September 8, 2022 – By Lauren Schwann
The Biden administration announced plans for federal student loan relief last month. The plans include the cancellation of up to $10,000 in debt for borrowers who meet income requirements and up to $20,000 for Pell Grant recipients. Beyond cancellation, the proposal also extended the pause on loan repayment through the end of the year and introduced a new income-driven repayment plan aimed at lowering monthly payments.
For now, these plans are just, well, plans. And plans can change. Many experts expect the proposal to face legal challenges, so don’t make any big money moves just yet. Here’s what you can do now to prepare for relief, and what it could mean for your budget.
There’s still uncertainty
If the proposal moves forward unchanged, it could still take time for your budget to feel the effects. Loan forgiveness should be automatic for roughly 8 million people because they’ve already supplied income data, according to the Department of Education. The Biden administration aims to make an application available for everyone else by early October. Relief is estimated to come four to six weeks after completing the application.
“There’s still a lot of unanswered questions,” says Kyle Liseno, head of the student loan department at the nonprofit agency American Consumer Credit Counseling. “I’ve been telling people, just kind of stay tuned to studentaid.gov, which is the Department of Education website.” You can also sign up for application notifications on the Department of Education’s subscription page. The application deadline is Dec. 31, 2023. But borrowers are advised to apply before Nov. 15 of this year to get relief before the payment pause ends.
Here’s what could happen if relief withstands legal challenges
It could free up more money for expenses and goals
The newly announced relief plans could erase or reduce a substantial amount of your federal loan debt. (Private student loans are not covered.) The impact on your budget could be massive, especially during a time of heightened inflation and interest rates.
“$10,000 could be a great amount for someone, and it could really help them in terms of just getting back on their feet and getting rid of financial debt,” says Maggie Klokkenga, a certified financial planner in Morton, Illinois.
If you don’t qualify for forgiveness, you’ll still benefit from the pause on loan payments, which has been extended through Dec. 31, 2022 — interest-free. If you keep making payments during the pause, your balance will drop. If you hold off, you can put some of the money you previously spent on payments toward more urgent expenses, such as rent or high-interest debt.
But even if you’re eligible, you won’t be handed a $10,000 check. Klokkenga suggests looking at your previous student loan statements to remind yourself of the minimum payment amount. Then, you can allocate some or all of that amount (depending on how relief impacts your balance) toward saving for an emergency fund and other financial goals, “whether it’s vacation, short term, or whether it’s retirement, long term,” Klokkenga says. “And then you can still have some fun with it, but it’s not to say this is a windfall or that you just won the lottery.”
Liseno says he’s already seen many people pursue financial goals while payments have been paused. “All this deferment has shown that when student loans are off the table, young people are buying homes now. They’re buying cars. That money is going into the economy,” he says.
Think of what you would do with the extra cash if your $300 minimum monthly payment got slashed to $150. Or $0. Klokkenga says using an online tool, such as Utah State University Extension’s PowerPay, can help you create a debt payment or spending plan based on your student loan savings.
You might not feel a difference
Federal student loan payments have been on pause since March 2020. This latest extension should feel familiar.
The relief plan “is going to help a lot of Americans with … their future budgets,” Liseno says. “Because most people haven’t had to pay in almost three years.”
If you took advantage of the pause, you’ve likely already moved money around elsewhere in your budget. Or, if you’ve been responsibly socking the monthly payment amount away in savings, you’ll be accustomed to parting with that money if you still have a balance to pay come January.
Student loan relief plans are still up in the air. It may be tough to predict what will happen with your finances until there’s a clear resolution. In the meantime, stay on top of news and do your best to prepare for different outcomes.