When the government ends its pause on federal student loan payments — currently set for the end of September — millions of Americans will be forced to dust off their checkbooks, even if their finances are still reeling from the pandemic.
It’s sure to be a stark transition. So this week, a group of lawmakers who have been calling on President Joe Biden to wipe out much of that debt turned up the heat, demanding to know how the Education Department will help people adjust after an 18-month reprieve.
At the same time, a new leader is taking over the office of student aid, stepping into the very center of the raging debate over loan forgiveness.
Education Department must reach millions
Massachusetts Sen. Elizabeth Warren, one of the most vocal advocates of widespread loan forgiveness, says many borrowers are still out of work due to COVID-19 and are scrambling to make ends meet.
“If struggling borrowers are dropped back into repayment on their student loans with no adjustments or support … they could find themselves in default or distress, facing a vulnerable situation and disastrous long-term economic consequences,” she and fellow lawmakers write in a letter to Education Secretary Miguel Cardona.
Biden’s $1.9 trillion stimulus bill that passed in March — the one that provided those $1,400 stimulus checks — allocated around $91 million for the Education Department to help with outreach to borrowers.
“This outreach must go beyond blanket emails and form letters,” the letter reads. “Borrowers will need individualized support to assess their current circumstances, identify the repayment plan that best meets their needs, and navigate enrollment or re-enrollment — a process that is likely to take more than a few weeks for any one borrower and that must be repeated on a scale of millions.”
Federal student loan borrowers have been allowed to skip payments since March of last year, when the government’s first coronavirus relief act was signed into law. The deadline was extended more than once and is now Sept. 30.
Cardona says the department is looking into possibly extending the deadline, media outlets reported this week — but as of now, the deadline is set.
Petition to cancel debt grows by the minute
Warren and her Democratic allies in Congress say student loan forgiveness would help consumers move forward in their lives, whether that’s buying a home, starting a business or investing for their futures.
Now, more than 1 million Americans — and growing — have signed a Change.org petition compelling the president to cancel federal student loans by executive order.
Democrats and consumer advocacy groups want Biden to use executive authority to cancel $50,000 in student loan debt per borrower. The president has said he is willing to cancel up to $10,000 per borrower and has asked Cardona to look into whether he can cancel more without Congressional approval.
It’s no exaggeration to say the future of the economy is at stake, according to Student Loan Justice, the group that sponsored the petition.
“Trillions could be injected into the economy with no tax money needed, and nothing added to the national debt,” the petition reads.
Some analysts, however, say the argument that broad forgiveness will provide an oversized boost to the economy is flawed.
“Unless your debt is completely erased, loan forgiveness doesn’t provide immediate financial relief,” said student loan expert Mark Kantrowitz, author of the book How to Appeal for More Financial Aid, in a recent interview with MoneyWise. “It provides mid-term to long-term financial relief because it reduces the number of payments you’re going to have to make. It doesn’t cause your monthly payment to go down.”
A new leader steps in amid the fray
As the debate continues, an ally of Warren’s was appointed this week to head the Education Department’s office of Federal Student Aid, which manages the government’s financial assistance programs for students.
The FSA’s new chief operating officer, Richard Cordray, is the former director of the Consumer Financial Protection Bureau, which Warren helped create, and former attorney general of Ohio.
Warren praised the appointment, saying Cordray would bring “much needed accountability to the federal student loan program.”
Many borrowers have already received some relief from the White House. Since taking office, Biden has forgiven $2.3 billion in student loans and has made canceled loans tax-free until 2026. Normally, forgiven debts are taxed as income.
And in his recent address to Congress, he presented several proposals that could lessen the amount of college debt taken out by students in the future.
In outlining his $1.8 trillion “American Families Plan,” he proposed offering two years of free community college and increasing the maximum federal financial aid award by around $1,400 for low-income students.
What if you’re struggling and need relief now?
While Congress weighs its options, you already have a few ways to gain some financial wiggle room if you’re facing overwhelming debt from your college days.
You could look into refinancing your student debt. Interest rates on private student loans have hit record lows, so replacing your debt with a new loan from a private lender could cut your payments substantially.
But don’t forget that refinancing out of a federal loan would disqualify you for relief if more federal forgiveness comes along.
Interest rates have plunged for mortgages, too. If you’re a homeowner, you could consider refinancing your loan with a cheaper rate. Some 13 million homeowners still have an opportunity to save hundreds of dollars a month by switching loans, according to mortgage data and technology firm Black Knight.
Finally, look into some ways to grow your income without stretching your tight budget. A popular app helps you earn returns in the stock market just by investing your “spare change”.