Should You Wait on Student Loan Forgiveness?April 30, 2021
When President Joe Biden was running for office, student loan forgiveness was one of his campaign promises. Specifically, Biden pledged to forgive up to $10,000 in federal student loan debt. And some Democrats are calling for even bolder action, with progressives on the left urging the Biden Administration to forgive as much as $50,000 in unpaid educational debt.
If you currently owe money on your student loans, the possibility of having that debt wiped away may have you wondering if it makes sense to pay off student loans or wait for forgiveness.
Here’s what you need to know to help you decide.
Does it make sense to pay off student loans or wait for forgiveness?
When deciding what to do about paying your student loans while waiting for possible debt forgiveness, the first key question is whether you have private or federal student loans.
President Biden’s forgiveness plan would likely apply only to federal student loans issued by the Department of Education. There are currently no viable proposals to forgive private student loan debt. As a result, if you have these types of loans, there’s no reason not to work on paying them down.
Private student loans also don’t come with other borrower protections federal student loans provide, and they often have a higher interest rate. Repaying your private student loans ASAP can be a smart choice, as can refinancing them if you can qualify for a new loan at a lower rate in order to make payoff easier.
If you have federal student loans, though, things become a little more complicated. This type of debt potentially could be forgiven if President Biden follows through on his campaign pledge.
What to do if you have federal student loan debt
If you have federal student loans, you’ll need to consider your options carefully when deciding if you should pay off student loans or wait for forgiveness.
First and foremost, when administrative student loan forbearance ends, you may want to make at least the minimum payments on your student loan debt, even if you’re hoping to have the balance forgiven.
Interest rates and payments on federal student loans are suspended through September 30, 2021, so you do not have to make payments until then unless you want to. But once interest starts accruing again, making payments ensures your loan balance won’t grow over time. That’s important in case forgiveness doesn’t occur.
Making all your required payments is also necessary to keep your loans out of default, which can have serious financial consequences including negatively impacting your credit score.
How much do you owe?
You also need to be aware that forgiveness is not guaranteed, and that there will be a limit on the amount of student loan debt that is forgiven — even if it occurs.
If you have more than $10,000 of student loan debt, chances are good that only part of your loan balance will be forgiven, if any debt is wiped away at all.
As a result, you may want to continue making progress on reducing your balance at least down to that level. If you have the money to do so, that could mean paying extra towards your loan balance once student loan payments resume, to speed your repayment process. Or it could mean making payments during the administrative forbearance period.
By making extra payments or paying on your loan when interest isn’t being charged, more money would go to reducing the principal balance each month. This means you could pay less interest over time and reduce your balance below the forgiveness threshold more quickly.
Forgiveness isn’t a sure thing
If your loan balance is under $10,000, you may be tempted to avoid paying now while administrative forbearance is in effect — or even to put loans into deferment or forbearance if you qualify once payments resume in October.
After all, if you can hold off on making payments until your loan is forgiven, you might not have to send any more money to your lender. Unfortunately, this strategy could backfire on you because forgiveness is far from a done deal.
President Biden has made clear that he supports forgiving up to $10,000 in student loans. He’s also recently asked the Secretary of Education to prepare a report assessing the legality of the President eliminating up to $50,000 in debt.
However, the President can take one of two approaches with loan forgiveness:
- He could act via executive order and make a unilateral decision on his own to cancel some student debt.
- Or he could encourage Congress to draft legislation forgiving student loan debt, which he would then sign into law.
Forgiveness by executive order
The problem is, it’s not yet clear if the President has the authority to act unilaterally and forgive debt held by the Department of Education.
If he does take this action, it will likely be challenged in court. That means it could take years for student loans to be forgiven, or it may never happen if the court decides President Biden’s action is an abuse of his executive authority.
Forgiveness by Congress
If the president does not take executive action, then Congress would need to pass a bill forgiving student debt, which may present a challenge. Democrats have only a narrow minority in the House of Representatives and would need almost every vote to pass the bill. Passing this type of bill would be even more difficult in the Senate, where Democrats have just 50 votes.
Make smart financial choices today
Don’t let speculation about the future affect your ability to make the right choices today. When deciding if you should pay off student loans or wait for forgiveness, consider your specific circumstances.
If you have private student loans or more than $10,000 in federal student loan debt, working on paying down your loans is likely the best move.
And even if you have debt that could potentially be forgiven if the Biden Administration acts, you can’t count on student loan forgiveness. In the meantime, it may be wise to continue making at least your minimum payments while watching Washington, D.C. for signs of progress on student loan relief.