Are your student loans being forgiven or is the interest rate being reduced? Learn how you can benefit from the new student loan forgiveness program to improve your financial situation.
New Rules for Student Loans
The student loan plan is still being shaped and may be subject to some changes in the coming months, but here is what was proposed this week. Please note that these rules apply only to federal student loans – private loans are not subject to these new rules.
1. Forgiveness of up to $20,000 in student loans
Headlines have been talking about student loan forgiveness – $10,000 of federal student debt for individuals earning less than $125,000 as a single tax filer, and $250,000 for couples. The forgiveness amount increases to $20,000 if you were eligible for a Pell Grant while in college – a move aimed at directing aid to low- and middle-income families.
2. Interest payments on income-driven loans
As long as you are making payments on your income-driven student loans, the government will cover the unpaid monthly interest, helping to ensure that the debt does not increase while being repaid.
3. Reduction in income-driven loan payments
If you are following an income-driven repayment plan, the amount you have to pay has been reduced from 10 percent of your discretionary income to 5 percent, and the minimum income considered “discretionary” has been raised to help reduce the amount required to be paid.
4. Forgiveness of loan balances earlier
Federal student loan balances can be forgiven after 10 years of regular payments, instead of the current 20 years.
5. Easing loan forgiveness for public service workers
There has been an established program for student loan forgiveness for people working in the public sector, such as teachers, firefighters, and nonprofit employees, which has often been difficult to navigate and has kept many eligible individuals from benefiting. The new rules simplify the application process and obtaining loan forgiveness.
6. Continued freeze on student loans until 2023
Student loans have been on freeze throughout the pandemic, and the freeze has been extended until the end of 2022 to allow for the implementation of the new plan.
How Student Loan Relief Can Improve Your Financial Situation
For many Americans, the new student loan plan can make their financial future brighter. “Changes to federal student loans may allow families to reframe their financial goals,” says Anastasio. “With lower levels of accumulating interest, repaying these loans may become a lower priority, freeing up more cash flow for other goals such as saving for a home, starting a family, paying off other debts, or investing.”
But what should you do first if you benefit from the new rules? Here’s what financial experts recommend.
1. Wait a little before making any big changes
While the news may make you want to search for your first home on Zillow or shop for a new electric car, it may be best to exercise caution for now. “It’s not entirely clear what the impact will be, as it is likely to be legally challenged,” says O’Connell Rodriguez. “I wouldn’t spend money before I see how it affects my account balance.”
You will definitely want to keep an eye on the news regarding the progress of this plan. “For most borrowers, forgiveness won’t be automatic, so you may need to follow up on when the application process becomes available and apply for forgiveness,” she says.
2. Build (or increase) your emergency fund
With a potential economic recession looming, it’s wise to have some savings set aside – at least enough to cover three to six months of expenses. “You can bolster your emergency savings while you wait and watch what happens with student loans,” says O’Connell Rodriguez.
3.
Paying Off High-Interest Debt
If you are no longer shackled by federal student loan debt, it’s time to focus on any other high-interest loans you may have, such as credit card debt or private student loans.
If your private student loans are still an issue, consider reaching out to your lender. “The best course of action is to be proactive,” says O’Connell Rodriguez. “If your debt payments are more than you can afford, contact your lender and try to negotiate. It’s always worth talking, even if you’re not successful.”
4. Start Investing
“If you’re spending $300 or $800 or $1200 on student loan payments and have built that into your budget, don’t remove that item from your budget,” says O’Connell Rodriguez. “Direct that item to continue building wealth.” A 401K or IRA is the best place to put that money to help you grow your retirement.
5. Start Saving for Major Goals
If marriage, a new home, a new child, or another major goal is in your future, student loan forgiveness can accelerate your timeline for achieving those big life goals.
Was this page helpful? Thank you for your feedback! Let us know why! Another
Source: https://www.realsimple.com/work-life/money/money-planning/student-loan-debt-forgiveness
Leave a Reply