Student Loan Forgiveness Updates: Top Questions Answered

The student loan pause ushered in during the pandemic is coming to an end, with regular payments restarting on October 1, 2023.¹

Until recently, millions of Americans holding student debt had been waiting to see if President Biden's student loan forgiveness plan would come to fruition. Under the proposal announced in August 2022, borrowers with federal loans that fall under the U.S. Department of Education's William D. Ford Federal Direct Loan Program would have been eligible to have up to $20,000 in federal student loan debt canceled if they met certain parameters.²

After the proposal was struck down by the U.S. Supreme Court on June 30, 2023, borrowers have been left wondering what alternatives can help them manage their loans—and budget.³ Read on to find out what to expect now.

1. Are There Other Programs That Will Erase Student Debt?

While the breakdown of this wide-ranging proposal was a crushing blow to borrowers who had hoped to have at least some of their debt burden eased, there are several promising alternative efforts to help borrowers manage student loan debt. Here are the highlights of some programs:

Automatic loan forgiveness

This plan is estimated to forgive $39 billion in student loan debt for more than 804,000 borrowers. The Biden administration has modified an existing income-driven repayment program to correct errors that loan servicers made by improperly crediting payments borrowers had completed.⁴

This forgiveness applies to borrowers with Direct Loans or Federal Family Education Loans held by the Education Department, including borrowers with Parent PLUS loans. You need to have made either 20 or 25 years of “qualifying months" payments (depending on your loan type and payment plan) through an income-driven repayment plan, which bases payments on a borrower's income and family size. Borrowers will receive credit for partial or late payments.⁴

What to do: The U.S. Department of Education intends to alert eligible borrowers via email.⁵

Saving on a Valuable Education (SAVE) plan

This is an income-driven repayment plan that lowers the amount borrowers have to pay on their loans from 10% to 5% of discretionary income, and moves the poverty line so that more income is protected. It also ups the interest subsidy from 50% to 100%, which means that even if a borrower doesn't pay the accrued interest each month, the balance will not increase. Also, the plan halves the amount of time until loan balances are forgiven for borrowers whose balances were originally $12,000 or less.⁶

What to do: Borrowers with federal direct unsubsidized or subsidized, consolidated, or grad PLUS loans can apply to enroll in the SAVE plan on the Federal Student Aid website. Those who are already signed up for the current Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in SAVE when the new plan is implemented.⁷

Public Service Loan Forgiveness (PSLF) program

Updates to this program, which applies to public or government service workers such as teachers, firefighters, military personnel or those who work for qualifying nonprofit organizations, have helped hundreds of thousands of U.S. borrowers get their debt canceled due to changes in the way payments are counted. The updated formula applies more payments to the requirement, including adding in the months of nonpayment during the pandemic pause.⁸ 

If you've made a total of 120 payments, your remaining balance has been forgiven, while other borrowers will have their balance reduced.⁸ 

What to do: The PSLF Help Tool will explain what you need to know about the PSLF program and how your loan has been affected.

Employer-sponsored benefits 

According to SHRM's 2023 Benefits Survey, only about 8% of employers offer student loan repayment—but that number may be growing, with additional high-profile companies offering the popular perk.⁹

What to do: Talk to your human resources department to find out if your workplace provides this benefit. If not, it can't hurt to request it. 

2. During the Pause, What Has Been Happening to My Loans? 

All federal student loan payments were paused in March 2020, followed by several extensions, which offered a reprieve to borrowers grappling with uncertain economic conditions. During the pause, not only did borrowers not have to make payments, but interest did not accumulate.¹⁰

However, if you did continue making payments, you might be pleasantly surprised when you check your loan balance. That's because with interest paused, the entire payment went toward the principal (which is the original amount you owe, not including interest). Those payments could shorten your payback timeline and lower your total cost over time.¹⁰

3. If I Applied for and Received a Refund, Will I Have to Pay It Back?

If you continued to make payments during the pause—anytime from March 13, 2020, through August 2023—you are eligible for a refund.¹¹ Why would you want that money back? It could be because you need those funds to pay other bills if your financial situation has changed, or you might have had a large part of your loan forgiven through one of the programs mentioned above. 

Many borrowers have already applied for this refund in anticipation of broad loan cancellation and may have already received a refund check. However, unless your loan has been erased due to one of the programs mentioned, you will have to pay that money back. But you won't have to pay it back in a big chunk—the amount you received will be added to the balance of your loans.¹¹

4. How Do I Resume My Student Loan Payments?

Payments are set to restart on October 1, 2023, although interest will begin accruing on September 1, 2023. Borrowers should receive their billing statement at least 21 days before the payment due date.¹²

With those dates fast approaching, now is a good time to verify that your information is current. To find out more about your loan and payment information, visit StudentAid.gov. Click on the log-in menu to sign in with your Federal Student Aid (FSA) ID, then go to the “My Aid" tab. There, you'll see what you owe and directions for updating your information, as needed.

If you were previously enrolled in an automatic payment plan, you'll need to restart your autopay deduction, as payments won't start automatically.¹²

5. What Happens if I Can't Make My Payments?

The Department of Education is providing an “on-ramp" period from October 1, 2023, through September 30, 2024, when payments won't be considered delinquent, reported to credit bureaus, placed in default or referred to debt collection agencies. However, keep in mind that interest will accumulate, further bloating the amount you owe.¹²

If you need to lower your payment, look into an income-driven repayment plan or loan consolidation. But before you make a move, be sure to read all the details so you know the repercussions in terms of interest rates and loan terms. 

6. If I Qualify for One of the New Debt-Relief Options, What Should I Do With The Funds I Had Set Aside to Pay These Loans?

If you discover you have more discretionary income each month thanks to having your debt reduced or eliminated, now is the time to review your financial goals and start a new savings habit (or reinvigorate one that has lapsed).

For shorter-term needs, consider a high yield savings account; with a longer time horizon, reap the attractive return rates of a certificate of deposit (CD). As your budget becomes a little looser and you feel more financially confident, look into a longer-term asset like an individual retirement account (IRA). An IRA enables you to boost your net worth through the magic of compound interest, supercharging your future retirement as your nest egg accumulates.

Anytime you have a meaningful financial event—especially one like student debt relief that allows you to “reset"—it's an ideal moment to assess your future goals and make moves that will improve your overall financial well-being.

7. What Is Next for Student Debt Relief?

Widespread student loan debt cancellation may still be a possibility, as the U.S. Department of Education recently began new regulatory procedures aimed at developing a second student loan debt cancellation. However, the process is expected to be lengthy, and there is no guarantee it will materialize.¹³ Therefore, it's important to create a plan to tackle your existing student loan debt.

The Bottom Line

Find out today how your student loan has been affected and when you need to resume payment. Then, start making a plan. If you were counting on relief that is not yet coming, it can be stressful to figure out how to stretch your income to make those payments. Now is the time to revisit your budget to identify changes you can make as you start building your savings. For more information on budgeting and saving, visit the "Money Matters" blog.

 

Cathie Ericson is an Oregon-based freelance writer who covers personal finance, real estate and education, among other topics. Her work has appeared in a wide range of publications and websites, including U.S. News & World Report, MSN, Business Insider, Yahoo Finance, MarketWatch, Fast Company, Realtor.com and more.

 

READ MORE: 3 Strategies for Managing Education Debt