Proposed College Funding and Student Loan Repayment Changes under the Biden Administration

President White HouseIn 2021, we will have a new President and administration.  As a result, there are many proposed college funding and student loan repayment changes under the Biden administration.  What will be interesting to see is how big some of these will be and how fast they occur.

Here is a list of the proposed changes that are being discussed.  These changes will affect both college funding and student loan repayment.  Most of the changes are related only to federal loans but some may be extended to private loans.

Lump-Sum Loan Forgiveness Amount

This is one of the most talked-about items.  It is expected that there will be at least 1 or could be multiple loan forgiveness rule changes.  The amount varies from $10,000 to up to $50,000.  It is also being discussed as a one-time event or over 5 years.

There has been some pushback from various groups, especially those who have made the sacrifice to pay it back and will not receive any benefit.  There is a possible IRS issue since most loan forgiveness events trigger it as income and this would become a taxable event.

Automatic Income-Driven Repayment (IDR) Enrollment

Under the current student loan repayment process, after the grace period is over the borrower is enrolled in the standard 10-year repayment plan, if they do nothing.  This is typically the most expensive repayment method.  The proposed change is to enroll the borrower in an IDR method which is normally a more manageable monthly payment.

This sounds like a great idea but there is the risk of loan balances going up.  For this to work seamlessly, the IRS would need to provide income to the Department of Education to calculate the borrower’s IDR monthly payment.  That income for many borrowers will be understated resulting in a payment that may not cover the monthly interest charge.

Reduction in Income-Driven Repayment (IDR) Percent

The current IDR methods use 10, 15, and 20 as their monthly percentages of income in their calculations.  This is after adjustments are made for a borrower’s family size, poverty level, and tax filing methods.  The new administration is considering a 5% option.  It is unclear what impact that will have on current borrowers using other IDR methods.

The biggest risk with this change is the same as the one listed above.  Many current borrowers are using IDR methods to repay their student loans.  Their monthly payment is not covering their student loan interest charge now resulting in higher student loan balances.  IDR methods are perceived as traditional loan repayments like a mortgage or car loan and they are not.  The monthly payment is based on income and not debt outstanding.

Limit Public Service Loan Forgiveness (PSLF) to $50,000

Public Service Loan Forgiveness (PSLF) does not have a limit of how much can be forgiven.  The basic rules are that your need to make 120 on-time payments, use an IDR method, and work for a qualified employer.  Limiting the amount would be a significant change to the current rules.  It is unclear if some of the enrolled borrowers would be grandfathered in.

Easing of Bankruptcy Regarding Student Loan Debt

The President Obama administration began to allow for some bankruptcy leniency and the student loan amount that could be forgiven.  It still could be difficult since some of the proof will need to include identifying misleading promises made by the education provider.

This possible change may create some changes for future private loan borrowers.  Private lending underwriting rules may become more restrictive resulting in private loan approval more difficult.

Increase in Pell Grants   

To increase accessibility to higher education and reduce the net cost for lower-income families, an increase in the Pell Grant amount is being proposed.  This has been discussed numerous times.

Free Tuition for State and Community Colleges

A free tuition option would allow families with income below $125,000 to qualify for free tuition.  This is only tuition not other fees like room and board.

Possible Biden Administration Educational Changes Summary

These listed items are the major changes that are being discussed.  In addition to these changes, the restart of loan repayment will be occurring in the first quarter of 2021.  This will include IDR recertification, loan interest being reinstated, PSLF application, and many individuals revisit refinancing.  At PayForED, we will keep you informed of the changes and how it will impact your student loan and repayment decisions.

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