In 2022, the landscape of student loans was a chaotic muddle. It is understandable that borrowers of federal student loans are confused about the current state of affairs.
In August 2022, President Joe Biden offered to forgive between $10,000 and $20,000 in federal student loan debt per eligible applicant, but the situation is currently being held up in court. A staggering number of times since March 2020, payments on federal student loans have been temporarily suspended, only to be suspended again at the last minute.
To prepare for 2023, you should be aware of potential changes to the Public Service Loan Forgiveness Program, including a new repayment plan that is (potentially) in the works. Here are a few of the most important changes to federal student loans that you should know about if you're curious about what the future holds for you and your finances in this area in the year 2023.
To begin, regardless of what student loan "experts" are saying right now, Biden's student loan forgiveness plan may or may not be implemented in 2023. Everything hinges on what the Supreme Court says about it after hearing formal arguments at the end of February.
This ultimately means that the federal student loan debt forgiveness of $10,000 (or $20,000 for Pell Grant holders) for qualifying borrowers may never occur. At this point, borrowers can still hope for the best, but it appears at least somewhat plausible that the entire proposal will be scrapped.
Probably not until a few months after the oral arguments have been presented; therefore, don't expect to learn this until closer to the summer.
Despite the several extensions, borrowers with federal student loans will almost certainly be required to resume making payments in 2023. The start of repayment will be delayed until the Supreme Court rules on Biden's plan to cancel student debt. On its official website, the United States Department of Education states:
"The student loan payment pause is extended until the U.S. Department of Education is permitted to implement the debt relief program or the litigation is resolved. Payments will restart 60 days later. If the debt relief program has not been implemented and the litigation has not been resolved by June 30, 2023 — payments will resume 60 days after that. We will notify borrowers before payments restart."
Future extensions of the payment suspension are unlikely given that the Biden administration has already announced that the Covid-19 State of Emergency would likely terminate in May. The only question is whether or if the administration would try to sneak in one more extension before the end of the Covid-19 emergency.
Borrower defense to repayment is a term used to describe the discharge of some or all of your federal student loan debt, according to Studentaid.gov. It can be used "if your school misled you or engaged in other misconduct in violation of certain state laws."
According to the US Department of Education, several changes to this program will take effect on July 1, 2023:
- Borrower defense to repayment may be applied automatically to groups of students.
- Loans can be discharged under an expanded list of claims through borrower defense to repayment.
- Schools will be barred from requiring students to "participate in pre-dispute arbitration or sign class action waivers."
- Borrower defense to repayment claims must be resolved within a certain time frame, or the loans will become unenforceable.
When borrowers are charged interest, it is added to the principal of their loan balance. As a result, interest is charged on interest, and loan balances have the potential to balloon.
A new US Department of Education rule prohibits the capitalization of interest when it is not required by statute.
"This means interest will no longer be added to a borrower’s principal balance the first time a borrower enters repayment, upon exiting a forbearance, and leaving any income-driven repayment plan besides Income-Based Repayment," studentaid.gov explains.
This rule also applies to Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans, according to the website.
When Biden introduced his new student debt forgiveness plan, the program's fact page included a new income-driven repayment plan designed to assist qualified borrowers in making lesser payments (or no payments) on their federal student loans.
"The Department of Education is proposing a new income-driven repayment plan that protects more low-income borrowers from making any payments and caps monthly payments for undergraduate loans at 5% of a borrower’s discretionary income—half of the rate that borrowers must pay now under most existing plans. This means that the average annual student loan payment will be lowered by more than $1,000 for both current and future borrowers. "
The proposed modifications update the REPAYE program so that borrowers can become eligible for loan forgiveness in as little as 10 years, and in no case more than 20 years for undergraduate loans. However, the exact implementation date is still up in the air.
The administration seems committed to launching the program by the end of 2023, but that may not happen until 2024 at the earliest.
“ Loan Forgiveness is still up in the air, and there are a lot of people claiming that it will happen or that it won't happen, I prefer to err on the side of the more conservative option. Therefore, I advise people to save their money while they still can.” - Jen Swindler
1) Budget as though the payments will resume, and if they don't, that's wonderful news: you'll have extra cash available for future expenses. If payments are to restart, it is expected that they will do so within the following six months. You should factor that into your budget, as the timing may be sooner than you think, depending on the outcome of the loan cancellation.
2) Following this, a new rule will prevent interest from being capitalized, or added back to the principle of your loan sum, in the event that you enter repayment, switch payment plans, or exit forbearance. A new repayment plan may be implemented, capping payments at 5% of monthly income instead of the previous 10%.
3) Last but not least, the threshold for qualifying for Public Service Loan Forgiveness will be lowered to 30 hours per week of full-time employment. So, it may have an effect on persons who weren't qualified for eligible work before.
Resource: PSLF Limited Waiver Changes: What You Need To Know
Read blog: Student Loan Forgiveness - What You Need To Know
Watch video: $10,000 Student Loan Forgiveness: What You Need To Know
The takeaway is that you should always be ready for the unexpected. Treat any potential loan forgiveness money as extra savings for the time being and budget for conservative outcomes. Paying back your loans may be necessary in the future, so be prepared to do so.
Jen Swindler, CFP®, AFC®, MFPA is a Senior Wealth Manager and a Student Loan Analyst at Vincere Wealth. She works with clients to help them take financial control and make a plan to reach their money goals.
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To prepare for 2023, you should be aware of potential changes to the Public Service Loan Forgiveness Program, including a new repayment plan that is (potentially) in the works. Here are a few of the most important changes to federal student loans that you should know about.
To prepare for 2023, you should be aware of potential changes to the Public Service Loan Forgiveness Program, including a new repayment plan that is (potentially) in the works. Here are a few of the most important changes to federal student loans that you should know about.
To prepare for 2023, you should be aware of potential changes to the Public Service Loan Forgiveness Program, including a new repayment plan that is (potentially) in the works. Here are a few of the most important changes to federal student loans that you should know about.
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