What borrowers need to know while student loan forgiveness is in limbo

Personal finance

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After applying for student loan forgiveness, some borrowers are receiving what looks like good news from the U.S. Department of Education.

“We reviewed your application and determined that you are eligible for loan relief under the Plan,” according to a letter sent out by Education Secretary Miguel A. Cardona.

Yet the notice goes on to say that “Unfortunately, a number of lawsuits have been filed challenging the program, which have blocked our ability to discharge your debt at present.”

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Not long after President Joe Biden announced his sweeping plan to cancel up to $20,000 in student debt for millions of Americans, a number of conservative groups and Republican-backed states attacked the policy in the courts. Two of these lawsuits have been successful in at least temporarily halting the relief, and the Education Department closed its loan cancellation portal this month.

The Biden administration believes its plan is legal and will prevail in the courts, but for now, the financial future of millions of Americans remains uncertain.

Here’s what we know about the legal delays to the policy.

Delays could drag on for months or more

In a recent filing with the Supreme Court, the Biden administration warned that the legal battles over its forgiveness plan could drag into 2024 if the cases weren’t decided on an expedited basis.

However, such a long delay is unlikely, said higher-education expert Mark Kantrowitz.

He pointed out that the Education Department hopes its loan servicers will apply the relief to people’s accounts within two weeks after it gives it the green light to do so. That means if it’s allowed to continue forgiving student debt, it can act quickly and other legal challenges “will be rendered moot.”

Around 26 million borrowers have already applied for the forgiveness. Those who haven’t done so yet shouldn’t fret, Kantrowitz said. The government will just reopen its application portal again if its plan succeeds in the court.

Loan payment pause may be extended again

The Biden administration is reported to be considering extending the payment pause on student loan bills yet again. That relief policy has been in effect since the start of the coronavirus pandemic.

It would be the eighth time borrowers have been given more time to pause payments, but it may be the White House’s only option with so much still in the air, experts say.

“Restarting repayment now will be messy because the Biden Administration has promised forgiveness to tens of millions of borrowers who will be upset about having to make payments on loans that they expected to be forgiven,” Kantrowitz said.

Indeed, a top official at the Education Department recently said student loan default rates could dramatically spike if its loan forgiveness plan is thwarted, “due to the ongoing confusion about what they owe.”

Borrowers have other aid options

Those unnerved by the possibility of student loan forgiveness falling through may take some comfort in a number of other options that may offer help.

The Biden administration recently announced a new repayment plan for certain struggling borrowers that would cap monthly bills at 5% of their discretionary income. It should go into effect next July, Kantrowitz said. (Use one of the calculators at Studentaid.gov or Freestudentloanadvice.org to find the repayment plan most affordable for you.)

The Public Service Loan Forgiveness program, which allows those who work for the government and certain nonprofits to get their debt cleared after a decade, is also getting a number of improvements.

If you’re unemployed or dealing with another financial hardship, you can put in a request for an economic hardship or unemployment deferment. Those are the ideal ways to postpone your federal student loan payments, because interest doesn’t accrue under them.

If you don’t qualify for either, though, you can use a forbearance to continue suspending your bills. Just keep in mind that interest will rack up and your balance will be larger — possibly much larger — when you resume paying.

And for those in the most difficult situations, it may soon be easier to discharge your student debt in bankruptcy.

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