel student loan debt. So, if you have personal student loan debt, don’t expect a student loan foreclosure.
(Student loan cancellations reduced to $25,000 for student loan borrowers with new proposal)
2. Only federal student loans owned by the government would be called
When canceling student loans, it’s important to read the fine print. This includes the types of federal student loan debt that would be canceled. Only federal student loans owned by the federal government would likely be cancelled. These include, for example, direct loans. However, FFELP loans are mostly owned by third party financial institutions and investors. FFELP loans are backed by the federal government, but banks issued them before 2010. Since the federal government largely does not own these student loans, they are unlikely to be called. Similarly, Perkins loans are issued by colleges and universities. They too are not entitled to the cancellation of the student loan by the federal government.
(3 Ways to Get Student Loan Forgiveness Now)
3. Student loan cancellation is not available to everyone
Even if you have federal student loans owned by the government, more than 40 million student loan borrowers are unlikely to qualify for student loan foreclosure. Expect there to be restrictions on who qualifies. For example, the most likely constraint is income. Senator Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) proposed that federal student loan cancellations be limited to student loan borrowers earning up to $125,000. It is possible that Congress or the President will set an even lower income limit. For example, the stimulus checks from the Covid-19 pandemic had an income threshold of $75,000. It is also possible that student loan cancellations are targeting student loan borrowers who are in student loan default or default.
(What to do if you don’t qualify for student loan forgiveness)
4. Student loan forgiveness is not free
Student loan forgiveness would be a great win for student loan borrowers. With zero student loan debt, student loan borrowers could save for retirement, build their financial future, and buy a home. However, that does not mean that canceling the student loan is free. While student loan borrowers would benefit, the federal government still incurs significant costs. If a $50,000 student loan is canceled for borrowers, the cost could be $1 trillion. If a $10,000 student loan is canceled, the cost could be less than $400 million. In any case, the federal government would absorb these losses. Why? The federal government would not be able to collect principal or interest payments on these student loans.
(Where Biden Stands on Student Loan Ease)
5. Canceling the student loan does not solve the cost of higher education
It’s no secret that the cost of higher education is the underlying problem for many Americans. The student loan cancellation, if effective, would be a one-time mechanism to clear student loan debt for current student loan borrowers. If you are currently a student loan borrower, “Student Loan Cancellation Day” would be a day to remember. If you take out a student loan the day after “Student Loan Cancellation Day,” that day will also be remembered, but for the wrong reasons. Student loan borrowers will continue to borrow student loans, but they will not benefit from possible future student loan cancellations. Congress should provide a long-term solution to the cost of higher education that will benefit both current and future generations and their families.
It’s important to understand what foreclosure on a student loan means and whether you may qualify. Importantly, the student loan exemption is expected to end on May 1, 2022. That means federal student loan payments will resume unless Biden extends the student loan payment pause. It’s best to plan for restarting student loan payments so you’re fully prepared. That means you need to know all of your student loan repayment options.
Here are some smart options for paying off student debt: