If you are one of the millions of borrowers with federal student loans, the past two years have been a relief. Since March 2020, 95% of federal borrowers haven’t had to make payments toward their loans thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Plus, interest rates were reduced to 0%, so interest didn’t even accrue.
Unfortunately, that’s all about to come to an end. Along with the end of the CARES Act, there will be other adjustments. Here’s what to expect from the 2022 student loan changes and what you can do now to prepare.
2022 Student Loan Changes to Watch For
1. Many Borrowers Will Be In Default
As of June 2021, over 8 million federal loan borrowers were in default. Thanks to the CARES Act, borrowers in default didn’t have to worry about collections costs, wage garnishment, or other measures.
However, the CARES Act’s student loan relief initiatives will come to an end on May 1, 2022. Borrowers that were in default before will still have their default status, so they should expect collections agencies to start pursuing repayment.
If you’ve defaulted on your loans, start planning for May. You may be able to get out of default through consolidation or student loan rehabilitation.
2. Payments Will Likely Resume
Since March 2020, you haven’t had to make payments toward your federal student loans. You may have had hundreds of dollars more in your budget each month, making it easier to pay your bills and save for other goals.
Update 4/6/2022: On April 6, 2022, The Biden administration announced that it is again extending the payment pause on federal student loans through August 31, 2022.
3. Interest Rates Will Increase
During the COVID-19 pandemic, federal student loan interest rates reached historic lows.
Now that the CARES Act is ending, you may expect big changes to student loan interest in 2022. Already, there have been some significant increases. Federal PLUS loans went from 5.30% in June 2021 to 6.28% today, and undergraduate loans went from 2.75% to 3.73%.
Keep in mind that for many borrowers, your interest rate will be the same on your current federal student loans as it was before the 0% interest began. However, your interest rate may have changed if, for example, you consolidated your loans during the payment pause. Contact your loan servicer for your exact interest rate.
With inflation concerns, the Fed has hiked interest rates. Therefore, federal interest rates will likely follow suit and continue to rise.
4. There Will Be Changes to Income-Driven Repayment
The Department of Education established a new rulemaking committee to consider changes to IDR plans. While these measures aren’t the widespread forgiveness programs that borrowers hoped for, they may make it easier to enroll in an IDR plan.
The measures discussed include:
- Lowering the discretionary income limit to make payments more affordable.
- Caps on unpaid interest that accrues to reduce total repayment
- Simplifying the application process so more borrowers can take advantage of IDR plans
5. Loan Forgiveness Will Be Tax-Free
Borrowers enrolled in IDR plans can qualify for loan forgiveness if they still have a balance at the end of the 20 or 25-year loan term. However, this could come with a nasty surprise. Previously, the forgiven balance was taxable as income, causing borrowers to get huge, unexpected tax bills.
That’s changing now. In 2021, the Biden Administration adjusted the rules so that loan forgiveness is tax free through 2025. If your loans are forgiven in 2022, you won’t have to worry about paying taxes on the discharged amount.
6. More Employers Will Offer Repayment Assistance
As of 2020, just 8% of employers offered student loan repayment assistance. However, that percentage will likely grow in 2022.
Under the Consolidated Appropriations Act that was passed at the end of 2020, employers can make tax-exempt student loan repayment contributions of up to $5,250 through 2025. That’s a significant advantage for companies, making it likely that student loan repayment assistance will become a more common benefit this year.
Preparing for Student Loan Repayment
With the upcoming 2022 student loan changes, it’s essential to come up with a plan to repay your student loans before federal loan repayment resumes in May. Review your loans and if you can’t afford your payments, talk to your lender about alternative payment plans and forbearance to avoid falling behind.
If you’re considering refinancing to lower your interest rate or extend your loan term, you can get a rate quote from ELFI without impacting your credit score.
