Student Loan Cancellation Doesn’t Mean What You Think It Means

Student loan cancellation doesn’t mean what you think it means.

Here’s what you need to know.

Student Loans

Will President Joe Biden cancel your student loans? White House Chief of Staff Ron Klain says that Biden could make a decision on student loan cancellation before student loan payments restart on May 1, 2022, or Biden could extend the student loan payment pause. It’s possible that this year, Biden could both cancel student loans and extend the student loan payment pause. That would be a double-win for student loan borrowers who are seeking major student loan relief in the wake of the Covid-19 pandemic.

However, student loan cancellation may not mean what you think it means. (6 major changes to student loan forgiveness). For example, there’s no universal definition for “student loan cancellation.” This can cause confusion for student loan borrowers, particularly if you’re expecting your student loans to get cancelled. Here’s how it could impact your student loans.

(Biden Will Cancel $6.2 Billion Of Student Loans)

1. Private student loans won’t get cancelled

Sen. Bernie Sanders (I-VT) has proposed to cancel all $1.7 trillion of student loan debt. This includes all private and federal student loans. However, if there is any wide-scale student loan cancellation, it would only be for federal student loans that are owned by the U.S. Department of Education. Private student loans are owned by financial institutions such as banks as well as investors. Since these companies earn money from interest payments, they aren’t planning to cancel your private student loans. The federal government also can’t compel these institutions to cancel student loan debt either. Therefore, if you have private student loan debt, don’t expect any student loan cancellation.

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2. Only federal student loans owned by the government would get cancelled

When it comes to student loan cancellation, it’s important to read the fine print. This includes the types of federal student loan debt that would be cancelled. Only federal student loans owned by the federal government likely would get cancelled. For example, this includes Direct Loans. However, FFELP Loans are mostly owned by third party financial institutions and investors. FFELP Loans are backed by the federal government, but they were issued by banks prior to 2010. Since the federal government mostly doesn’t own these student loans, it’s unlikely they will be cancelled. Similarly, Perkins Loans are issued by colleges and universities. They too won’t be eligible for student loan cancellation from the federal government.

(3 Ways To Get Student Loan Forgiveness Now)

3. Student loan cancellation won’t be available to everyone

Even if you have federal student loans owned by the government, it’s unlikely that more than 40 million student loan borrowers will qualify for student loan cancellation. Expect there to be limitations on who qualifies. For example, the most likely limitation is income. Sen. Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) proposed that federal student loan cancellation be limited to student loan borrowers who earn up to $125,000. It’s possible that Congress or the president could set an even lower income threshold. For example, the stimulus checks from the Covid-19 pandemic had a $75,000 income threshold. It’s also possible that student loan cancellation could be targeted to student loan borrowers who are in student loan default or student loan delinquency.

(What To Do If You Don’t Qualify For Student Loan Forgiveness)

4. Student loan forgiveness is not free

Student loan forgiveness would be a big win for student loan borrowers. With zero student loan debt, student loan borrowers could save for retirement, build their financial future, and buy a home. However, this doesn’t mean that student loan cancellation is free. While student loan borrowers would benefit, there’s still substantial cost for the federal government. If there is $50,000 of student loan cancellation for borrowers, the cost could be $1 trillion. If there is $10,000 of student loan cancellation, the cost could be less than $400 million. In either case, the federal government would absorb these losses. Why? The federal government wouldn’t be able to collect principal or interest payments on these student loans.

(Where Biden Stands On Student Loan Relief)

5. Student loan cancellation doesn’t solve the cost of higher education

It’s no secret that the cost of higher education is the underlying issue for many Americans. Student loan cancellation, if enacted, would be a one-time mechanism to erase student loan debt for current student loan borrowers. If you’re a current student loan borrower, “student loan cancellation day” would be a memorable day. If you borrow student loans the day after “student loan cancellation day,” that day will be memorable too, but for the wrong reasons. Student loan borrowers will continue to borrow student loans, but they won’t get the benefit of any potential future student loan cancellation. Congress should provide a long-term solution to the cost of higher education that helps both current and future generations as well as their families.

It’s important to understand what student loan cancellation means and whether you may qualify. Importantly, student loan relief is scheduled to end on May 1, 2022. That means federal student loan payments will restart, unless Biden extends the student loan payment pause. It’s best to plan for the restart of student loan payments so you’re fully prepared. That means learning all your options for student loan repayment.

Here are some smart options to pay off student debt:

• Student loan refinancing (lower interest rate + lower payment)
• Income-driven repayment (lower payment)
• Student loan forgiveness (federal student loans)

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