Student Loan Forgiveness Blocked: What Now?

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Credit Sesame discusses student loan forgiveness blocked by the courts and what happens next.

On November 10, 2022 a U.S. District Court in Texas ruled President Biden’s student loan forgiveness program to be unconstitutional.

Beyond being a setback for the President and the millions of borrowers who may be affected, this ruling creates a lot of uncertainty over what happens when student loan payments resume in January.

This is understandably an emotional issue to people who have thousands of dollars worth of debt hanging in the balance. It is important to think rationally about what to do next. Coping with the uncertainty the right way could save you money and help protect your credit score for years to come.

This is not the end of the story

The ruling in question is more definitive than an earlier court challenge which put the loan forgiveness program on hold. That earlier ruling by the Eighth U.S. Circuit Court of Appeals simply delayed implementation until the court could consider separate challenges to the program.

The new ruling by a U.S. District Court judge found the program to be unconstitutional on the grounds that the Executive Branch had overstepped its authority to forgive student loans.

In a statement following the ruling, Secretary of Education Miguel Cardona noted that the Justice Department had filed an appeal of the U.S. District Court decision. In short, the District Court judge’s ruling is not the final word on the matter. Given what’s at stake, it wouldn’t be surprising if the issue were not decided until it goes before the Supreme Court.

Even then, there are other court challenges to the program in the works, on different legal grounds. It’s entirely possible that the program could be in limbo for a long time to come.

That creates a very challenging situation for a large number of borrowers. In his statement, Secretary Cardona noted that 26 million borrowers had applied for loan forgiveness under the Biden program. 16 million of those had already been approved.

Are payments to resume in January?

The backdrop to this legal wrangling is the fact that the scheduled resumption of payments is fast approaching. The appeals process and other legal challenges are unlikely to be resolved by January.

There is the possibility that the Biden Administration will grant yet another extension of the deadline for resuming payments, but that is far from certain. The pause on student loan payments was originally put in place because of financial hardships caused by COVID. Now that employment has soared past pre-pandemic levels that reasoning no longer applies.

Significantly, Secretary Cardona’s statement made no comment on what borrowers should do if the deadline for repayment should come before the fate of the loan forgiveness program is resolved. Until such guidance is forthcoming, borrowers are left to decide for themselves how to proceed.

Prepare for either outcome

While the best solution may depend on a borrower’s particular circumstances, the safest thing to do might be to assume that you still owe your full amount of debt. That means getting ready to resume your payments in January.

Preparing to make payments based on the full amount of your debt covers you in case the forgiveness program is not ultimately rescued. That way, you won’t be subject to penalties, additional interest charges and damage to your credit score as a result of failure to make full payments.

At the same time, there’s no harm in applying for the forgiveness program, if you haven’t done so already. Then, if it turns out the forgiveness program is saved, you could be in line for a financial windfall.

The following are a few steps you can take to be prepared for either outcome.

Apply for the forgiveness program anyway

As of this writing, the application for the student loan forgiveness program is still live on the official Federal Student Aid website.

If you haven’t done so already, go ahead and fill out your application. It doesn’t cost anything, takes about five minutes to complete and requires no special documentation.

If the legal challenges are resolved in favor of the loan forgiveness program, having your application already processed allows you to benefit sooner.

Contact your loan servicer before year end for an update on your obligation

Since payments have been suspended for over two years now, contact your loan servicer to see where you stand. Check your remaining balance and payment amount if you have to start making it again.

Failing to resume your loan payments could have consequences. It could cost you additional interest charges plus penalties. It could also damage your credit for years to come.

Apply for income-based repayment now

One under-utilized tool for people with student loan debt is income-based repayment. That can limit the size of your payments to a certain percentage of your income. The aim is to make sure those payments are not too onerous.

If you expect to have trouble making your payments because your income is too low, it might be worth looking into income-based repayment.

Also, there are a variety of other loan forgiveness programs available. These are based on the borrower’s occupation or circumstances. Information on other student loan forgiveness programs can be found on on the Federal Student Aid website. It’s worth checking out whether you’re eligible, in case the general loan forgiveness program doesn’t survive.

Create a budget based on no forgiveness

While the Biden program is still in doubt, work out a budget assuming that you owe the full amount of your debt. Practice living on this budget between now and the end of the year so you will be ready. This may even help you put a little extra cash aside to help you get by once student loan payments resume.

Prioritize your debts

If you’re going to be juggling student loan payments along with other debts, you need to prioritize how you repay your debts.

The best approach is to make sure you make at least the minimum payment on every debt. Then, if you have any money left over, apply that to the debt with the highest interest rate.

Government-sponsored student loans typically have relatively low interest rates. So, you may want to apply extra payment amounts to more expensive debt, like credit card balances.

Frustrating as it is to have the student loan forgiveness yanked away, you are simply back to where you were before it was announced. For now, manage your finances as if you have to start payments and student loan forgiveness is blocked for good.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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