Your student loans may get cancelled in the new stimulus package.
Here’s what you need to know.
Congress and President-elect Joe Biden could release a new stimulus package as early as this week. It’s likely that $2,000 stimulus checks as well as state and local aid will be included. It’s possible that Congress also may include student loan cancellation in the new stimulus package. Why? Biden wants Congress to cancel student loans immediately. Several House and Senate Democrats also support student loan cancellation. Before Congress or Biden cancels student loans, they have to agree how much student loan debt gets cancelled and who gets student loan cancellation. Here are 5 ways that Congress could cancel student loans in the new stimulus package:
Option 1: Cancel $10,000 of student loans for all federal borrowers
First, while student loans were dropped from the most recent stimulus package, Congress could cancel $10,000 of student loans for all federal student loan borrowers. Under this potential proposal, Congress could cancel student loans such as Direct Loans, including Stafford Loans. Congress also could cancel FFELP Loans and Perkins Loans. However, the Cares Act — the $2.2 trillion stimulus plan that Congress passed in March — excluded FFELP Loans and Perkins Loans from student loan relief such as paused payments. Why? FFELP Loans and Perkins Loans aren’t owned by the federal government, which could complicate student loan cancellation with borrowers who hold these types of federal loans. Congress would have to pay off owners of FFELP Loans (such as financial institutions or institutional investors) and Perkins Loans (such as colleges and universities).
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Option 2: Cancel $10,000 for some federal borrowers
Second, Congress could cancel $10,000 of federal student loans for some student loan borrowers. This proposal is similar to the first, but Congress could choose to exclude FFELP Loans and Perkins Loans, which aren’t owned by the federal government. If Congress pursues this path, it would be the same types of student loans contained in the Cares Act. That said, since the Cares Act, Democrats and some Republicans have proposed to include FFELP Loans and Perkins Loans so that all federal student loan borrowers can get student loan cancellation.
Option 3: Cancel $10,000 if you earn $125,000 of income
Third, Congress could cancel $10,000 of student loans for each borrower who earns $125,000 of annual income. There are many ways your student loans could change this year, and student loan cancellation is one possibility. Congress could choose a higher or lower income threshold, but President-elect Joe Biden has referenced this amount in his student loan plan. Supporters of student loan forgiveness generally want to increase the amount of potential beneficiaries who get student loans cancelled. Opponents want to limit student loan forgiveness either completely, or at least to a small sample size. Income limitation is one way to shrink the pie, although opponents could push for a lower income threshold such as $75,000, for example, which was the cut-off for stimulus checks.
Option 4: Cancel $10,000 if you’re “economically distressed”
Fourth, Congress could cancel $10,000 of student loans for borrowers who are “economically distressed.” This language appeared in the Heroes Act, which is the stimulus package that House Democrats passed last year and from which Biden has said he wants to base his new stimulus plan. “Economically distressed” could be defined in many ways. In the Heroes Act, “economically distressed” referred to a student loan borrower who would otherwise pay $0 monthly through an income-driven repayment plan, was in student loan default, or was 90 days delinquent on their student loans. Under this definition, millions of student loan borrowers will not receive any student loan forgiveness. Alternatively, Congress could, for example, define “economically distressed” as unemployed or otherwise materially impacted financially from the Covid-19 pandemic.
Option 5: Cancel $50,000 of student loans if you earn $125,000 of income
Fifth, Congress could cancel up to $50,000 of student loans for each borrower who earns $125,000 or less of annual income. This is the proposal from Sen. Elizabeth Warren (D-MA) and Senate Minority Leader Chuck Schumer (D-NY). Warren and Schumer believe that their proposal will stimulate the economy, reduce disparity, and help a generation of Americans start life without the threat of student loan debt. Warren and Schumer want Biden to cancel student loan debt directly through an executive order. However, Biden won’t cancel $50,000 of student loans. Biden has consistently championed $10,000 of student loan forgiveness, and said he is unlikely to use an executive order. Given the potential cost, this proposal is the least likely to be included in the new stimulus package.
How to pay off student loans faster
What’s the best way to pay off student loans? There’s no guarantee that Congress will cancel student loans in the new stimulus package, or through standalone legislation. Biden and several members of Congress want to cancel student loan debt, but Congress also wants to pass other policies like stimulus checks first, which could delay any student loan cancellation. That’s why it’s essential for you to make a student loan game plan now. Start with these three options, all of which have no fees: