Student loan forgiveness can make your financial burden lighter if you owe federal student loans. While the federal CARES Act offered temporary student loan forbearance for eligible borrowers, those benefits are set to expire at the end of January. With millions of Americans struggling financially as a result of the coronavirus pandemic, congressional leaders are calling for the new administration to cancel student debt.
"Regardless of the strong differences between Republicans and Democrats, it does seem likely that some sort of debt relief is coming in 2021," said Lamar Brabham, CEO, and founder of financial services firm Noel Taylor Agency.
If you have a private student loan or don't qualify for forgiveness right now, you may want to consider refinancing your student loans to ease the financial burden. To see if a refinance fits into your personal finance plans, head to online marketplace Credible and crunch the numbers. Credible allows you to compare rates and lenders free of charge!
What will happen to student loans in 2021?
President-elect Joe Biden has proposed several scenarios in which some federal student loans could be canceled. Here are three potential options considered in 2021.
- Universal student loan forgiveness
- Targeted student loan forgiveness
- Prop up existing student loan forgiveness programs
Option 1: Universal student loan forgiveness
One of the measures proposed by the incoming Biden administration would offer universal student loan forgiveness of up to $10,000 for all eligible federal student loan borrowers.
This a short-term move that would be designed to promote economic recovery. If you're out of work or were laid off in 2020 because of the coronavirus pandemic, $10,000 in loan forgiveness could be a welcome financial break.
It could also be an appealing option if you aren't eligible for the federal Public Service Loan Forgiveness Program (PSLF). That program offers student loan forgiveness if you work in a public service career and make 120 qualifying payments toward your loans. It also requires you to be enrolled in an income-driven repayment plan.
Remember, those with federal loans have different perks and benefits (and you're going to want to hold onto them) than those with private student loans. If you have a private student loan and don't qualify for forgiveness programs, then consider a refinance. Want terms that work best for your financial situation? Credible can do the work for you.
Option 2: Targeted student loan forgiveness
A second proposal focuses on targeted student loan forgiveness. Specifically, Biden has suggested forgiving undergraduate debt for students attending two- and four-year public colleges. But, there are limits on how far this forgiveness may extend.
First, you would only be eligible for this benefit if you earn less than $125,000 a year. Second, there hasn't been any definitive talk about which type of federal loans would be included in this forgiveness option. So, if your income is over the threshold, or you don't have a covered loan, you may miss out on this benefit.
Option 3: Prop up existing student loan forgiveness programs
A third option is to expand the federal Public Service Loan Forgiveness program. Specifically, the Biden team has called for allowing 50% loan forgiveness after five years of service and expanding benefits to borrowers with previously ineligible loans.
The new administration has shown support for a program that would allow you to have $10,000 of student loan debt forgiven each year for up to five years of national or community service. If it becomes a reality, you could apply any prior years of service to qualify for this benefit.
Biden has also proposed restructuring the income-driven repayment plan. If you make less than $25,000 a year you wouldn't have to pay anything toward your undergraduate loans. No interest would accrue either. If you make over $25,000 you'd have to pay 5% of your discretionary income.
Will student loan forgiveness happen?
There are still plenty of 'ifs" surrounding the issue of forgiveness. Any plan formally proposed by Biden once he takes office would have to be approved by Congress. And a potential roadblock exists that's causing some to oppose the idea of loan forgiveness.
"An issue that keeps coming up, and will have to be dealt with, is the fact that many people who’ve borrowed money for school have already paid their loans back," Brabham said. The new administration will have to balance loan forgiveness options against backlash from critics who say it unfairly penalizes those who have cleared their student loan debt.
What if you owe private student loans?
Biden's forgiveness plan has some interesting points but there's one it doesn't cover: private student loans.
If you owe private student loans, they wouldn't be eligible for any of the forgiveness options the new administration is putting forth. Student loan refinancing could be more attractive as a result.
If you want to take advantage of low interest rates, consider refinancing your student loans — especially if you have private student loans. Online marketplace Credible can check your credit score, debt-to-income ratio, and determine if you qualify for a refinance easily.
"If you’re not eligible for student loan forgiveness, or a student loan forgiveness plan fails to come to fruition, refinancing to private student loans could be beneficial," Brabham said. "Refinancing could lead to better interest rates and better terms, which ultimately could help ease the pain."
You can use an online tool like Credible to check rates and get prequalified for student loan refinancing rates without affecting your credit scores.
Before refinancing student loans, it's helpful to first do the math to see if it makes sense financially. A student loan refinancing calculator can help you estimate your interest savings and monthly payments.