Last month, the Biden administration announced plans to relieve the federal student loan. The plans include debt cancellation of up to $ 10,000 for borrowers who meet income requirements and up to $ 20,000 for Pell Grant beneficiaries. In addition to the cancellation, the proposal also extended the loan repayment suspension until the end of the year and introduced a new income-based repayment plan aimed at lowering monthly payments.
For now, these plans are just, well, plans. And plans can change. Many experts expect the proposal to face legal challenges, so don’t make big money just yet. Here’s what you can do now to prepare for relief and what it could mean for your budget.
There is still uncertainty
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“There are still a lot of unanswered questions,” says Kyle Liseno, head of the student loan department at the nonprofit agency American Consumer Credit Counseling. “I told people, stay tuned to studentaid.gov, which is the website of the Department of Education.” You can also subscribe to application notifications on the subscription page of the Department of Education. The application deadline is December 31, 2023. But borrowers are advised to apply by November 15 of this year to get relief before the end of the payment break.
Here’s what could happen if relief resisted legal challenges
It could free up more money for expenses and goals
The relief plans just announced could cancel or reduce a substantial amount of your federal loan debt. (Private student loans aren’t covered.) The impact on your budget could be huge, especially during a time of rising inflation and interest rates.
“$ 10,000 could be a large sum for someone, and it could really help them in terms of getting them back on their feet and getting rid of financial debt,” says Maggie Klokkenga, a certified financial planner in Morton, Illinois.
If you do not qualify for forgiveness, you will still benefit from the loan payment break, which has been extended until December 31, 2022, without interest. If you keep making payments during the break, your balance will go down. If you hold back, you can invest some of the money you previously spent on payments in more urgent expenses, such as rent or high-interest debt.
But even if you’re eligible, you won’t be handed a check for $ 10,000. Klokkenga suggests looking at your previous student loan statements to remind yourself of the minimum payment amount. Then, you can allocate some or all of that amount (depending on how the relief affects your balance) to save for an emergency fund and other financial goals, “whether it’s vacation, short-term or retirement, long-term. term, “says Klokkenga. “And then you can still have some fun, but it’s not to say that this is a boon or that you just won the lottery.”
Liseno says he has already seen many people pursue financial goals while payments have been suspended. “All this deferral has shown that when student loans are out of the question, young people are buying homes now. They are buying cars. That money is going into the economy, “she says.
Think about what you would do with the extra money if your minimum monthly payment of $ 300 was reduced to $ 150. Or $ 0. Klokkenga says that using an online tool, such as Utah State University Extension’s PowerPay, can help you create a debt payment or spending plan based on student loan savings.
You may not feel the difference
Federal student loan payments have been on hiatus since March 2020. This latest extension should sound familiar.
The relief plan “will help many Americans with … their future budgets,” says Liseno. “Because most people haven’t had to pay for nearly three years.”
If you’ve taken advantage of the break, you’ve probably already moved money elsewhere in your budget. Or, if you’ve responsibly invested your monthly payment amount in savings, you’ll be used to parting with that money if you still have a balance to pay in January.
Student loan relief plans are still pending. It may be difficult to predict what will happen with your finances until there is a clear resolution. In the meantime, stay up to date on the news and do your best to prepare yourself for different results.