Monthly Archives: August 2022

A Rundown of that Big Student Loan Announcement

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This was a big week for financial aid news.  On Wednesday President Biden announced a plan to forgive up to $10,000 in student debt for some borrowers and up to $20,000 for other borrowers.  And there was a lot of other good news bundled in there as well.  Here’s the good, the bad, and the ugly of what I know so far.

The good is that this will bring a lot of relief to a lot of student loan borrowers.  Any borrower with outstanding Federal Direct Student Loans as of July 2022 will receive up to $10,000 in forgiveness on their loan balance if their income for 2020 or 2021 was less than $125,000 for single tax filers, or less than $250,000 for joint filers.  If those same borrowers also received a Pell grant for their undergrad study, they will receive up to an additional $10,000 in forgiveness, for a total of $20,000.  Nobody is going to receive forgiveness of more than their current balance, but some borrowers may be fortunate enough to have their total outstanding balance forgiven.  The details of how this is all going to work is still a bit fuzzy.  It’s my understanding that if the Department of Education has the borrower’s income on file already, either from an income-driven repayment plan or from a current FAFSA form, there won’t be an application process required—the forgiveness should process automatically.  For those without income information on file, there will be an application process.  I’ve heard that the application will be short and simple, but that remains to be seen.  I’ve heard conflicting information about whether this application will become available in September or October of this year, but I’m sure we’ll know soon.  And there is a catch for those in their first year of graduate study this year.  If you were a dependent student for financial aid in the 2021-22 academic year, this will all be based on your parents’ income, not on your own.

The other big news in the announcement was yet another extension of the pandemic-related payment pause on federal student loans that began in March 2020.  Since that time all Federal Direct Loans have not required any payments, and the interest rate on these loans has been set at 0%.  These terms have been extended one last time, through December 31, 2022.  Repayment will resume in January for those borrowers not in another deferment status (like the in-school deferment while you are working on your law degree).  And loans will start accruing interest again in January.

These two things are the hot topics in the news, but there was additional good news tucked away in Biden’s announcement, which I think are even more exciting than the hotter, sexier topics.  The Department of Education is planning to make a major change to the way unpaid student loan interest is managed.  Previously, when a borrower with large student loans was making payments on an income-driven payment plan, the amount the borrower paid was oftentimes less than the amount of interest accruing.  And that extra interest was added on to the principal of the loan.  This is called negative amortization.  The borrower was making regular payments and their total amount due was growing rather than shrinking.  This is going to change going forward.  While it may take a while for the details to be released, the announcement on Wednesday claimed an end to the process of negative amortization.  If you make an income-driven loan payment (even a payment of $0), no extra interest will accrue.

The final piece of the announcement involves the creation of a new income-driven payment plan, which will be much more favorable to borrowers than the existing plans.  Existing plans calculate the monthly payment based on 10%, 15%, or 20% of the borrower’s “discretionary income,” dependent upon the plan.  This new plan will calculate that at 5% of discretionary income for undergraduate debt, but sadly will maintain the 10% calculation for graduate level debt.  There will be some kind of weighted calculation for those with both graduate and undergraduate debt.  But this new plan will still be an improvement even for those with only graduate level debt, because the definition of discretionary income is changing as well.  On the existing income-driven plans discretionary income is 150% of the current poverty guideline.  On the new plan that will be 225% of the poverty guideline, so the portion of the borrower’s income protected from inclusion in the student loan payment calculation is larger.

That was a lot of information for one little Presidential press conference.  And not everyone is happy about it.  Any kind of loan forgiveness comes with questions about equity.  Some think any forgiveness at all is too much (and I’m actually anticipating delays in implementation due to legal challenges from this camp).  Others think $20,000 is not near enough.  I’m still conflicted myself about the forgiveness portion of this, but I’m not angry and not begrudging anyone the forgiveness they may receive.  I think it will help a lot of people. But the other parts of the announcement are the more important parts, as they are solid first steps toward fixing a student loan system that hasn’t been serving students particularly well for some time now.  In a perfect world, my job as a financial aid administrator would be completely unnecessary because education would be affordable to all.  But we don’t live in a perfect world.

I’m sure that there is still a lot of clarification to come on all of this.  I’ll be watching for updates at https://studentaid.gov/debt-relief-announcement/ and through my many financial aid administrator networks.  When there is more news to share, you will certainly hear from me.  Until then, I hope that you are able to find some joy in all of this news.

Happy New Year!

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Happy new year!!!  I know that most people celebrate the new year on January 1.  But for those of us who live our lives in higher education, the new year always starts in late August and ends in mid-May. The months in between are simply a big blur of trying to squeeze in some vacation time while still working at breakneck speed to make sure everything is ready in time for the new year.

For many folks the new year involves making resolutions.  And a very popular resolution is about building a budget to manage your money.  If that B word scares you, call it a spending plan instead.  It somehow sounds less like a punishment and more like a goal that way.  Unless you are independently wealthy (which is rare among students), a spending plan of some sort is a necessity to make sure you have enough money to get through the semester.  Otherwise you could find yourself surviving on a menu of ramen noodles three times a day by the time you get to exams, when you most need some decent nutrition to power your brain.

There are a lot of online tools available to help build a spending plan.  I’ve tried a bunch of them, but I always end up coming back to a good old-fashioned spreadsheet.  It’s tried and true and does exactly what I want it to, giving me flexibility to manipulate and analyze my own data.  I like to start with my monthly income—that stays the same every month.  Then I subtract fixed expenses like my housing, insurance, debt payments, and utilities.  Then what is left over is what I have left to divide among the things that can be flexible from month to month, like food, gasoline, entertainment, medical expenses, and clothing.  All of these are necessary in my life, but I can spend varying amounts depending on the month.  If I spend more in one category, I may have to carve it out of my spending in another category.  And I always put some money in savings each month for future emergencies to prevent the need for future adjustments to my normal spending plan.

Things work a little differently for students living on student loans funds during the academic year.  You may be receiving a large refund at the start of the semester that you need to portion out over the full semester.  I generally recommend putting the lump sum into a savings account.  Some of the online banks are actually starting to pay a somewhat reasonable interest rate again, rather than just a fraction of a percent, so a savings account can actually earn you a bit of money.  Then each month you should transfer a designated amount to your checking account, so it is more readily available for that month’s expenses.  But once that month’s money is gone, don’t let yourself transfer more until the next month’s designated “pay day.”  That will make it easier to keep some control over your spending plan.

It’s the start of a new year.  It’s a fresh start.  New semester.  New classes. New people to meet. For many, a new place to live.  A new spending plan.  Now is your chance to get the year started right.  Happy new year!!