Our last newsletter detailed several changes and updates to the student loan system as of February 2022. Since that time, the student loan pause was extended through August 31, 2022, and was recently extended through December 31, 2022. With payments set to resume, the U.S. Department of Education has been working to forgive the debts of certain categories of borrowers. It also has recently proposed many changes to the student loan lending system. This article will discuss the current status of student loan forgiveness, student loan cancellation, and program changes.
The Biden administration is still focused primarily on forgiving the debt of those borrowers who may qualify for Public Service Loan Forgiveness, commonly referred to as PSLF. As a reminder, for a limited period of time, borrowers can receive credit for past payments regardless of whether the payment was made on time, whether a payment was made for the full amount, or whether the payment was on a qualifying plan. Furthermore, since the last article on the student loan system, the U.S. Department of Education has clarified that up to 36 months of deferment or forbearance can also count toward your 10-year time limitation for PSLF. That means that borrowers could be much closer to forgiveness than they think and should really concentrate on the amount of time that they have been in public service. If you have worked for an entity that may meet the qualifying employment criteria (i.e., federal, state, or local government entities or nonprofit companies and agencies), you should submit the “Certification & Application” form.
As of the writing of this article, this waiver is only available for a limited time, and you must apply for the waiver and forgiveness no later than October 31, 2022. There are some rumors that the deadline may be extended due to the number of applications for waiver and employment certifications that have been received. Currently, it is taking anywhere between 30 and 90 days to process an application and update the number of qualifying months that a borrower has toward loan forgiveness. However, borrowers should not count on an extension at this time, and any borrowers who think that they meet the qualifying employment parameters should absolutely submit a request as soon as possible.
In other news concerning PSLF, PSLF loan servicing is transferring from FedLoan as of September 2022. You should have received or will receive shortly a mail or email notification of the transfer of your loan to the new lender, MOHELA.
We all hate to log in to our student loan accounts. However, transfers of student loans to new lenders are notorious for errors in account holders’ information, payment counts, interest rates, etc. Therefore, in August, you should make sure that you have copies of your most recent student loan statements showing your balance, your monthly counts toward qualifying payments, and your interest rate. You should also ensure that you have created a new username and password with MOHELA in order to have access to your new account so that you can correct any incorrect information as soon as possible.
While the changes to the PSLF will be great for qualifying borrowers, the reality is that many borrowers, particularly those in the legal profession, do not work for qualifying public service entities. With all the concentration on PSLF, nonqualifying borrowers are left wondering, “What about us?”
Student loan cancellation is still very popular with younger voters. The Biden administration was significantly delayed in making any announcements on student debt cancellations due to handling several unexpected events, such as the shootings at Uvalde, inflation, and recent Supreme Court decisions. However, on August 24, 2022, the administration announced it will cancel of $10,000 per borrower, and $20,000 for those with Pell Grants. The cancellation is only available to borrowers making less than $125,000 per year. Many specifics have not been addressed but it is expected that borrowers will have to apply for the forgiveness and certify their annual income if they have not already done so with the Department of Education, which indicates the application will be available in early October. Currently, there is no deadline to apply for forgiveness but the Department recommends submitting the application prior to November 15 to give more time to process the applications prior to the end of the student loan payment pause on Dec. 31.
One potentially positive development for all loan holders, including those who do not qualify for PSLF, is the recent announcement of proposed changes to accruing interest on loans: the U.S. Department of Education has proposed elimination of the capitalization of interest.
Capitalization of student loan interest occurs when a loan continues to accrue interest when that loan is in deferment or in an income-driven repayment plan. The interest then gets added to the principal balance, and interest is charged on the total balance. The result is that many borrowers see a ballooning of their loan if they are unable to cover the accrued interest with their monthly payments.
The administration has proposed to eliminate the capitalization of interest when borrowers enter repayment or default on their loans. In other words, capitalized interest would not be added to a borrower’s balance when a borrower enters repayment after deferment or when a borrower defaults on a loan. However, this proposed rule only applies to education loans issued by the federal government and would not retroactively apply to past interest capitalization.
It is obvious that student loans are still in a fluid state regarding what will ultimately be done. It would be helpful to seek out information wherever you can, including from experts such as Travis Hornsy, who began Student Loan Planner to provide free tools and paid consultations for high-income borrowers and who regularly provides updates regarding student loan program changes; and Nika with @debtfreegonnabe, who provides updates on the status of her own student loan and what she is doing to address it. Other than that, all you can do is prepare as best you can by knowing what the rules are and by keeping track of your own student loan information.
