How will President Trump’s new spending bill affect student loans?
President Donald Trump’s new spending bill will overhaul the federal student loan system.
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Student loan forgiveness has been reinstated for some Americans, experts say.
The Department of Education (ED) announced in July that it had suspended forgiveness for income-based repayment (IBR) plans as the system was updated to accurately account for eligible monthly payments. IBR plans cancel outstanding loan debt after the borrower has made 240 or 300 monthly payments, or approximately 20 to 25 years of payments, depending on the age of the loan.
Experts say the update is complete and eligible borrowers will have their loans forgiven in the coming months unless they opt out. Although the ED has not announced any debt forgiveness, industry experts report seeing and hearing an email from the department informing borrowers earlier this month.
Stacey McFetress, senior director of education finance at EdAssist by Bright Horizons, which provides education advisory services to organizations and families, said that while news of “trickle” forgiveness is good, “the big picture still remains. Hopes for global loan forgiveness have been dashed.”
How do I know if my student loans will be forgiven?
If a loan is eligible for forgiveness, the borrower should receive an email notification. “As always, borrowers are encouraged to ensure their contact information is accurate and provide up-to-date information to their federal student aid and loan servicers,” McFettle said.
This email must also allow the borrower to opt out of the forgiveness. If a borrower wants to deny forgiveness, they must contact their loan servicer, McFettle said.
Otherwise, the ED will forward the debt collection information to the debt collection agency after October 21, after which the debt collection agency will process the debt collection, he said.
Who is eligible for student loan forgiveness?
To qualify, a borrower must enroll in an IBR plan and make 240 or 300 monthly payments, or approximately 20 to 25 years. Loans made before July 1, 2014 have a payment period of 300 years, or 25 years. Anything acquired after that requires payments of 240, or 20 years.
IBR is one of four repayment plans that take your income into account to determine your monthly payments. The other three IDR plans are Pay As You Earn (PAYE), Income Contingent Repayment (ICR), and Savings on a Valuable Education (SAVE).
According to the ED, payments under the other three plans will only be counted towards forgiveness if the borrower enrolls in IBR.
Will a government shutdown affect pardons?
The government shutdown has already halted a class action lawsuit by the American Federation of Teachers (AFT) accusing the Trump administration of slow student loan forgiveness.
Although Justice Department lawyers are unable to work on the case during the shutdown, AFT is asking that the process be resumed as soon as possible to prevent delays that could affect borrowers’ taxes. The American Rescue Plan Act of 2021 exempted student loan forgiveness from federal taxes until the end of 2025.
“For those borrowers who are already eligible to cancel their loans, there is a real urgency to ensure that their cancellations are processed by the end of the year,” said Persis Yu, deputy executive director and executive advisor of the Student Borrower Protection Center. “Otherwise, they could end up with thousands of dollars in additional tax liability.”
If student debt forgiveness is pushed back to 2026, federal taxes will again apply in addition to state taxes.
Why do borrowers opt out of student loan forgiveness?
McFettle said he has heard that some borrowers may consider opting out of the exemption to avoid tax liability. “But those who opt out will still need to continue repaying their loans,” she says.
Student loan forgiveness is federally tax free until the end of the year, but may still be taxed in some states.
How many Americans will receive student loan forgiveness?
McFettle says it’s difficult to put a hard number on it, but it’s probably small.
About 2 million Americans are enrolled in IBR plans, and only some borrowers are eligible, he said.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
