If you have federal student debt, you may be anxiously awaiting whether the Supreme Court will stop the massive loan forgiveness program the Biden administration announced last August.
The judges will hear arguments Tuesday in two cases challenging the Department of Education’s debt relief efforts that would clear up to $20,000 in federal student loans for low- and middle-income borrowers. Two lower courts have put the program on hold.
The court will decide two issues: whether the administration exceeded its jurisdiction and whether the plaintiffs had a right to sue in the first place. A ruling is expected within a few months.
The Biden administration has extended its original pandemic freeze on payments and interest charges, which will end 60 days after the Supreme Court ruling.
What should you do now?
Financial experts say there are steps you can take now to prepare for the aftermath of the court’s decision.
First, determine which company is servicing your federal loan or loans so you know who to pay if and when the time comes. Jaylon Herbin, director of federal campaigns for the Center for Responsible Lending, said there has been a lot of turnover among loan managers in the nearly three years since borrowers were last required to make a payment.
If you owe more than the administration has suggested forgiving, as most borrowers do, your deferment will end in a few months, regardless of what the judges decide.
To find out who is paying off your loan, go to your account on the Federal Student Aid site (studentaid.gov) and call up the “My loan managers” list.
Then confirm how much you still owe, what your monthly payment will be, and what the interest rates on your loans are. You can call your administrator for the numbers, or you can log into your account at studentaid.gov and check the numbers there. Make sure the record shows all the payments you’ve made. If not, call your administrator and specify which payments are missing. And if that doesn’t solve the problem, file a complaint with the Education Department.
Start putting money aside now
Once you know what your monthly payment will be, Greg Ward, director of the financial wellness think tank at Financial Finesse in El Segundo, recommended saving that much money each month while waiting for the court’s decision.
“Pay yourself the same payment you would have made in your loans,” Ward said. “The idea is to get into the habit of living on less cash flow, in theory.”
By the time monthly loan payments resume, borrowers will have gone more than three years without that obligation. By saving the money now, you can adjust your spending habits.
Ward saw no benefit in making voluntary payments before mandatory payments resume — no interest is charged during the payment break, so reducing your balance won’t help on that front. Instead, he said, it makes sense to take the money you’re putting into savings right now, along with the interest it earns, and “pay a lump sum payment on whichever of your loans has the highest interest rate” once the government starts charging interest. again, he said.
Consider a change in payment plans
There are two basic ways to pay back federal loans: plans that tie monthly payments to the size of your loan, and plans that tie monthly payments to your income, where the unpaid balance is forgiven after a certain number of payments are made.
You can switch from one plan to another at any time studentaid.gov at no cost, but charges may apply. Any unpaid interest is “capitalized” — that is, folded into your loan balance, increasing the amount of interest you accrue each month.
Still, there may be good reasons to switch. A standard plan with a 10-year repayment period may have a lower total cost than a 20- or 25-year repayment plan tied to your income simply because the interest charged will be significantly lower. However, the monthly payments for the Standard plan would be higher – possibly much higher.
If you’re on a 10-year installment plan and the imminent resumption of payments seems prohibitive, there are a few options.
One is to move to an extended payment plan that extends your monthly payments over 25 years. Another is to move to an income-based Revised Pay As You Earn plan, the terms of which are being significantly upgraded by the Biden administration.
below a rule proposed last month, monthly payments under these plans would be cut by more than half, meaning a much larger amount would be waived after you’ve made means-tested payments for 20 years. (Some high school or professional study loans have a 25-year repayment option). Specifically, the amount would be reduced from 10% of your disposable income to 5%, and less income would be classified as disposable. In addition, forgiveness would come into effect earlier for borrowers who have taken out smaller loans.
Be warned: The federal government will tax any waived amount received after December 31, 2025. That’s a potential “tax bomb,” Ward said. However, the tax bill would likely pale in comparison to the amount of debt forgiven.
Will Public Service Still Erase Loans?
The government also revised its government loan forgiveness program, which promised to wipe out the federal student debt of people who make 10 years’ worth of payments while working in government offices, schools and other non-profit jobs. The Education Department suggested a rule last year to significantly expand eligibility and give borrowers credit for many types of payments already made. UC Merced economist Charlie Eaton said the changes already temporarily made to the program canceled $21 billion in debt nationally.
Aoife Delargy Lowe, vice president of Law School Engagement and Advocacy Equal Justice Works, a public service organization, urged borrowers with Federal Family Education Loans, Perkins Loans, and Health Education Assistance Loans to file federal Direct Consolidation before May 1. Apply for a loan to benefit from the changes in the program.
She added that the PSLF coalition regularly offers free webinars to educate employers and borrowers on how to successfully earn government loan forgiveness.
Prepare for the best case scenario
If the judges allow the administration to go ahead and cancel debt, you may need to apply to receive the aid if you haven’t already done so.
The exemption is only granted to borrowers with student loans issued by the federal government or, in the case of Perkins and FFEL loans, held by the Department of Education. Any federal loan for which monthly payments are still interrupted must qualify.
To check if your Perkins or FFEL loans are eligible, go to your account at studentaid.gov and look under the My Loan Managers list; any name prefixed with “DEPT OF ED” is a loan from the federal government.
Eligibility is also linked to your family income. The exemption is only for borrowers who earned less than $125,000 a year or married couples who earned less than $250,000.
The Department of Education has said it will automatically enroll you in the program if it has up-to-date information about your income to determine your eligibility. Borrowers in means-tested repayment plans must report their income annually.
However, if you have a standard subscription, you will need to fill out an application form online, which is not possible at this time. The department stopped accepting applications when a federal judge temporarily blocked the program. But you can sign up studentaid.gov to be notified when the application will be available again.
What the debt relief will mean for you depends on the size of your balance and the type of repayment plan you’re on. Eaton estimated that the cancellation would wipe out the balances of 16 million borrowers, or 40% of the total.
What if the court stops the loan forgiveness?
The Education Department offers a online loan simulator to help you explore your options.
Ward of Financial Finesse said it’s also a good idea to talk to your employer about it advantages it could offer student loan borrowers. Companies are beginning to offer loan repayment assistance, he said, and a new federal law will allow employers to contribute the same amount to employees’ retirement accounts starting in 2024 as employees pay for their student loans.
“Employers recognize that this is something that affects a lot of workers, especially younger workers,” he said. The new perks “are things you definitely want to bring to their attention,” he added.
Another piece of advice Ward gave was to discuss your options with a financial professional. If you have access to a financial coach, student loan counselor, or other advisor, you should discuss your options with them and evaluate “where you personally stand in terms of your career, family aspirations, and other such factors.”
