Student Loan Relief Plan- facts and a framework
Today’s post is longer than usual, but I hope you’ll take ten minutes to read it.
This past week, the Biden-Harris administration announced that federal student loan borrowers will receive student loan debt relief[1]. In today’s post, you’ll find insight into this plan as well as thoughts about how to move forward if you still will have student loans after the relief.
Normally, my posts are personal and ultimately about behavior, but I wanted to start this post with the facts about the relief plan. The first part of the post is facts about the new plan. The second part is the framework I would use if I had student loans after this relief, my feelings (and non-statistical findings), and rationale.
Part I. Just the facts, ma’am.
Some specific details of the relief plan are still being ironed out, but there are some things we know for certain. Please note that this only applies to federal student loans. If you have private student loans or consolidated your student loans, you are not eligible for any relief under this relief plan. All student loan relief is capped at income thresholds of $125,000 for individual taxpayers and $250,000 for those filing jointly.
1. There is one final pause on student loan repayment for all federally held student loans through the end of this year. Repayments will begin again in January of 2023. This also means interest on federal student loans remains paused until repayments begin again.
2. If you ever received a Pell Grant, you qualify for up to $20,000 in relief. If you never received a Pell Grant, you qualify for up to $10,000 in relief. Nearly 60% of borrowers are Pell Grant recipients, so it’s possible you qualify for greater relief.
Check on whether you received a Pell Grant by visiting studentaid.gov and on the front page of your account, click “My Aid.” This page will tell you what if any, grants you received.
3. Until October 31, 2022 (so, a very small window), you can apply for Public Student Loan Forgiveness (PSLF) if you have any federal, state, local, tribal government or non-profit work history. The rules have temporarily been relaxed and those with PSLF time will receive credit for time spent, even if it would not have previously been credited, perhaps because of non-consecutive or untimely payments. You can learn more about PSLF at this site. These changes will not be in effect after October 31, 2022, so it is important to sign up if you are eligible, in this narrow window. It seems there is no harm in exploring this option if you meet any of the criteria, even if you ultimately do not go the PSLF route.
4. For income-driven repayment plans:
If you are repaying undergraduate student loans, you will not have to pay more than 5% of your discretionary income towards repayment on an income-driven repayment plan, and rules will be implemented to consider more income non-discretionary (for needs) and less discretionary (wants).
If you utilize an income-driven repayment plan and your initial loan balance is less than 12,000, after 10 years of payments the balance will be forgiven.
Finally, if you make the monthly payment required under the income-driven repayment plan (even if that required payment is $0), the unpaid monthly interest will be forgiven so that the principal balance does not grow.
How you will get the relief
If relevant income data is already in the Department of Education’s (DoE) system, then you will be automatically eligible to receive relief. My guess is that when it’s processed, the balance in your account will simply show up as less based upon the relief received.
If the DoE needs your information or you’re not sure if they have what they need, there will be an application launched soon and no later than the end of this year.
Okay, so those are the nuts and bolts of what was announced this week. You can learn more and stay up-to-date on the student aid website.
But let’s think critically about what this means for you and the framework you should consider in determining how to move forward.
Part II. What I would do if I had a balance after the relief, some personal feelings, and some “stats”.
I graduated law school in 2016 with approximately $65,000 of student loan debt. My debt was entirely from my time in law school. When I graduated law school and started repaying my loans, I paid the absolute minimum I could. Turns out, this minimum payment didn’t even cover interest on my loans (this problem is being solved in the new proposal in part one, point 4 above). By the time I got a handle on my loans in December of 2017, I owed over $70,000. It was at this time that I saw that they were not ever going to go away on their own. In fact, I never really thought that they would.
This week I did a few polls on Instagram where I asked the following questions:
How do you feel about the outcome of the announced student loan forgiveness?
If you qualified for student loan forgiveness, will you still have a balance after?
Do you have a plan to pay off the rest?
This sample size and group is in no way representative of a valid statistical sample, but nonetheless, the answers were very interesting.
In response to the questions, these were the answers:
How do you feel about the outcome of the announced student loan forgiveness?
- 48% of respondents said: It helps me a lot!
- 8% said: it doesn’t help me…
- 44% said: It wasn’t enough.
If you qualified for student loan forgiveness, will you still have a balance after?
- 96% will still have a balance after forgiveness
- 4% will not
Do you have a plan to pay off the rest?
- 22% of respondents said: Will just pay forever
- 44% said: Plan to pay off the balance quickly
- 33% said: Will just keep hoping for more forgiveness.
What surprised me most about these answers were the responses “It wasn’t enough” and “Will just keep hoping for more forgiveness”. I was surprised by these answers because for me, I don’t recall forgiveness ever being on the table, and I didn’t finish school all that long ago! What I do recall when I borrowed student loans, although this was a very loose understanding, was that after paying back my loans for 20 years, whatever balance was remaining (if there was one), would be discharged. I always understood that they were my responsibility, and I would have to pay them back. So, hearing from people who graduated at similar times to me that they expected any forgiveness or more forgiveness was surprising.[2] It seems as though these answers reflect a lot of the feelings of hopelessness around having large student loan balances.
So, I took to Instagram again and asked what individual’s expectations were about borrowing student loans. Here are some of the responses I received:
“I never thought forgiveness would happen. Def should have thought about it more”
“Pay forever”
“Fully expected to pay them on my own which drove me to public service work.”
“I thought I would easily be able to pay them back with my income from a Master’s degree.”
In my work with clients, a common sentiment I hear is that they feel duped by student loans. My clients didn’t have the foresight to understand what they were signing up for. At 18, or 21, this was a decision that they had no framework for and then they signed up for tens of thousands of dollars of debt without a clear path to earn income or pay back the equivalent of a car or even mortgage. I can understand these sentiments. I assumed that with a law degree, I would earn a lot of money. The reality was, that was a long track and one that I wasn’t confident I could continue.
Our first year of marriage, 2018, my husband and I made a combined income of $88,000. We were both lawyers. I didn’t work for a few months of that year, between moving, planning our wedding and getting married, and then starting a new job, so our next year of marriage, 2019, we made a significantly higher income - $117,000*, combined. Truthfully, this is what I thought one of us would be making. We were lawyers! It was shortly before we got married that I had this realization that our debt wasn’t going away. We paid off all of our debt between December 2017 and February 2020. Our debt totaled over $92,000 – my student loans and a new car my husband and I financed. When we could live on $88,000 a year and were making progress on our debt, then making $117,000 was a huge bonus to us and allowed us to make significant progress.
So, I don’t personally benefit from any of this Administration’s decision to provide student loan relief. But that’s okay and here’s why:
Since we haven’t had any debt since February 2020, we have been able to make big life decisions for our family. Our income is entirely ours – we don’t use it for any past decisions we’ve made. We get to use it for investing in our future.
This leads to the final question I asked on Instagram this week. I asked, “Do you feel like student loans hold you back in any way?” 80% said yes, while only 20% said no.
If student loans are holding you back, don’t hold on to them longer than you have to.
This is the framework I would use in considering how to proceed with student loan debt.
I was asked to address this question. Does it make sense to do the Income-Driven Repayment (IDR) Plan under the new relief plan[3]? We can look at the math and we also have to look at how student loans make you feel and what they do for you.
The new IDR plans make it so you have to pay less than before but will continue to have student loans for very long periods of time, 10-25 years. Ultimately, while the $10,000-$20,000 relief will be a large kick start for many, the relief isn’t designed to help you get rid of your loans any faster.
Back to the framework: Are your student loans holding you back in any way?
When I had student loans, the answer was a very simple yes. When I looked at our budget, the amount of debt payments we had meant that we needed two incomes to live. We could not afford to only have one person work and it held us back because we wanted flexibility to possibly have a stay-at-home parent, explore new careers at some point, or simply, live differently. It was easy to say that having student loans for a long time would mean we couldn’t make some of these choices we knew we wanted to have the possibility of making. (Spoiler: We have since had a career change – me! And, we have both been stay at home parents at some point for almost the entirety of our son’s 2 years of life – neither of which would have been possible with the debt we had).
So, if the answer to this question for you is yes, then I encourage you to do these exercises.
1. Find out how much the monthly payment would be if you paid the balance off in 2 years, 3 years, 5 years or 10 years. I’ve made an interactive resource for you to help you with parts 1, 2 and 3 here. You can find it on the “Resources” page.
2. Look at how much interest you would owe over that same time and compare it to taking 10, 15, or 20 years to pay back the debt.
3. Think about what you would do with that difference in interest.
4. And then, here’s the next challenge: Look back at the last month of your spending and see where your money went. Can you identify all your spending? Is there room to make payments that get you out of debt in 2 years? Or maybe it will take 3. If your student loans are holding you back, don’t let it take more than 5. (I’ve also made a Monthly Spending Mindfulness Review template so you can perform this exercise - you can find it on the “Resources” page).
Are there things you are spending on that are not moving you forward or providing you the life you want, while student loans are holding you back. Can you temporarily pause that spending to focus on eliminating the thing which is holding you back? It’s only moving forward from there, baby.
This relief was a pacifying Band-Aid but it hasn’t had that effect. Many are upset about the amount of relief provided. The relief didn’t help some of those who needed it most. And, most of all, the underlying problem exists – higher education is sold as the gateway or investment for the American dream. Many aren’t prepared for higher education, don’t finish, and ultimately don’t earn the income required to pay the exorbitant costs of higher education. On top of that, proper spending habits are never taught, and consumer spending is encouraged, causing enormous debts aside from student loans as well as extreme stress and burdens.
Student loan forgiveness is not the problem, nor was it the solution. Greater reforms, at the core level need to occur for there to be actual change. What will happen with the students currently in school? Or those graduating high school this year and starting college next?
Final thoughts
I truly hope this relief acts as a springboard for you to experience freedom from the burden of debt, which I know holds so many back from living in a way they truly intend to.
The sooner debt is gone, the sooner policy decisions, or consequences of decisions, don’t affect you. The sooner it’s gone, the sooner you have more resources to use for what you like or to help those you care about. The sooner it’s gone, the greater your resources are to make decisions for the present and future, instead of paying for something (you maybe regret) in the past.
[1] Perhaps you have gotten a little more relief than you thought! As of May 2022, the moratorium on payment of federal student loans has canceled the equivalent of $5,500 per student loan borrower. NYT Article
[2] One of the criticisms of the relief is that it will set a precedent for relief and make future borrowers believe that it is possible, even if it may not occur again. NYT Article
[3] IDR Plans are based on family size and income and payments are based on those factors and repayment periods. But, these plans have been problematic in the past. 98% of people who have applied to have their debt forgiven under these plans had their claims rejected. More reason to take charge yourself. NYT Article
*Something I would be remiss to not point out: The median income in our state (NM) is $51,000, so during the time we paid off our loans, our family of two earning between $88,000 - $117,000 was not all that modest, but according to the relief package, a family earning $250,000 is still low to middle income. Of course, $250,000 has different values depending where you live, but my point is to provide perspective.