Since March of 2020, we’ve seen some interesting changes occur to the rules and guidelines surrounding student loan debt, particularly with federal education loans. In light of the Covid-19 pandemic, many borrowers were put at a financial advantage when mandatory repayment and interest accrual was put on pause through the CARES act.
Now that we’re in a new year and new phase of the pandemic, the rules surrounding federal student loan debt continue to evolve and change. In this article, we’ll take a look at what’s new on the horizon for federal student loans in 2022.
Federal loans
By now, most graduates with any government-held student loan debt are aware of the Department of Education’s pause on student loan repayments, interest accrual and collections on defaulted loans. This administrative forbearance was put into effect in March of 2020 when the CARES Act relief package was passed. This allowed borrowers to reallocate their income during the Covid-19 pandemic and minimize financial hardship.
Originally set to end February 1st of this year, the Department of Education has extended this pause on student loan repayments, interest, and collections. This will remain in effect until May 1st, 2022.
This also includes the garnishment of wages for those who have defaulted on their federal student loans. All borrowers with federal student loan debt will be required to resume payments on May 1st, 2022.
New grad ODs in the position to make extra payments on their loans, could make significant gains on the principal balance of their educational debt during this temporary pause period where interest rates are 0%. Those pursuing Public Service Loan Forgiveness however should hold off and pay as little as possible (or nothing!) as the rules have changed. More to come on this below.
New grads needing more time to prepare for loan repayment this spring may also apply for additional federal forbearance through an economic hardship or unemployment deferment request. This can extend repayment requirements for up to 36 months. Switching to an income-driven repayment (IDR) plan may also be helpful as well.
There is also discussion around President Biden’s possible automatic forgiveness of $10,000 in student loan debt across the board to all borrowers with federal education loans. This would not only cut $10,000 off the principal balance but would also save the average borrower over $13,000 on interest payments as well.
Private loans
Unfortunately, most private student loan lenders are operating business-as-usual, despite the pandemic. Most of these companies are willing to work with borrowers in times of financial hardship. Some lenders are offering modified payment plans (eg. interest-only payments) as well as 3 to 9 month emergency forbearance periods where repayment can be put on pause. Every lender is slightly different so be sure to check and see what your options are.
Refinancing to a longer term can also help students and new grads with private loans to lower their monthly payments.
Anyone with federal educational debt should be aware that by refinancing federal education loans, forfeiture of any federal benefits and protections will occur. These include income-driven repayment plans, Covid-19 administrative forbearance and student loan forgiveness.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) program has also been significantly impacted by Covid-19. The PSLF program originally allowed for nonprofit and government employees to have the remainder of their federal educational debt to be forgiven after making 120 consecutive qualifying payments.
When it comes to qualifying for the PSLF program, it depends more on your employer than on the specific job you’re doing. Qualifying employers include:
- Government organizations, such as the IHS, the VA, or the US military, among others
- Non-profit or charitable organizations with tax exemptions under Section 501(c)(3) of t he Internal Revenue Code
With recent changes to the program, borrowers previously not enrolled in PSLF are now able to use any prior federal loan payments to count towards loan forgiveness, should they find themselves on a new career path that qualifies them for PSLF.
New grads still carrying Direct Federal Loans (excluding Parent Plus loans) will be eligible for Public Service Loan Forgiveness using any previous full or partial loan payments regardless of whether these payments were made late or on time.
These will all count towards the requirement of 120 total payments. Also, the number of months during this temporary pause on mandatory Federal student loan repayments (March 2020 - May 2022) all still count towards loan forgiveness (even if no current payments are made).
Any student loan payments that were made during the pause (since March of 2020) are also eligible for a full refund. Any months that a borrower receives a refund will still count towards PSLF.
Under these recent changes, eligible borrowers who apply for PSLF now will also be able to count more of their prior student loan payments toward the program. This loophole is available for borrowers through October 31st, 2022. Those with Federal Family Education (FFEL) loans or Federal Perkins loans will need to consolidate their educational debt to the Direct loan program by this date in order to qualify for PSLF. These changes will bring over 500,000 borrowers an average of two years closer to debt cancellation through the PSLF program.
New grads who are not pursuing PSLF can consider refinancing their student loans with a private loan servicer in order to lower interest rates and reduce monthly payments. Unless a practice modality qualifies for PSLF, refinancing to a lower-interest private loan is typically the smarter financial decision over the long run. Again, one thing to consider is that once a federal loan is refinanced, it can no longer qualify for the various government benefits like IDR, Covid-19 administrative forbearance or PSLF.
No more tax bombs (through 2025)
A new provision was included in the American Rescue Plan, a $1.9 trillion stimulus package passed late last year making all student loan debt canceled by the federal government to be tax-free. In the past, any federal educational debt that was canceled was treated as income to the borrower and therefore subject to ordinary income tax. Some forgiveness programs like PLSF typically did not result in a tax bomb on the remaining forgiven balance, however other forgiveness programs like IDR or Pay As You Earn (PAYE) did. Now ALL forgiveness programs are tax-free through January 2026.
Key takeaways
- Mandatory repayment on all federal student loans will begin in May 2022 - regardless of whether or not borrowers are pursuing PSLF. They have been on pause since March of 2020 - including mandatory payments, interest accrual, and collections on defaulted loans.
- Those pursuing PSLF are not required to make any student loan payments during the temporary pause on loan repayment (March 2020 - April 2022). These ~25 months will all count towards the mandatory 120 payments required for PSLF - regardless of whether or not borrowers have made any payments. Those that have made payments during this period may be eligible for a refund.
- Federal loan borrowers not previously pursuing PSLF are now able to apply any and all previous full/partial loan payments towards PSLF - should they find themselves on a new career path that qualifies them for PSLF.
- Borrowers who know they’re not going to pursue PSLF should consider switching to IDR/PAYE federal repayment options (automatic loan forgiveness after 20-25 years based on scenario) or refinance with a private loan servicer and pay off their educational debt sooner.
- ALL loan forgiveness is now tax-free, regardless of plan (PSLF, IDR, or PAYE)
- Depending on the company, most private student loan servicers will have a variety of options available to borrowers facing financial hardship. While likely less forgiving than the federal government, these private companies are willing to work with borrowers to help avoid defaulted loans. Borrowers facing financial hardship should check with their private loan servicer to see what their options are.
Conclusion
With the regulatory changes made around federal education loans during the pandemic, borrowers must stay abreast on updates surrounding their finances. While federal loans typically carry higher interest rates, staying with them during the Covid-19 pandemic may prove to be a smart financial decision in the long term.
Borrowers should use this time to reassess their financial strategy in tackling their student loan debt and consider all of their options in light of recent changes made over the past two years.
