How To Develop A Debt Resolution Strategy
As long as you are not required to repay federal debt, it is a great time to think about your debt challenges. Keep in mind that once debt repayment is resumed, loan servicers will be extremely busy. Hence, they might not provide the service and the help you need. Here are a few steps to start your plan:
Make Idr Student Loan Forgiveness Later For Graduate Loans
While undergrad loan forgiveness would speed up under Trumps plan, grad loan forgiveness wouldve taken longer.
Under Trumps plan, graduate borrowers wouldve needed to make 30 years of payments before qualifying for forgiveness. Thats five years longer than current IDR plans for graduate loans.
There are more undergraduate borrowers compared with graduate borrowers. Its unclear exactly what the effect wouldve been on overall cost of changing the length of IDR forgiveness, but it would likely have cost borrowers money overall.
Elimination Of Subsidized Student Loans
Trump has also proposed the elimination of subsidized student loans in his 2019 budget proposal. Subsidized student loans provide student loan borrowers with significant assistance – with the government paying for interest accrued during school. This can result in significant savings for borrowers.
The government issued 5.7 million subsidized student loans in the 2016-2017 school year. These loans go towards students with a financial need, based on filling out the FAFSA.
These loans only go towards students who have a financial need. They will still borrow to pay for college, but now it will be more expensive.
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Trump Student Loan Legislation That Has Been Passed Into Law
Removed Obama-Era Protections for Borrowers
In 2015, President Obamas Administration issued a memo that prohibited debt collectors from charging high-interest rates on past-due student loans. The memo only applied in cases where borrowers entered a federal loan-rehabilitation program within 60 days of defaulting on the loan. It restricted the bank-based Federal Family Education Loan Program from charging up to 16% in interest. Basically, borrows seeking to rehabilitate their loan were to be spared from harsh collection fees.
In 2017, the Department of Education, under the Trump Administration, issued a memo that removed the 2015 Obama-era protection for student loan borrowers who want to rehabilitate their FFEL loans. By making rehabilitation of privately held loans less attractive, borrowers are more likely to skip rehabilitation and immediately consolidate their FFEL loans into the Federal Direct Loan Program to take advantage of income-based repayment programs. When borrowers take this action, it moves loans from private balance sheets to the federal government, growing the federal governments involvement.
Trumps Current Proposed Changes
Here are a few initiatives that the Trump Administration currently has in the works:
Accelerate Program Completion
Expand Pell Grant Eligibility
Cut Funding to Work Study
Limits for PLUS Loans
College Financial Aid Office Reform
Cut Funding to the U.S. Department of Education
Loan Forgiveness For Nurses
Registered nurses, nurse practitioners and members of nursing faculty, who work in high-need population areas or areas where there is a critical shortage could qualify to have up to 85% of their loans forgiven under the NURSE Corps Loan Repayment Program.
Qualified candidates can have 60% of their student loans forgiven for working two years in an underserved area. Another 25% could be forgiven for working three years.
Some states also offer loan repayment assistance. Go to the Loan Forgiveness for Nurses website to see if yours is one of the 33 states that has one and what the eligibility requirements are.
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Tuition And Fees Deduction No Longer Available
The Tax Cuts and Jobs Act eliminated the Tuition and Fees Deduction. Before it expired, you could use this deduction for certain school expenses. Enrollment fees, tuition, course books and lab fees were examples of qualifying expenses.
Its a bit of a bummer that this deduction is no longer available. But several other popular student loan tax programs remain unchanged. The American opportunity tax credit, Lifetime Learning Credit and student loan interest tax deduction are still available under the current tax code.
No Longer Offering Subsidized Student Loans
Also included in the 2019 budget proposal is the elimination of subsidized student loans. This would be a significant change for new borrowers. Currently, the government pays the interest accrued while the student is in school for federally subsidized loans.
Subsidized student loans are only available to borrowers who demonstrate financial need when filling out their FAFSA. There are still unsubsidized loans, but these are much more expensive in the long-run and students would graduate with more debt. According to a report by the Congressional Budget Office in December 2016, eliminating subsidized loans altogether would have added $26.8 billion in costs to students over 10 years.
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Trump Administration Attempts To ‘box In’ Biden On Student Loan Forgiveness
The Trump administrations Education Department released a memo earlier this week arguing that student loan debt cancellation through executive action a potential move advocated by prominent Democrats but downplayed by President-elect Biden would be illegal.
The Education Secretary does not have the statutory authority to cancel, compromise, discharge, or forgive, on a blanket or mass basis, principal balances of student loans, and/or to materially modify the repayment amounts or terms thereof, the memo stated, at another point adding: Among other things, we must be mindful of the fact that the Executive Branch does not have the dispensing power on its own.
The content of the memo and timing suggested the outgoing administration was going to try to box in the Biden administration, Luke Herrine, a student loan expert and a PhD candidate at Yale, told Yahoo Finance. The fact that this is a memo that’s especially written to Betsy DeVos, who is no longer in office . I think it’s pretty clear that they were just trying to find a way to say with as much pomp and circumstance and authority as they can muster that they don’t agree with this interpretation.
John Brooks, law professor at Georgetown University Law Center, noted that while the memo itself isnt binding, the reading is clearly meant to influence the incoming Biden administration.
For Student Loan Borrowers Who Are Struggling
If you’re out of work because of the pandemic, or you’re just feeling more financially strained, focus your resources right now on your most urgent necessities and take advantage of your student loans being deferred longer, McClary says.
This means putting any extra money toward your high-priority bills that impact your survival, like housing and utilities. Once you get your feet back on the ground, you can then start using that cash in different ways.
The proposed extension of deferring student loan payments is only for federal loans, but if you’re worried about private student loans, contact your loan servicer to ask for a forbearance period or other options for financial relief.
“At the end of the day, each person will need to examine their goals and current financial standing to determine what their next immediate financial priority should be,” Ladejobi tells Select.
Information about Marcus by Goldman Sachs High Yield Online Savings, Ally Online Savings Account, Synchrony Bank High Yield Savings, and Aspire Platinum Mastercard® has been collected independently by Select and has not been reviewed or provided by the bank prior to publication.
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Public Service Loan Forgiveness Program
This is Option No. 1. Congress created it in 2007 to encourage people to pursue noble careers that serve mankind and lessen student debt.
To qualify for the Public Service Loan Forgiveness program , you must be a full-time employee in a public service job. You must also make 10 years of on-time monthly payments after consolidating your federal loans in a qualified repayment program.
This option applies solely to Direct Federal Student Loans. Private student loans are not eligible for the PSLF program.
Before we proceed, heres a red flag: Applicants from the class of 2007 theoretically were the first ones eligible for loan forgiveness in 2017 and 99% of applications were rejected. That number has gotten slightly better with 2.4% of applications approved as of September 2020, according to the U.S. Department of Education.
Many borrowers discovered their application was rejected because they had been in an incorrect repayment plan. The Department of Education introduced its PSLF Help Tool in 2018 to try and reduce the number of rejected applications.
The PSLF Help Tool allows you to search for qualifying employers and has a series of question related to the programs requirements that should help steer borrowers through the eligibility process.
If you are deemed ineligible because some or all of your payments were not made under a qualifying plan, you might still be eligible through Temporary Expanded Public Service Loan Forgiveness.
Why This Why Now
Broad-based student debt cancellation isnt a newidea, but it being discussed in establishment political circles is.
Forty-five million Americans now owe a total of about $1.6 trillion in student loans, and one in 10 loans are in delinquency or default. The Federal Reserve estimates the typical monthly payment to be between $200 and $299. Research suggests people are delaying buying homes, having kids, and changing jobs in part because of student loan debt, which means it could become a drag on the overall economy. The burden is especially heavy on Black borrowers, who generally carry more debt and struggle more to pay it off.
This is not some niche problem, said Bharat Ramamurti, a member of the Congressional Oversight Commission that oversees the CARES Act funds and former adviser to Sen. Elizabeth Warren. Student loan debt affects a lot of people its basically a fifth of all adults.
As student debt, which isdifficult to get discharged in bankruptcy, has become an increasingly prevalent issue, so have proposals regarding how to address it. In the 2020 Democratic presidential primary, Bernie Sanders ran on canceling all student debt, and Elizabeth Warren proposed canceling debts of up to $50,000.
Many Democrats and progressives are calling for Biden to cancel some or all debt through executive action, namely, a settlement and compromise provision that they argue would allow for debt to be canceled through executive authority.
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Eliminate Subsidized Student Loans
Currently, some federal student loans dont accrue interest while borrowers are still in school. To qualify for these subsidized federal student loans, borrowers must demonstrate financial need.
If your family income is too high, you can take out an unsubsidized federal student loan. But Trump wants to do away with subsidized student loans altogether.
According to the nonpartisan Congressional Budget Office, Stafford Subsidized loans have a 10.7 percent subsidy rate. Out of $254 billion in issuance over 10 years, this would cost borrowers $27 billion over 10 years.
Again, this is sure to be an unpopular proposal. It also will have a hard time passing both houses of Congress.
One Looming Question: Taxes
One major policy and political issue that hangs over the forgiveness discussion is taxes. Debt cancellation isgenerally counted as taxable income. So if someone has $50,000 in student loans forgiven, that would mean $50,000 would be counted as gross income for the year it was forgiven on top of other income.
Under todays tax rates, that would be taxed likely somewhere between 22 and 37 percent. In other words, major student debt cancellation could come with an enormous tax bill for borrowers.
Those who have studied the issue say there are workarounds. John Brooks, a law professor at the Georgetown University Law Center who has studied student debt taxes, told me that there are a number of legal arguments that would allow the secretary of education, the treasury department, and the IRS to make forgiveness tax-free. Forgiveness could get a general welfare exclusion, or qualify as disaster relief, or get a scholarship exclusion, among other options.
Student debt is just really, really weird, and it just doesnt fit into the categories and the ways we think about other kinds of debt, he said. Its a form of government funding for higher education, and its designed to provide as many people as possible with a way to get over some degree of affordability problems thats limiting their ability to enroll in higher education.
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