The average undergraduate student now graduates with nearly $25,000 in debt. Under an unprecedented student loan forgiveness plan announced by the White House, millions of Americans could have all or some of their outstanding student loan debt to the federal government erased.
Let’s take a look at how student loan forgiveness could affect your school loans and some smart ways that you could use the extra money in your pocket if all or part of your federal loans are forgiven.
What Is Student Loan Forgiveness 2022?
The student debt relief plan announced by President Joe Biden aims to ease the burden of the almost $1.6 trillion in federal student loan debt held by about 45 million Americans.
According to figures released by the White House, the plan will offer up to $20,000 each for up to 43 million lower-income earners with outstanding federal loans. Up to 20 million of these borrowers could see the entire balance of their loans canceled altogether. According to the government, up to 90% of the relief will go to borrowers now earning $75,000 per year or less.
What Does the Plan Offer?
The federal loan forgiveness program offers federal loan holders:
- Up to $20,000 in relief to recipients of Pell grants now earning less than $125,000 per year (or $250,000 per year for married couples), and
- Up to $10,000 for other borrowers now earning less than $125,000 per year (or $250,000 per year for married couples).
Pell Grants are intended to help students from low-income families access a college education. The White House estimates up to 27 million Pell Grant recipients will benefit from the program.
Who Is Eligible?
The plan is intended to benefit all lower-income borrowers with direct loans offered or backed by the federal Department of Education. This includes:
- Qualified holders of Stafford student loans
- Qualified holders of both subsidized and unsubsidized federal student loans
Who Is Not Eligible?
The plan does not cover any student loans from state or local governments or from banks, credit unions, or other private lenders.
Some borrowers with indirect student loans may also not be eligible for the program. This includes borrowers who took out former Department of Education-backed loans from:
- Banks and non-profits under the Federal Family Education Loan (FFEL) program
- College-approved lenders under the Federal Perkins Loan Program
In some cases, these loans might have been bought back by the federal government or transferred to government-backed loan service companies, but if your federal student loan is still held by a commercial lender, you might not be eligible for relief.
Federal loan forgiveness is also already available to several special categories of borrowers. You can check if you qualify here.
How to Apply
It is not yet clear how or when this student loan forgiveness will be extended. The Department of Education has said it already has enough income information for nearly 8 million borrowers to allow them to qualify automatically for relief.
According to the White House, an online application process for other borrowers will be put in place by the end of the year, when the pause expires on repayments due on federal student loans, granted as part of COVID-19 relief measures under the American Rescue Plan.
How Should You Use Your Debt Relief?
The Biden Administration hopes the student debt relief will free up money to allow working families to begin to build wealth by buying homes, saving for retirement, or starting a business.
Whether or not these goals are immediately within your reach, if you qualify for student loan relief, you could soon have additional income at your disposal. Let’s look at some smart ways to put that extra money to work.
Pay Down High-Interest Debt
An unexpected windfall of extra income that would have otherwise gone to your student loan payment is a golden opportunity to pay down other debt that might bear even higher interest than your loans. These include:
- Credit card debt: Many college graduates often rack up credit card debt because so much of their income is already earmarked for student loan repayments. Credit card debt is unsecured and subject to variable rates. Now is the time to pay it down.
- Store credit: If you’ve overspent using credit from a favorite store or vendor, you might end up being charged even more interest than on a credit card with less favorable terms. This is a great time to pay off expensive purchases and free up cash you can use.
- Personal loans: If you have taken out personal loans to cover major purchases or unforeseen expenses, paying these down is a great way to take advantage of student loan forgiveness. This is unsecured variable-rate debt that you’re better off getting rid of.
- Car payments: Vehicles are a rapidly depreciating asset, and getting ahead of your payments is a great way to turn debt relief into real money in your pocket. This is especially true if you took out a longer-term or higher-interest auto loan to allow you to pay down your student loan.
- Lines of credit: If you’ve borrowed against your home using a home equity line of credit (HELOC), you risk being exposed to high-interest rate repayments for years to come. Get ahead of HELOC payments to avoid repayment shocks and balloon payments.
- Debt consolidation: Even if you cannot pay down all your high-interest debt, the extra income available to you now might allow you to pay fees or charges to consolidate your debt on a single, lower-interest credit card or loan. Talk to your bank or financial advisor about your options.
Other Ways to Benefit From Student Debt Relief
After years of paying down student loans, having a little wiggle room in your monthly budget might feel unfamiliar. Here are some other ways you can use those extra dollars to build real wealth:
- Start or supplement your retirement savings: It might sound boring, but chances are you’ve been neglecting to save for retirement while prioritizing your student loans.
- Save for a down payment: Owning your own home is the best path to financial security.
- Improve your home: If you already own your home, put more money into it in the form of renovations, upgrades, or simple maintenance. You’ll add to its value and build your equity stake with additions you’ll enjoy using.
- Start a college fund for your child: College is only getting more expensive and your child is unlikely to also benefit from further debt relief measures. Help them build their future by starting to save for their education today.
Leverage Your Student Debt Relief With Belco
At Belco we understand how hard you have worked to get your education and pay down your student loans. Whether you qualify for student debt relief or not, Belco is here to help you make the most of the financial opportunities open to you.
Our services include:
- Retirement and investment services
- Savings, money market, and certificate accounts
- Home loans, home equity loans, and lines of credit
- Credit cards and personal loans
Now is a great time to consider consolidating your credit card payments or other debt into a lower-rate personal loan. Click below to learn more about Belco’s debt consolidation services.