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Student loan forgiveness is still up in the air. What to do in the meantime

CNBC logo CNBC 9/24/2021 Annie Nova
  • Millions of student loan borrowers are on edge, left questioning if they'll be paying back their loans for years more or have them soon erased.
  • Here's what we know now.
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It's now been more than seven months since President Joe Biden asked the U.S. Department of Justice to review his legal authority to cancel student debt.

The agency hasn't released its findings yet. And although top Democrats argue that the president can cancel the debt through executive action, Biden has said little on the subject.

All the uncertainty is taxing on Austin Hossfeld, who owes around $50,000 with his wife, Hayley.

Every day, he types the same words into Google: "Biden" and "student loans."

"A lot of the times, it's the same articles," Hossfeld, 26, said. "I reread them."

Millions of other borrowers are likely on edge too, left questioning if they'll be have their loans soon erased or be stuck making payments on them for years to come.

Here are some answers, based on what we know right now.

Can I count on my student loans being forgiven?

The odds of student loan borrowers getting their balances reduced or eliminated have never been greater, experts say.

Biden has said he supports cancelling at least $10,000 per borrower, and now he's asked two agencies to study his legal authority to cancel the debt without Congress.

That being said, "until legislation is signed into law, you can't count on anything," according to higher education expert Mark Kantrowitz.

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It's unclear when the findings from the U.S. Department of Education and the U.S. Department of Justice will be publicly available.

In the meantime, he added, "borrowers should not take any precipitous action in anticipation of loan forgiveness."

When could forgiveness happen?

If Biden decides to go ahead and forgive the loans through executive action, in theory borrowers could see their balances reduced or eliminated pretty quickly.

But such a move may be met by court challenges, which could lead to delays, experts say.

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If the White House opts to leave student loan forgiveness to Congress, Democrats may try to use the budget reconciliation process, which unfolds in the fall, to get it done.

That avenue allows them to pass legislation with a simple majority, which is all they have. Other bills typically must garner 60 votes to advance, thanks to Senate procedural rules. Republicans are mostly hostile toward the idea of a student debt jubilee.

How much could be forgiven?

At the moment, the main point of contention among student loan forgiveness proponents is over how much debt should be scrapped: $10,000 or $50,000?

If all federal student loan borrowers got $10,000 of their debt forgiven, the outstanding education debt in the country would fall to around $1.3 trillion, from $1.7 trillion, according to Kantrowitz. And roughly one-third of federal student loan borrowers, or 15 million people, would see their balances reset to zero.

Canceling $50,000 for all borrowers, on the other hand, would shrink the country's outstanding student loan debt balance to $700 billion, from $1.7 trillion. Meanwhile, the debt for 80% of federal student loan borrowers, or 36 million people, would be gone entirely.

Even under that more generous plan, not everyone would be entirely happy. One-fifth of federal student loan borrowers owe more than $50,000, and around 7% of borrowers owe more than six-figures.

Should I still make payments?

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Most federal student loan borrowers don't have to pay their bills until January, and during that time interest is suspended.

Since $10,000 in student loan forgiveness is the proposal most likely to turn into reality, Mayotte said she sees nothing wrong with people who owe under that amount redirecting their usual payments to savings, "earning a little interest on them, then seeing which way the wind is blowing" as we near closer to the winter.

"If it looks like we're no closer to forgiveness, pay the funds then," she said.

Even if you owe more than $10,000, it can still be wise to take advantage of the government's pause on student loan payments.

You can use the extra cash to wipe out high-interest credit card debt, for example, or to build up your emergency savings.

Is there anything else I should do for now?

There are some smart moves you can take in anticipation of student loan forgiveness, experts say.

Millions of people who took out student loans before 2010 under the Federal Family Education Loans program have been excluded from the government's offer to pause their payments without interest accruing.

There's now some concern that those with these loans could also be left out of any forgiveness.

As a result, these borrowers might want to consolidate their FFEL loans into the main Direct Loan program, which will qualify for the forgiveness, Kantrowitz said. The main downside of doing so is that your repayment timeline will be reset; so, if you're near the end, it may not make sense.

Borrowers thinking about refinancing their federal student loans into private loans for a lower interest rate may want to wait, Kantrowitz said. For one, the interest rate on most federal student loans is 0% for another four months.

What's more, "they will feel foolish if they refinance only to have the federal government announce loan forgiveness," Kantrowitz said.

Could my private student loans be forgiven?

"When it comes to private student loans, it seems highly unlikely that they would be included in the forgiveness plan," said Elaine Rubin, senior contributor and communications specialist at Edvisors.

Would my forgiven debt trigger a tax bill?

Student loan forgiveness is now tax-free, thanks to a provision included in the $1.9 trillion federal coronavirus stimulus package that became law in March.

Formerly, any student loan debt canceled by the government was considered taxable and levied at the borrower's normal income tax rate.

According to a rough estimate by Kantrowitz, $10,000 in cancellation would have triggered an extra $2,000 in taxes for the average borrower. If $50,000 per borrower was canceled, the average person would have to write the IRS a check for $10,000.

Borrowers would now be off the hook from these bills.

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