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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.

What’s New(ish) in Student Loans

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Throughout the pandemic some interesting things have been happening in the world of student loans—some pandemic-related and others that just fell into this timing.  And if you have student loans, you really should know what is going on.

The Pause

In March 2020, when the pandemic started to hit hard in the U.S. and we learned all about lockdowns and quarantines, all federal student loans (including Direct Subsidized/Unsubsidized and Grad PLUS) were placed in a payment pause.  The idea was to make life easier for student loan borrowers while we all deal with this whole global pandemic thing.  For those in loan repayment, this made it so the required minimum payment on loans has been $0.  And the pause has had another benefit that has helped those currently in school as well as those in repayment:  during the pause the interest rates on all federal student loans have been set to 0%.  This means that no interest has been accruing on federal student loans for almost two years.  That adds up to thousands of dollars in savings for a typical law student.  The pause has been extended a couple of times as the pandemic has dragged on, and it is currently set to expire on May 1, 2022.  If there is not another extension, on May 1 loans will go back into repayment and their interest rates will reset to their original rates.  Brace yourself…it is coming.

The Loan Servicer Shuffle

When a student borrows a Federal Direct student loan, those loans are each assigned to a loan servicer contracted by the Department of Education (ED) to be in charge of managing that loan until it is repaid.  In the year 2021 three major loan servicers decided not to extend their contracts with ED and are exiting the Direct Loan servicing business.  Granite State Management and Resources is the smallest of these three.  Granite State loans will be transferred to EdFinancial, another experienced Direct Loan Servicer.  The other two servicers exiting the business are much larger and will impact a larger number of borrowers.  Navient (formerly a part of Sallie Mae) will be moving their loan portfolio to Aidvantage, which is a division of Maximus Education.  Maximus is experienced in Direct Loans as the collection agency that works on defaulted loans for ED.  Finally, FedLoan Servicing (a division of PHEAA), the servicer that handles all Public Service Loan Forgiveness loans (in addition to many others), will be transferring all of their Federal Direct Loans to MOHELA, yet another experienced Direct Loan servicer.  What this means is that if your loans are currently held by Granite State, Navient, or FedLoan Servicing, your loans are on the move.  If you have not already received notification that your loan has been transferred, that notification will be coming soon.  This does not change any of the terms of your loan.  It simply changes who you need to be in contact with regarding the loan.  Also, if you were on an income-driven payment plan and your loan has moved to a new servicer, you should contact that servicer to make sure your income-driven plan is set up in your loan’s new home.

The PSLF Limited Waiver

The Public Service Loan Forgiveness limited waiver doesn’t really impact currently enrolled students, but I know I have some alumni readers out there who can benefit.  Plus I find this whole issue pretty fascinating.  When the Public Service Loan Forgiveness (PSLF) program first began, there was a lot of chatter on Capitol Hill about how expensive the program would be, assuming that everyone who ever thought about working in public service was going to have tens of thousands of dollars in loans forgiven.  But when we finally (several years later) arrived at the point where borrowers were eligible to apply for forgiveness, almost nobody was approved.  Maybe they had the wrong kind of job.  Maybe they had the wrong kind of loan.  Maybe they were on the wrong payment plan.  There are multitude of reasons why a borrower can be denied PSLF, and this limited waiver allows a reprieve for some of those reasons.  The “wrong kind of loan” issue can be corrected retroactively with a Direct Loan Consolidation.  The wrong payment plan issue can be waived during this time.  The wrong kind of work issue, however, cannot be overlooked.  ED did a deep dive review of all the applications that were denied, and found that many of them could be approved under the terms of this waiver.  And as an extra added bonus, many borrowers who had made additional payments after they were technically eligible for forgiveness had those extra payments refunded to them.  It’s been a huge help to a lot of public servants.  But it is, indeed, temporary. This limited waiver expires on October 31, 2022.  So if you are in repayment and think you may benefit, it is important that you complete the PSLF Help Tool  before the end of October in order to make sure as many payments as possible count toward your 120 qualifying payments needed to earn forgiveness.

There’s been a lot happening behind the scenes in the world of student loans over the last two years.  I hope this helps to keep you in the know.  Questions can always be directed to your loan servicer.  Or to your friendly neighborhood law school financial aid director who always enjoys talking to students and alumni alike.