Last week, President Biden asked the Department of Education to review his legal authority in using executive action to forgive student loan debt, which has renewed hope for many of the 45 million borrowers that collectively owe $1.7 trillion in student loans. But how should this affect your repayment strategy, and should you be banking on a possible $50,000 write-off on federal loans?
There are no guarantees
Since taking office in November, President Biden has shown a willingness to tackle student loan debt through various policies, including the extension of the student loan moratorium through September (0% interest charged and a repayment freeze), the expansion of student loan forgiveness eligibility for public-sector workers, and the cancellation of debt for students defrauded by for-profit schools.
Biden has said he supports cancelling $10,000 in federally-backed student loan debt, but that it should be passed through Congress, stating in a February town hall that “I don’t think I have the authority.” However, it’s not obvious that Democrats have enough votes to pass debt relief legislation through Congress, which might explain why the progressive wing of the party has been pressuring Biden to take executive action route and raise the loan forgiveness to $50,000.
Biden’s legal review now suggests more willingness to consider executive action—especially since White House chief of staff Ron Klain has confirmed that the legal review will look into forgiving debt up to $50,000, an amount Biden has previously not supported (“I am prepared to write off $10,000 of debt, but not $50,000” he said in the February town hall).
Does this mean $50,000 debt forgiveness will happen? There’s no way of knowing for sure, although it’s certainly less likely than $10,000. A legal review is non-binding, as it merely answers the question of whether Biden has the authority for executive action, not whether he should use it or how much debt should be forgiven, as Zack Friedman points out in Forbes. The bottom line is that President Biden has yet to publicly support in $50,000 of student loan debt relief.
What should you do with your student loan repayments?
As Lifehacker’s Jordan Calhoun argues in this post about the topic from February:
Should you continue making regular payments on your federal loan to reduce your principal? Unless you’re flush with cash, the answer is “no.”
The argument is that with zero-percent interest rates on student loans, it’s actually safer to temporarily put aside dedicated loan payment cash into low-risk savings or an emergency fund, in case the pandemic gets worse. The key thing is to not spend the money at all (except for emergencies), as you would still owe the same outstanding balance and need to make payments against it once the payment freeze was lifted.
Consider saving that money instead, making an extra-large safety net for yourself if possible. Then, if you don’t need it, you can pay a big lump sum on Sept. 29, or whatever day interest charges ultimately resume.
As Ashley Norwood-Struppa, from the AccessLex Center for Education and Financial Capability, told CNBC Select:
If forgiveness is announced in the future, you would have cushioned your emergency fund and didn’t lose out on any loan forgiveness benefits. If forgiveness does not occur, you can decide if taking the amount you saved and paying down your student loans makes financial sense for you.
In light of Biden’s legal review: If your student loan balance is less than $50,000, you might want to hold off on any lump sum repayment until student loan repayment moratorium expires in October, or when there’s more clarity on whether loan forgiveness will happen. Even if there’s, say, a 1% chance of $50,000 student loan forgiveness actually happening, why not wait and see?
Of course, this is just one approach (Bankrate has a good overview of all your other options, including further avenues for debt relief here) and it should never interfere with your ability to pay off your student debt.