The recent Supreme Court decision rejecting President Biden’s loan-forgiveness plan has sent shockwaves through the United States, leaving millions of Americans grappling with the harsh reality that they will need to repay their entire student debt balances. This follows a three-year pause in payments and a period of uncertainty filled with legal challenges. The Biden administration’s forgiveness plan, which proposed to eradicate up to $20,000 in federal student-loan debt for qualified borrowers, has now been thwarted by a 6-3 court decision. The verdict determined that the Education Department does not possess the authority to enact a program that would significantly alter student loans in this manner. As a financial advisor, I have compiled essential information and suggestions to aid borrowers in navigating this new landscape.
The Road Ahead
Borrowers should, for now, refrain from relying on student-loan forgiveness, as per the advice of legal professionals. Despite the setback, President Biden has expressed his intention to advocate for student loan forgiveness once more, using a different legal authority – the Higher Education Act of 1956. However, this route will likely be a longer journey, fraught with renewed legal challenges.
While we anticipate these developments, it is crucial to prepare for the recommencement of payments, expected at the end of the summer. All borrowers with outstanding federal student-loan balances will see interest on their loans resume as of September 1st. Payments are due to start in October.
To alleviate some of the potential financial shock, the Biden administration has announced a temporary 12-month “on ramp” period following the ruling. This period aims to safeguard borrowers who might miss payments from defaulting on their loans or suffering a negative impact on their credit.
Brace for Impact
As borrowers, we must brace for the inevitable surge of activity in the aftermath of this decision. Scott Buchanan, executive director of the Student Loan Servicing Alliance, warns that loan servicers are likely to be overwhelmed with calls from borrowers, leading to long wait times and busy phone lines. He further notes that the student-loan servicing system may encounter issues in reactivating so many accounts after the long pause. This situation could potentially give rise to a bottleneck in August and September.
In preparation for the resumption of payments, ensure that your account information is up-to-date. Recover any forgotten passwords and double-check your login info to avoid delays. Many borrowers might be understandably concerned about re-incorporating monthly student-loan payments into their budgets after a three-year hiatus. As Rob Williams, managing director of financial planning at Charles Schwab, puts it, “Good financial planning is juggling priorities.” It’s critical to re-examine your monthly cash flow and discretionary spending to see where you can trim expenses.
How Much Will I Owe?
Planning for the lowest possible payment plan is a risky strategy. If your payments end up being higher than expected, you may find yourself scrambling for funds. The wise course of action is to plan for what you believe the maximum amount would be. For most borrowers, this calculation should be simple: whatever their payment was before the pause, as interest hasn’t accrued and most people haven’t made voluntary payments during this period.
Those who have continued making payments during the pause, or are considering changing payment plans, should contact their loan servicer directly well in advance of the payment resumption deadline. The Education Department also offers a loan simulator tool that uses information such as income and family size to calculate potential monthly loan payments.
Repayment Options
Contact your loan servicer to discuss possible payment-plan options. Some of these options might even create a path to eventual forgiveness. Last October, the Biden administration announced changes to the Public Service Loan Forgiveness program (PSLF).
These changes streamline debt relief for workers in professions like teaching, nursing, and public-interest law. Further, they allow borrowers who make late or partial payments to remain on track for eventual forgiveness.
Some qualified borrowers might be able to leverage the Revised Pay as You Earn plan, a new income-driven repayment plan introduced by the Biden administration. These new plans calculate monthly student-loan payments based on income and family size, lower borrowers’ monthly payments, and hasten the repayment process. Under this revised plan, borrowers could pay as little as 5% of their discretionary income toward undergraduate loans. The plan also promises to write off remaining debt after 10 years for borrowers with balances less than $12,000.
What if I am unable to make payments at all?
The pandemic pause placed all student loans in forbearance, irrespective of status. Forbearance grants a reprieve from any payment at all, unlike income-driven repayment plans, which permit borrowers to make smaller payments calculated by their family size and income. For some borrowers, who might be unable to afford payments due to medical issues, a change in employment, or other financial hardships, forbearance remains an option.
Heather Jarvis, a lawyer who teaches financial professionals about student loans, reminds us that “Forbearance is not often the best option, but it is an option. The worst thing people can do is not pay attention and not make decisions based on good information.” To explore forbearance, borrowers must first contact their student-loan servicer and apply to see if they qualify. However, after the payment and interest pause ends on August 30, your student loan may still accrue interest during the forbearance period, which could raise the amount of money you pay over the course of the life of the loan.
In Conclusion
The Supreme Court’s rejection of student-loan forgiveness has certainly dealt a heavy blow to borrowers nationwide. However, it’s essential to remember that there are still options and resources available. As we step into this new phase, we must stay informed, proactive, and strategic in managing our student loans. Despite the challenges ahead, careful financial planning and understanding the array of repayment options can help borrowers navigate this uncertain terrain.
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