Last Wednesday, President Biden made his long-awaited announcement about a plan for student loan payment forgiveness, extending the pause on payments that began during the pandemic. Read on to understand how Biden's student debt cancellation could affect you.
On August 24th, 2022, President Biden announced a student debt relief plan, which the FSA describes as "a three-part plan to help working and middle-class federal student loan borrowers transition back to regular payment as pandemic-related support expires." This includes loan forgiveness of up to $10,000 in federal student debt per borrower and up to $20,000 for Pell Grant recipients based on the debtor's income bracket.
While this immediately only affects those who qualify for debt relief, this plan is important to keep in mind for families who are gearing up for the college admissions season and want to consider the different options for financial aid. Below, we answer the most-asked questions about student loans and debt surrounding this new student loan forgiveness plan.
What are student loans, and what different kinds of student loans are available?
Student loans are loans students take out to cover the costs of higher education, and they can be offered to students as part of a financial aid package. Students and families have two options when it comes to student loans: federal loans or private loans. The loan amount, term, repayment options, monthly payment, and interest options can vary based on the type of loan.
Federal loans: As the name suggests, federal student loans are offered by the federal government and have a fixed interest rate that is set at the beginning of every year. There is also an origination fee that can vary based on the amount you're borrowing. Loans for undergraduate students that are offered based on demonstrated financial needs are Direct Subsidized Loans, and loans awarded not based on financial need are known as Direct Unsubsidized Loans. There are also Direct PLUS Loans for graduate students and Direct Consolidation Loans, which allow students to combine their loans. Federal loans are affected by Biden's student debt relief plan.
Private loans: Private student loans, as suggested by the name, come from a private entity, like a company, and usually have a variable interest rate that is different from that of federal loans. Because they require a credit check and most students do not have an established credit history, these loans often require a cosigner. Private loans are not affected by Biden's student debt relief plan.
What other types of financial aid are available to undergraduate students?
There is a wide variety of financial aid options for most students, from private scholarships offered through companies to merit-based scholarships offered by the school. Every student's situation is different, so refer to your school of choice's Financial Aid Office for specifics. However, one type of financial aid that is relevant to the student debt relief plan — the Pell Grant.
According to Federal Student Aid: "Federal Pell Grants usually are awarded only to undergraduate students who display exceptional financial need and have not earned a bachelor's, graduate, or professional degree... A Federal Pell Grant, unlike a loan, does not have to be repaid, except under certain circumstances."
Usually, this money does not need to be repaid unless a student fails to complete an academic period, and the school will notify the student if they are expected to pay the amount of the grant. The maximum amount that a student can receive can change yearly — this year (2022-2023), the maximum Pell Grant award amount is $6,895.
When do I have to pay back my student loans?
This depends on the type of student loan. Most federal student loans are designed to be repaid in 10 years, and private loan repayment schedules can vary. Depending on when the interest begins to accumulate, it can be a wise option for students to start repaying the loans as soon as possible so as not to acquire a large amount of interest.
I have federal student loans. Do I qualify for Biden's student debt cancellation plan?
This depends on your current financial situation. As you know, no one with federally held student loans has had to repay the loan since Biden took office due to extenuating circumstances of the pandemic. This pause will be extended through the end of 2022, and payments will resume in January 2023.
However, according to Federal Student Aid: "The U.S. Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for households."
Additionally, borrowers who are employed by non-profits, the military, or federal, state, Tribal, or local government may be eligible to have all of their student loans forgiven through the Public Service Loan Forgiveness (PSLF) program. Certain eligibility requirements have been waived for this program, so if you might qualify for the PSLF program, look into your options ASAP.
In order to see this change reflected in your account, you will need to register with the US Department of Education when the process officially opens — you can subscribe here to receive notifications about when this registration is available. Loan experts estimate that you may see these changes in your account by the end of the year if you qualify.
I'm a student or parent of a student applying for college this year. What does this mean for my financial aid options?
At the moment, this doesn't mean anything for prospective undergraduate students who do not currently have federal loans. However, many are hoping this will set a precedent for student loan forgiveness in the future under the current Administration. As student debt starts to become a larger, more pressing issue for today's students with tuition costs on the rise, many are hoping this kind of debt relief will become a more common occurrence, even outside of the circumstances of the pandemic.
If you’re looking for help with financial aid or general guidance during the college admissions process, don’t hesitate to set up a free consultation today!