After multiple extensions of the suspension on federal student loan payments that started in 2020, on August 24, President Joe Biden announced a plan that both cancels some debt for certain borrowers and extends the payment moratorium for a seventh time until December 31, 2022.
The plan forgives up to $10,000 in federal student loan debt for borrowers who make less than $125,000 per year (for individuals) or $250,000 (for married couples or heads of households), based on either 2020 or 2021 income. Pell Grant recipients who meet those income standards are eligible to have up to $20,000 in debt forgiven.
So if you're one of the 43 million Americans with federal student loan debt, now’s a good time to determine if you’re eligible for forgiveness — and to start thinking about how you will add your student loan payment back into your budget come January 2023 (as most borrowers will still have remaining balances to pay down).
Which loans qualify for the payment pause?
The federal student loans eligible for suspended repayment include:
- Direct Loans
- Federal Family Education Loan (FFEL) Program Loans owned by the Department of Education
- Federal Perkins Loans owned by the Department of Education
- Defaulted Health Education Assistance (HEAL) Loans
However, FFEL Program Loans owned by private lenders, Perkins Loans owned by individual colleges, HEAL loans owned by commercial lenders and any private student loans didn’t qualify for the suspension. If you’re not sure whether your loan qualified, there’s no need to worry — if it did, you would have been automatically opted into the pause, with no action required on your part.
During the repayment suspension, your loans have not been accruing interest. This is similar to what you would experience if you had borrowed a federally subsidized student loan and then placed it in deferment.
Which loans qualify for forgiveness?
If your federal student loan qualifies for the payment pause, it likely qualifies for forgiveness as well. Federal parent PLUS loans also qualify. However, only loans awarded by June 30, 2022, are eligible.
What you can do now
For loan forgiveness, there isn’t much action to take right now — the Department of Education announced it would have an online application available by the end of the year to help borrowers determine if they are eligible. In the meantime, make sure your loan servicer has all your most up-to-date information.
And although the resumption of student loan payments is still several months away, it’s a good idea to start getting used to the idea of taking on that bill again. Here are a few ideas for how to start preparing your finances.
Determine how much room you might need to make in your budget
If you haven’t been making loan payments, it’s possible you’ve found other uses for that money, whether you’ve saved it or spent it. In preparation to start making loan payments again, revisit your budget, particularly if a lot has changed in your life that has impacted your finances. You want to ensure that you can still adequately cover your expenses and goal contributions with the addition of the student loan payment.
If you’re not in a situation where you’re able to start making payments, this is a good time to start researching other options such as deferment, forbearance or an income-driven repayment plan. You may even want to consider refinancing your loans if you’re not eligible for forgiveness and you think you can get a lower interest rate. But keep in mind that doing so would mean losing the benefits and flexibility of having a federal loan.
Take your loan payment for a ‘test drive’
Try setting aside your student loan payment amount early to get used to the idea of not having that cash in your bank account. Before your payments officially start up again, you could use that money to pad your emergency fund or pay down some credit card debt. Not only are you preparing your budget for the repayment, but you’re also helping yourself get ahead on some financial goals.
Start paying your loans back early
Remember, you don’t have to wait until January to start paying your loans back, especially if you know you’re not eligible for forgiveness under the new plan. The fact that your student loans are not accruing interest right now means that any payment you do make will go directly toward reducing your loan’s principal, helping you pay your loan down faster.