The Covid-19 pandemic affected people both socially and economically. While some of us are still complaining about its negative consequences in the form of lockdowns and social distancing, others faced troubles to meet the ends with the lower-income level. It was estimated that more than 40% of adults struggle to pay their bills since the pandemic started.
Considering that more than 40 million people in the U.S have student loans, it is not hard to imagine how financial challenges due to Covid-19 hit the borrowers. Fortunately, the government cared about some borrowers- the ones with federal loans- and provided some benefits in economic stimulus packages which may ease your financial struggles and indirectly help you get student loan forgiveness during coronavirus.
However, such solutions also have their disadvantages. First, the government help brings only temporary relief. Second, the proposed facilitation does not cover some loans, such as private ones.
Student Loan Forgiveness during Coronavirus
Sure, the debt non-collection period that was part of the government stimulus package is helpful for borrowers. The borrowers are revealed from making payments during the 8-month debt suspension period. Such government aid helps student debtors who cannot cover the monthly expenses with low income.
Yet, many borrowers are still expecting student loan forgiveness due to Coronavirus. President Joe Biden mentioned his support for direct forgiveness per borrower several times and created this expectation. However, forgiveness is not for sure yet.
Additionally, borrowers should not content themselves with a suspension period or the one-time direct forgiveness idea. Once the debt collection is resumed, the repayment struggles will most likely continue. Besides, even if debt forgiveness is accessible, it will again bring disadvantages, like tax requirements.
Instead, borrowers need to use this time to research and develop a plan to get rid of the debt quickly. In this guide, we will first discuss different stimulus packages utilized since the pandemic to give you a brief introduction about what happened. In the following sections, we will present student loan forgiveness options during coronavirus to help you get familiar with possible debt elimination strategies.
Back in March, Congress approved a $2 trillion stimulus package. As a part of legislation approved, student loan borrowers also benefited from government assistance. With another name, the CARES Act allowed borrowers to stop making payments for their debt till the end of September. During this period, no interest accrued. Besides, collection through taking wages, Social Security benefits, or tax refunds ceased temporarily. In general, this decision affected around 9 million borrowers.
Student loan borrowers struggling with finances did not need to take any further action to receive the assistance. The CARES Act covered such borrowers automatically and relieved them from repaying the debt for several months. In addition to loan assistance, the government also provided sick leave plans, etc.
In December, another economic relief package was introduced. It was nearly $900 billion worth. Out of this amount, $300 billion was allocated for small businesses. Besides, it included direct payment of a maximum of $600 for adults and $300 to top up weekly unemployment insurance.
As attractive as it might seem, the package was still weaker than the CARES Act approved in March. At that time, people got up to $1,200 direct payment, while in December’s stimulus package, this amount was halved.
Additionally, the stimulus package involved funds for COVID testing, vaccine development, protection equipment, etc.
New Package for 2021
Following these two economic stimulus packages approved during the Trump administration, the Biden administration also started working on a new plan immediately. In the middle of January, Joe Biden proposed a $1.9 trillion relief package. $400 billion out of these funds was allocated for vaccines and testing processes, while another $440 billion is directed to businesses and communities.
Biden also wants to bring more benefits to families in the form of direct assistance. Hence, more than $1 trillion funding is planned for this aim. Instead of a $600 payment per person during the December package, Biden aims to increase this amount to $2,000 per adult. Besides, different from previous stimulus packages, families with immigrant parents or an adult but the dependent child will also be able to get benefits.
What About Student Loan Forgiveness During Coronavirus?
Many parties supported direct loan forgiveness during this period. One of such parties was the current president, and former Vice president, Joe Biden, who argued about the necessity of at least $10,000 forgiveness.
Meanwhile, House Democrats supported $30,000 forgiveness per borrower, and Senate Democrats proposed a $10,000 cancellation. Unfortunately, neither of the proposals got the Congress’s approval yet. Hence, this legislation did not involve any direct student loan forgiveness to the borrowers.
However, it was mentioned that Joe Biden still supports the direct forgiveness idea. Although forgiveness is not included in January’s stimulus package, it might be effective in the near future. Yet, we need to wait and see if Congress approves such student loan forgiveness during the Coronavirus pandemic.
Consider This Before Getting Excited
We understand that forgiveness of a minimum of $10,000 is exciting news. Reducing the debt by that amount can be helpful for some borrowers. However, this issue is still subject to discussion. For example, the administration needs to decide whether the forgiveness will be taxable or not if it ever gets Congress approval.
Making the debt forgiveness subject to taxation can be devastating for some borrowers. Goldman Sachs suggested that the tax can be as high as 20%. It means 20% of the benefit received will be returned to the government as tax payments.
It is understandable that borrowers might not be able to meet the additional tax on their income. However, they have to; otherwise, the Internal Revenue Service can add interests and late payment fees to the original amount.
Yet, it is still unclear whether the student loan forgiveness during the Coronavirus pandemic will ever be accessible or taxable. In all cases, borrowers should be ready for different scenarios. For example, they can set aside some money to pay taxes, if they are subject to. Additionally, borrowers can search for alternatives, which we will discuss in the subsequent sections.
Biden Administration’s Tax Approach
When Biden revealed the campaign plan, it became noticeable that Biden does not support taxes. The plan suggests removing the taxability of forgiveness in Income-Driven plans.
When people make the required payments through Income-driven plans, they can get forgiveness after some time. However, the canceled debt is subject to tax. Biden opposed this idea and mentioned that people getting free of the debt should not be pressured to incur new debt to pay taxes.
Therefore, it can be expected that if student loan forgiveness during the Coronavirus pandemic gets accepted, it might be non-taxable.
What are Your Options?
As mentioned before, borrowers should not content themselves with the government aid provided during the Coronavirus pandemic. Sure, the government should help people during such unexpected situations and create new opportunities.
However, as a borrower, you should find complementary solutions if you want to get rid of the debt. The government aid that is in the form of suspension or extra money paid (which is around $1400 in the current stimulus package) is only a temporary solution.
The current 8-month non-collection period is a good opportunity for debtors to sit down and develop debt resolution plans. Probably, you have more time than ever to search for different debt repayment methods.
We will present you with some alternatives in this section, but you can check the official student aid platform or Student Loans Resolved blogs to get more information.
One of the best ways to get rid of the federal debt is to utilize student loan forgiveness options. Such programs are funded by the government and allow borrowers to eliminate their debt obligations. Some of the options available to federal borrowers are discussed in the following sections.
The Public Service Loan Forgiveness
This opportunity is available to people working in the public sector. The program grants debt elimination after the borrower makes 120 qualifying payments. Once 120 payments are made, the rest of the debt is forgiven.
When we discussed student loan forgiveness during Coronavirus, we expressed concern about the taxability. Luckily, the forgiven debt through the Public Service Loan Forgiveness is not subject to taxation.
Another concern people have nowadays is whether the government’s suspension period affects the PSLF progress. As mentioned before, 120 payments are needed for the cancellation. Keep in mind that the suspension period does not interfere with the progress. Borrowers can choose not to pay the debt during this period or continue making payments if they can afford it.
Eligibility for Public Service Loan Forgiveness During Covid-19 Pandemic
What makes the Public Service Loan Forgiveness challenging is its extensive eligibility list. There are different requirements for the workplace, working hours, loan type, etc. therefore, debtors need to get familiar with all the qualifications before applying.
First, the borrower needs to have full-time work. Working half-time is possible, but the debtor needs to work in more than one position to fulfill the full-time requirement. In general, full-time means at least 30 hours of service per week.
Next, borrowers should have qualifying loans. A qualifying loan is a direct loan. If you have FFEL or Perkins loans, you cannot apply to this program. The debtors need to repay this loan through Income-driven repayment plans. Besides, the repayments should be on time, in the full amount shown in the bill. After meeting this requirement 120 times, which is a minimum of 10 years, the rest of the debt can be forgiven.
Changes to the PSLF
While Biden brought some advantages to borrowers in the form of suspension, it might not be the end of his actions for the sake of student loan debtors. He also mentioned changes in other programs like the Public Service Loan Forgiveness in his campaign plan.
The changes aim to simplify the PSLF process. In more detail, Biden aims to give $10,000 forgiveness per year of service. Therefore, instead of waiting until collecting 120 payments, which is at least 10 years, borrowers will benefit faster. However, the new PSLF could be received only five times, which means maximum loan forgiveness of $50,000. In the current program, there is no limitation on the forgiven amount.
Teacher Loan Forgiveness
If you are a teacher, there is a high chance that you can get debt forgiveness instead of waiting for the student loan forgiveness during the Coronavirus. There are two programs specifically targeting teachers. One of them is Teacher Loan Forgiveness, which grants either $5,000 or $17,500 per applicant. However, again, there is a condition of qualifying service, loan type, work type, etc.
Borrowers must keep in mind that this forgiveness can be received if they serve for five consecutive years in a qualifying school. A qualifying school is usually the one that serves mostly low-income families. While the Public Service Loan Forgiveness does not require consecutive payments, missing a work length requirement can disqualify the borrower for the Teacher Loan Forgiveness.
This program applies to both direct and FFEL loans. The benefit amount depends on the qualifications of the teacher. For example, borrowers teaching math or science have a better chance to get a higher amount of forgiveness.
Perkins Loan Forgiveness
Another program available to teachers is Perkin Loan Forgiveness. As its name suggests, this program targets Perkins loans. Different from Teacher Loan Forgiveness, this program can bring up to 100% debt reduction in return for 5-year service. In more details, borrowers will receive:
- 15% forgiveness in 1st and 2nd years of service
- 20% forgiveness in 3rd and 4th years of service
- 30% forgiveness in the 5th year of service.
Besides, it should be mentioned that other professions in public services, such as military personnel, firefighters, law officers, etc., can also access this program.
Borrowers’ Defense to Repayment
Previously we discussed how the Biden administration aims to modify the Public Service Loan Forgiveness Program to help thousands of borrowers. Another program that Biden’s plan involves is the Borrowers’ Defense to Repayment.
Borrower’s Defense rule helps debtors that undertake debt worth nothing. Usually, borrowers get debt because they believe the education they get in return will bring better employment opportunities. However, when it turns out that the universities misled students, lied to them, and the quality of education is not adequate for a worthy degree, students are left with nothing. Borrower’s Defense rule was utilized a lot during the Obama administration, which allowed borrowers to stop payments for the debt if they faced misconduct by the school.
Yet, some parties believed that this rule was a gift or free money for the debtors. Hence, it was bringing unfair benefits. One of such parties is the Education Department. The department delayed the application review process during the Trump administration. Even when the court ruled that the review process should be resumed, they mostly rejected the applications after as long as a year of waiting.
Currently, Biden’s plan aims to revive the Borrower’s Defense rule.
Issues with Borrower’s Defense to Repayment
You might wonder why this program is so debated. The reason is that in other forgiveness opportunities, there is some service required in return for the benefit. For example, in Teacher Loan Forgiveness, borrowers work for 5 years in low-income family schools.
However, Borrower’s Defense is granted without a reciprocal benefit to the government. Hence, the Education Department views it as “free money.” However, others believe that the program is fair as students chose to enroll for a degree on false grounds.
After understanding the complexity of Borrower’s Defense, it becomes clear why student loan forgiveness during Coronavirus is hard to get. Such an opportunity is due to the current difficulty of a pandemic. Some people might argue that such forgiveness is unfair because borrowers will receive the funds from the taxpayer’s money. Not all taxpayers have a degree or getting loans to get further education.
Eligibility and the Process
The eligibility condition of this forgiveness program is simple. The main condition is proving that the school misled the student. Some borrowers think that they can utilize this program if the loan servicers engage in illegal actions. However, keep in mind that Borrower’s Defense rule is applicable only if the misleading party is the school. Besides, the matter should be education-related; personal issues like physical abuse or harassment does not make the borrower eligible.
Some examples of when this program can be useful are when the school officials lie about the job replacement rates or they use false advertising to attract students to enrollment. In these cases, students need to collect all necessary documents to prove the case. For instance, they can add brochures indicating false information or email communications to support their arguments. Additionally, the applicants should explain the case clearly in the application.
If the application is successful, borrowers will be notified about the loan discharge percentage in the notice. Besides, the reasons for rejection are stated in the notice if the result is negative.
While forgiveness programs require a service in return, discharge options do not. Discharge happens when there exists a specific condition. It is not possible to ‘make’ this condition to get eligible. Discharge can only happen if the borrower gets disabled, dies, files for bankruptcy (and gets approval from the court), or if the school closes, utilizes false certification, etc.
Private Debt Cancellation
As mentioned before, even if student loan forgiveness during the Coronavirus pandemic becomes accessible, it will not cover private student loan borrowers. Hence, such borrowers have only one option- to find a debt solution with their efforts, instead of waiting for government support. Private loan borrowers also do not have access to the above-mentioned forgiveness and discharge programs. However, they still have a few options.
Student Loan Refinancing
One of the most beneficial debt resolution strategies is to refinance student loans. Student Loan Refinancing means getting a new loan to pay out all existing loans. One can think that a new loan will not solve the problem.
However, keep in mind that refinancing only works when the new loan has better terms, such as lower interest and monthly payments. In this way, borrowers save money and reduce their debt obligation. Refinancing does not bring forgiveness to the debt, but at least it makes the debt repayment easier.
Another option for private borrowers is getting help from debt settlement companies. Such companies recruit debt experts who can develop a saving plan for borrowers. As a result, borrowers mostly stop debt payments and save money for some period to have a high amount of funding.
Later, the debt settlement company negotiates with the private lender to convince him/her to agree to a lower amount of payment. The creditors can agree to receive lower than the owed money as the borrower will pay a lump-sum amount instead of small payments for long periods.
Contact the Lender
Refinancing and debt settlement are great options, but they can be hard to achieve. Meanwhile, borrowers need to take a straightforward step when they face financial difficulties- contacting the lender.
It is understandable that the pandemic has hit many borrowers and even lenders. Hence, borrowers should explain the challenges clearly to the lenders and ask how the lender can help them. Sure, private lenders have no obligation to do a favor to the borrowers. However, they might understand the difficulty and grant loan forbearance, a non-collection period for the debtors. Additionally, they might reduce the monthly payments temporarily.
One can wonder why lenders should agree to such favors. The reason is that collecting the money is easier when the borrower does not default. When student loan default happens, legal actions and third-parties are involved in the collection process, which prolongs the repayment process. In some cases, it becomes a costly process to collect the money owed due to the legal fees. Hence, it is an easier way to help the debtors repay the debt instead of pushing them to default.
Before We End the Guide…
Let us once again remind you that Student Loans Resolved is ready to lend a hand whenever you need it. We understand that several programs of student loan forgiveness during Coronavirus mentioned above might confuse you. Each program has its own eligibility requirements, benefits, and drawbacks. Hence, borrowers usually face a challenge: Which program is the most suitable?
As a debt expertise company with years of experience, we can advise you to get third-party help. The debt specialists like those we work with in Student Loans Resolved have the required know-how to analyze your financial conditions and suggest the best options. Besides, they will help you in every step, from the evaluation of alternatives till the end of the application process. Contact us now to maximize your chance of eliminating student loan debt.