From Biden’s Student Loan Forgiveness Plan: What You Need to Know about Student Loans
If you’ve been keeping up with recent news then you’ve likely heard about the recent announcement from the Biden Administration regarding the 2022 Student Loan Forgiveness Plan.
With over $1.75 trillion in federal and private student loan debt in the United States as of August 2022, this debt relief couldn’t come at a better time. However, it’s not as big of a debt forgiveness plan as Biden once promised on the campaign trail.
What is there to know about this plan? From making sense of exactly what the plan includes to figuring out whether you qualify for debt forgiveness and how to apply for it, here’s everything you need to know about your student loans right now.
What to Know About Biden’s Student Loan Forgiveness Plan 2022
Biden’s Student Loan Forgiveness Plan is a proposal to forgive up to $20,000 of federal student loan debt for borrowers. The plan would also extend protections for borrowers in repayment and make it easier for them to access affordable repayment plans.
However, to make this easier to understand, let’s break the plan down into parts. This three-part plan includes the following.
Debt Forgiveness
Aside from confirming one last extension to the student loan repayment freeze (that will go up until December 31st, 2022), this plan confirms total debt forgiveness for certain people.
The Department of Education is set to provide debt relief in the following amounts:
- Up to $20,000 for anybody who received a Pell Grant
- Up to $10,000 for non-Pell Grant recipients
Note that these loans must be federal loans held by the Department of Education. Additionally, there are income requirements you will need to meet in order to qualify for this debt cancellation.
Loan forgiveness is only for people who make under $125,000 (or $250,000 for taxpayers that file as a married couple).
Improve Student Loan System
Aside from canceling current student debt, Biden’s Student Loan Forgiveness Plan aims to improve the student loan system for current and future students. Namely, this includes cutting monthly payments in half for undergraduate loans.
Via the Department of Education’s new income-driven repayment plan, low-income borrowers would have monthly payments for undergraduate loans capped at 5% of their discretionary income.
Other changes include ensuring that those on income-driven repayment plans don’t accrue interest while they’re making on-time payments. And, for those with $12,000 in loans or less, reducing the total debt forgiveness time to 10 years instead of 20.
Additionally, the plan proposes improvements to the Public Service Loan Forgiveness (PSLF) program. While this program was previously aimed at teachers and others in similar job roles, the new program should be extended to anybody who has worked in the military, at a nonprofit, or in federal, state, tribal, or local government.
Protect Future Students
It’s important to remember how we got into this mess in the first place. Since 1980, the total cost of both four-year public and four-year private colleges has nearly tripled. Yet, public support hasn’t continued to increase at the same pace.
The final part of this three-part plan aims to protect future students and taxpayers by reducing the cost of college. This includes increasing the number of Pell Grants given each year and also working to make community college entirely free.
Who Qualifies for Biden’s Student Loan Forgiveness Plan?
To qualify for the Biden student loan cancellation, you need to meet the following requirements:
- Earn less than $125,000 per year (or $250,000 if you filed your taxes as a married couple)
- Have federal student loans
That’s really it!
How Many Loans Can You Have Forgiven?
The total amount of federal student loans you can have forgiven depends on whether or not you received a Pell Grant while you were attending school (as long as you meet the maximum income requirements and don’t earn over $125,000 per year).
Those who were Pell Grant recipients can have up to $20,000 in loans completely forgiven. Regular borrowers who didn’t receive Pell Grants can receive up to $10,000 in loan forgiveness.
It’s unclear how the Department of Education will choose to cancel student loans under Biden’s plan. For example, if you have various loans of differing amounts, it’s unclear whether they will cancel the loan with the highest interest rate or how that will work.
Should You Still Take Out Student Loans?
Taking out student loans is ultimately a personal choice. However, with this plan and the included changes that aim to make attending college more affordable, taking out student loans is likely to be a better option for some than it previously was.
College is Expensive
As it currently stands, college is still pretty expensive. US News reports that the current annual cost of college at a private university is over $43,000 while out-of-state students at public schools pay over $28,000 a year for their education. This is compared to over $11,600 for state students at public colleges.
This makes student loans a great way to finance college costs if paying out-of-pocket isn’t an option. How do student loans work? A student loan enables you to borrow money to pay the tuition and pay it back later, with an interest rate. The interest rates on student loans are generally lower than on credit cards and other types of loans.
Likewise, student loan repayment plans are based on your income, so if you don't have a high income right after graduation, you can choose a plan that gives you lower monthly payments. There are also options for student loan deferment or student loan forbearance if you can't afford the payments.
Student Loans Can Help Build Credit
Does paying student loans build credit? Actually, yeah!
For many people, student loans are the first type of loan they ever take out. As such, these loans can play an important role in helping young people build a strong credit history.
On-time payments of student loans can help to establish a positive payment history, which is one of the key factors that lenders look at when considering a loan.
Additionally, student loans can help to diversify your credit mix, as having different types of accounts is also viewed favorably by lenders. And finally, having a student loan can improve your utilization ratio, which is the amount of available credit you're using relative to your total credit limit.
By wisely managing your student loan and making on-time payments, you can set yourself up for success when it comes to future borrowing.
Things to Consider When You Have Student Loans
While there are benefits to taking out student loans, it’s important to keep in mind that simply having those loans doesn’t automatically boost your credit score or help your overall financial future. There are a few things to keep in mind.
Watch Out for Interest Rates
The current average student loan interest rate is 5.8%. That’s higher than mortgage loans but way lower than the average interest rate on a credit card. So, it’s important to keep these interest rates in mind when applying for student loans and agreeing to take them on.
If you have private loans with high interest rates, you may end up paying more in the long run. What are your options? You may be able to get a lower rate by cosigning with a parent or relative. Federal student loans usually have lower interest rates than private loans, so it's worth considering federal loans first.
You should also think about how much you'll need to borrow and whether you'll be able to make your monthly payments. If you're not sure, it's always a good idea to speak with a financial advisor.
Make On-Time Payments
Making your student loan payments on time is important for several reasons. First, late payments can lead to additional fees and penalties. Additionally, missed payments can damage your credit score, making it more difficult to get approved for loans in the future.
And finally, defaulting on your student loans can result in wage garnishment, meaning that a portion of your paycheck will be automatically deducted to repay your debt. Not only is that not ideal but defaulting on your student loans can also make it difficult to qualify for certain types of employment.
As you can see, there are many good reasons to make sure you're always making your student loan payments on time. By doing so, you'll avoid costly penalties and damage to your financial standing.
Keep Up With Your Credit
Whether you benefit from Biden’s Student Loan Forgiveness Plan or not, it pays to keep up with your credit. At Cheese, we’re working hard to help you do just that.
While you wait for the official student loan forgiveness application form to be released, stay tuned for Cheese’s credit builder product!
