When the CARES Act was passed in March, payments were suspended and the interest rate was temporarily set to 0% for federal student loans. The student loan relief is set to expire on Jan. 31, 2021. Will President-elect Joe Biden extend the temporary relief? No one knows.
While there is uncertainty about what will happen after Jan. 20, 2021, we have an idea of the long-term changes that might be coming to student loans when Biden takes office.
These proposals will have to be approved by Congress to become law, but here is a summary of what Biden has proposed so far with regards to student loans.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Cancellation of up to $10,000 per borrower
On March 22, 2020, Biden tweeted that he would cancel up to $10,000 for each borrower of federal student loans. This cancellation was originally proposed by the Democrats to be included in the CARES Act. It did not make it into the act, but it is possible that the Biden administration will include the $10,000 cancellation as part of a future stimulus package.
Monthly payment capped at 5% of your income
The Biden Plan for Education Beyond High School includes changes to the current repayment and forgiveness programs for federal loans. Currently, borrowers in Income-Driven Repayment (IDR) plans are required to pay 10%-20% of their income over the federal poverty line toward their student loans. The Biden Plan would limit that to 5% of income over $25,000. Also, there would be no monthly payments required and no interest accrual for individuals making less than $25,000 a year.
Automatic enrollment in IDR and forgiveness
New and existing federal student loans will be automatically enrolled in the IDR plan. Borrowers have the choice to opt-out. This is a major change to the current complex system. Under the current federal system, borrowers pick and enroll in one of many available plans, which can be confusing. According to the proposed plan, the remaining balance of the loan will also be forgiven automatically after 20 years of payments are made. There would be no income tax on the forgiven amount in this new long-term forgiveness program.
Public Service Loan Forgiveness
Biden’s proposal suggests putting a cap on the amount of forgiveness a borrower can get in the Public Service Loan Forgiveness (PSLF) program. Again, the enrollment in the PSLF is automatic for “individuals working in schools, government, and other non-profit settings.” However, the amount of PSLF forgiveness is $10,000 of undergraduate or graduate debt for every year of qualifying service, for up to five years, which means that the maximum amount of forgiveness would be $50,000, in contrast to the unlimited amount under the current rules. Although this may be bad news for borrowers who were hoping to get more than $50,000 forgiven tax-free, the proposed plan allows up to five years of prior national or community service to count towards PSLF.
Private Student Loan Discharge
It has generally been very difficult to get student loans discharged in bankruptcy.
Biden has promised to enact legislation from the Obama-Biden administration to permit the discharge of private student loans in bankruptcy.
Tuition-free colleges and universities
The Biden Plan also includes ideas for reducing the need for some students to take out student loans in the first place. The plan proposes making public colleges and universities tuition-free for all families with incomes below $125,000. These tuition-free colleges and universities would include community colleges and state colleges and no private colleges, except for private Historically Black Colleges and Universities (HBCU) or Minority-Serving Institutions (MSI). Only tuition and related expenses would be free. Students and their families would still pay for other expenses, such as room and board.
Again, these plans will not become law unless approved by Congress. But it’s good to keep track of the changes in the law that may affect your student loans and repayment strategy. If you need help coming up with a strategy, contact a professional with student loan expertise for help!
-
Dow Sinks 301 Points on Trade War Talk: Stock Market TodayThe contentious relationship between the world's two biggest economies continues to drive global financial markets.
-
Top Places to Park $10K (or More) as Rates Start to FallWith more rate cuts upcoming, here are some smart places to maximize your savings on $10,000.
-
Financial Fact vs Fiction: The Truth About Social Security Entitlement (and Reverse Mortgages' Bad Rap)Despite the 'entitlement' moniker, Social Security and Medicare are both benefits that workers earn. And reverse mortgages can be a strategic tool for certain people. Plus, we're setting the record straight on three other myths.
-
The End of 2%? An Investment Adviser's Case for Why the Fed Should Raise Its Inflation TargetYes, inflation can be tough on those living on fixed incomes, but protecting us from it too strictly could do our overall economy more harm than good.
-
Banks Are Sounding the Alarm About StablecoinsThe Kiplinger Letter The banking industry says stablecoins could have a negative impact on lending.
-
Medicare Open Enrollment: Why You Need to Pay Extra Attention to Part D, From a Financial AdviserThe lowest premium for prescription drug coverage might not actually save you the most money. Make sure you take copays into consideration and do the math.
-
How the One Big Beautiful Bill Will Change Charitable GivingTaxpayers who don't itemize will be able to take a bigger deduction for donations, which could boost giving. However, high-income donors could see their tax benefits reduced.
-
A 'Fast, Fair and Friendly' Fail: Farmers Irks Customers With Its Handling of a Data BreachFarmers Insurance is facing negative attention and lawsuits because of a three-month delay in notifying 1.1 million policyholders about a data breach. Here's what you can do if you're affected.
-
Serving the HNW Market: How Financial Advisers Can Break Through and Deliver Lasting ValueFinancial advisers have a significant opportunity to serve high-net-worth clients by elevating their capabilities, delivering comprehensive planning, building diverse teams and prioritizing family wealth education.
-
Don't Just Sell, Connect: How Financial Advisers Can Ignite Their Sales GrowthAvoid complacency and embrace small, consistent improvements to optimize your sales process and results.
