Student loan forgiveness could be around the corner. What to do while you wait

Student loan forgiveness could be around the corner. What to do while you wait

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Contact your lender

Adding some messiness here is the fact that millions of borrowers will have a new loan servicer by the time payments resume because of changes in the industry.

Impacted borrowers should get multiple notices, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers.

Come September, if you mistakenly send a payment to your old servicer, the money should be forwarded to your new one, Buchanan said.

Save up

Again, don’t count on student loan forgiveness wiping out your entire balance.

“In all likelihood, student loan forgiveness will be limited in eligibility and amount, so you can’t count on it erasing all of your student loan debt,” Kantrowitz said.

Student loan forgiveness, if it happens, will likely be limited to just federal loans

Mark Kantrowitz

higher education expert

For example, $10,000 in cancellation would only fully clear the debt for a third of borrowers.

As a result, Kantrowitz recommends starting to salt away some money now to ease the pain of the bills resuming.

Hold off on refinancing

Even though interest rates are low at the moment, Kantrowitz said borrowers should think twice about refinancing their debt with a private lender.

“Student loan forgiveness, if it happens, will likely be limited to just federal loans,” he said.

You don’t want to miss out on debt cancellation while pursuing a lower interest rate.

Try to make sure you’ll qualify for the relief

Millions of people who took out student loans before 2010 under the Federal Family Education Loan program have been excluded from the government’s offer to pause their payments without interest accruing during the coronavirus pandemic.

There’s some concern that these borrowers could also be left out of any student loan forgiveness.

As a result, holders of FFEL loans may want to contact their servicer and consolidate them into the main Direct Loan program, which will qualify for the forgiveness, Kantrowitz said.

The main downside of doing so is that your repayment timeline will be reset and so if you’re near the end, it may not make sense.

Don’t stress about taxes

Student loan forgiveness is now tax-free, thanks to a provision included in the $1.9 trillion federal coronavirus stimulus package that became law in March 2021.

Formerly, any student loan debt canceled by the government was considered taxable and levied at the borrower’s normal income tax rate.

According to a rough estimate by Kantrowitz, $10,000 in cancellation would have triggered an extra $2,000 in taxes for the average borrower. If $50,000 per borrower was canceled, the average person would have to write the IRS a check for $10,000.

Borrowers would now be off the hook from these bills.

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