(NerdWallet) — The Biden administration announced federal student loan relief plans last month. The plans include debt forgiveness of up to $10,000 for borrowers who meet income requirements and up to $20,000 for Pell Grant recipients. Beyond cancellation, the proposal also extended the pause on loan repayments until the end of the year and introduced a new income-focused repayment plan aimed at lowering monthly payments.
For now, these plans are just plans. And plans can change. Many pundits expect the proposal to face legal challenges, so don’t make any big moves just yet. Here’s what you can do now to prepare for aid and what it could mean for your budget.
There is still uncertainty
If the proposal moves forward unchanged, it may still take time for your budget to feel the effects. According to the Ministry of Education, loan forgiveness should be automatic for about 8 million people because they have already provided data on their income. The Biden administration aims to make an app available to everyone else by early October. Relief is estimated to occur four to six weeks after completing the application.
“There are still a lot of unanswered questions,” says Kyle Liseno, head of student loans at the nonprofit American Consumer Credit Counseling. “I told people to kind of stay tuned to studentaid.gov, which is the website for the Department of Education.” You can also sign up for application notifications on the Department of Education’s subscription page. The application deadline is December 31, 2023. But borrowers are advised to apply before November 15 this year to get relief before the payment break ends.
Here’s what could happen if relief resists legal challenges
It could free up more money for expenses and goals
Recently announced relief packages could erase or reduce a substantial amount of your federal loan debt. (Private student loans aren’t covered.) The impact on your budget could be huge, especially in times of inflation and high interest rates.
“$10,000 could be a lot of money for someone, and it could really help them get back on their feet and get rid of financial debt,” says Maggie Klokkenga, Certified Financial Planner in Morton, Illinois. .
If you are not eligible for the discount, you will still benefit from the loan repayment pause, which has been extended until December 31, 2022 – interest free. If you continue to make payments during the break, your balance will decrease. If you’re procrastinating, you can spend some of the money you’ve already spent on payments on more pressing expenses, like rent or high-interest debt.
But even if you qualify, you won’t receive a check for $10,000. Klokkenga suggests looking at your previous student loan statements to remind yourself of the minimum payment amount. Then you can allocate some or all of that amount (depending on the impact of the help on your balance) to saving for an emergency fund and other financial goals, “whether it’s a vacation, short term, or whether it’s retirement, long term,” says Klokkenga. . “And then you can still have fun with it, but that doesn’t mean it’s a bargain or you just won the lottery.”
Liseno says he has already seen many people pursue financial goals while payments have been suspended. “This whole adjournment has shown that when student loans are off the table, young people are now buying homes. They buy cars. This money goes into the economy,” he says.
Think about what you would do with the extra money if your minimum monthly payment of $300 was reduced to $150. Or $0. Klokkenga says using an online tool, such as Utah State University Extension’s PowerPay, can help you create a debt payment or spending plan based on your student loan savings.
You may not feel a difference
Federal student loan payments have been on pause since March 2020. This latest extension should sound familiar.
The relief plan “is going to help a lot of Americans with … their future budgets,” Liseno said. “Because most people haven’t had to pay for almost three years.”
If you’ve taken advantage of the break, you’ve probably already moved money elsewhere in your budget. Or, if you’ve saved the monthly payment amount responsibly, you’ll be used to parting with that money if you still have a balance to pay in January.
Student loan relief plans are still pending. It can be difficult to predict what will happen to your finances until there is a clear resolution. In the meantime, stay on top of the news and do your best to prepare for different outcomes.