On Wednesday, President Joe Biden announced that the Department of Education would provide up to $10,000 in student loan forgiveness to individuals making under $125,000. He also added a twist: individuals who received Pell Grants as students are eligible for up to $20,000 in relief.
He also extended the pause on student loan payments and interest until the end of 2022.
Thanks to the CARES Act, federal loan borrowers haven’t had to make a student loan payment in over two years. These relief benefits were most recently set to expire on August 31, 2022, before Biden extended them.
This means that payments and interest charges will now resume on January 1, 2023.
Here’s what this means for your student loans — and how to plan ahead.
Student loan forgiveness is here at last
American college grads and their parents owe $1.75 trillion in student loan debt, with an average balance of roughly $30,000.
These borrowers have been waiting for student debt relief ever since Joe Biden promised $10,000 in student loan forgiveness during his presidential campaign.
Now that this forgiveness program has been formally announced, let’s take a look at who it will benefit.
Who qualifies for student loan forgiveness?
According to the announcement, the $10,000 in forgiveness will go to individuals earning under $125,000 per year, or $250,000 per year for married couples that file taxes jointly.
Additionally, Biden announced that individuals who received Pell Grants would receive an increased forgiveness amount of $20,000. Pell Grants are generally awarded to students who come from families with income below $60,000 per year.
Only certain types of federal student loans are eligible. If you have private student loans, this student loan relief package will not apply to them.
What happens to the rest of my student loan balance?
The CARES Act’s student loan benefits were most recently set to expire August 31, 2022. But President Biden just extended the protections until the end of the year.
If you had eligible federal loans, you haven’t been required to make payments and no interest has accrued on your loans since the CARES Act was implemented in 2020.
On January 1, 2023 you will officially begin making payments and accruing interest on any remaining federal student loan balance you have after Biden’s student debt relief.
Planning ahead for January — should you refinance your student loans?
It’s important to have a game plan for the restart of federal student loans on January 1, 2023. Once the CARES Act expires, refinancing your student loans could be a smart idea.
While the CARES Act was in place, it didn’t make sense for you to refinance; payments were suspended, and interest was waived. But once payments and interest resume, student loan refinancing can help you save money and pay off your loans faster.
With refinancing, you apply for a loan from a private lender that is big enough to pay off your existing student loans. Your refinanced loan will have a different interest rate and loan term from what you had previously.
Just how effective is student loan refinancing? Consider this example: Jeff had $50,000 in student loans at 6.7% interest and a 10-year repayment term. Over the course of his repayment, Jeff would pay a total of $68,741; interest charges would cost him over $18,000.
To save money, Jeff decided to refinance his loans. He opted for the same 10-year term and qualified for a 4.80% interest rate. By refinancing his loans, he’d repay a total of just $63,054; refinancing helped him save over $5,600.
In addition, by refinancing, Jeff’s student loan payment went down by $47 per month.
| Original Loan | Refinanced Loan | |
| Interest Rate | 6.7% | 4.8% |
| Loan Term | 10 Years | 10 Years |
| Minimum Monthly Payment | $573 | $525 |
| Total Interest | $18,741 | $13,054 |
| Total Repaid | $68,741 | $53,054 |
| Total Savings: $5,687 |
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What if I can’t afford my student loan payments?
If you cannot afford your payments, consider these alternative strategies for managing your loans:
1. Apply for loan deferment or forbearance
If you have federal loans and are unemployed or dealing with a medical emergency, you might be eligible for a federal deferment or forbearance. With these options, your loan servicer will allow you to temporarily suspend your payments, even after the CARES Act expires.
In most cases, interest will accrue during your deferment or forbearance period. However, not having to make your minimum payments can give you time to find a job or rebuild your savings.
2. Consolidate your loans
Federal loan borrowers can also take advantage of Direct Consolidation Loans. With this approach, you combine your loans into one. When you consolidate, you can extend your repayment term up to 30 years. With a longer loan term, you’ll pay more in interest charges over time, but you’ll also reduce your monthly payments and get more breathing room in your budget.
Consolidating certain loans also can make you eligible for other federal benefits, such as income-driven repayment (IDR) plans. For example, Parent PLUS Loans aren’t eligible for IDR plans unless the borrower consolidates the loan first.
3. Enroll in an income-driven repayment plan
For those who cannot afford their monthly payments under a 10-year Standard Repayment Plan, IDR plans can give you substantial aid. Available only to federal loan borrowers, IDR plans extend your repayment term and base your monthly payment on a percentage of your discretionary income. Depending on your family size and income, you might be able to significantly lower your monthly payment.
Plus, you might qualify for loan forgiveness with an IDR plan. At the end of your repayment term — 20 or 25 years, depending on your repayment plan — your loan servicer will forgive the remaining balance on your loans if you have one. However, the forgiven amount might be taxable as income, so make sure you set aside some money for your tax bill.
4. Refinance to a longer repayment term
When you refinance, you get to choose a new repayment term that fits your needs. Most lenders offer options in the 15 to 20 year range, which can go a long way to easing your monthly expenses.
Here are some examples of monthly payments you could get if you qualified for a 5.0% interest rate on a refinance loan:
Loan Balance | 15 Year Loan | 20 Year Loan |
$20,000 | $158 per month | $132 per month |
$35,000 | $277 per month | $231 per month |
$50,000 | $395 per month | $330 per month |
$80,000 | $633 per month | $528 per month |
$100,000 | $791 per month | $660 per month |
$150,000 | $1,168 per month | $990 per month |
$200,000 | $1,582 per month | $1,320 per month |
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