[00:00:00] Speaker A: Last week, the Biden administration released their second attempt at widespread forgiveness for federal student loans. In this episode, we go through the details of that plan, and I share whether or not I think it has good odds of being passed. Let's get started.
[00:00:15] Speaker B: Are your student loan payments or loan balances a major obstacle in your financial life? Then tune in and let's escape student loan debt.
[00:00:26] Speaker C: Hello.
[00:00:26] Speaker A: My name is Brenton Harrison of escape student Loan debt and your host for the Escape Student Loan Debt podcast. If you are like many people in this country who have federal student loans, you'll recall during the pandemic when they were going through all those machinations of pausing student loan payments and pausing student loan interest, that there was also a very big program that was released that was affectionately known as the Biden Student Loan Forgiveness program, although that was not the actual name of the program itself. And when it was finally struck down, we went through what was next, in our opinion, when it came to federal student loans. Well, if you were paying attention last week, you recognized that the Biden administration, who took that defeat and kind of went back and gathered together and said, let's try this again, released their second stab at widespread student loan forgiveness. If you're following along on screen, we're looking at an article from Ed Dot Gov that we're going to use as kind of the template for what we cover in this episode, because we're going to go through, tenant by tenant, the elements of this program. I'm going to explain how this second version at forgiveness is really a collection of different changes that have already been implemented in other areas of student loans, just all under one umbrella. And then in the second half of the episode, I'm going to give you my opinion on whether or not it has a good chance of actually being passed. So let's start with the first bullet point on this press release, and if you're not reading along on screen, we're going to have a link to this article in the show notes and that bullet point. The first tenant of this Biden student loan forgiveness program is waiving accrued and capitalized interest for millions of student loan borrowers. Accrued interest is essentially the idea that we've covered in the podcast in the past where, based on the student loan payment that you're making, it's not necessarily guaranteed to be enough to make your student loan payments go down. As a matter of fact, if you have an income driven repayment plan, there's a good possibility, based on how much you owe, that you could be making consistent, timely payments and still seeing your student loan balance increase. Now, capitalized interest is a different story. Capitalized interest is really the combination of what are typically two different categories when it comes to your loans. Unlike many forms of debt, student loan interest accrue based off of simple interest, which simply means that if I owe, for example, $100,000 at 5% interest, well, that means that in the first year, $5,000 of interest is going to accrue against that debt. But unlike other forms where they add that 5000 on top of the 100,000 that you originally owe student loans, they put that $5,000 in a separate interest category. And they do that so that in year two, when 5% interest is calculated, again, it's calculated off of the initial $100,000, even though you technically owe $105,000. So as much as we hate federal student loans, it's actually a really forgiving way to have interest accrue as compared to other forms of debt. But capitalization occurs when those two categories are combined, meaning that you have done something. Maybe you forgot to recertify your income on a certain income driven repayment plan. Maybe you left an income driven repayment plan. Maybe you consolidated your student loans. There are certain types of things that could occur, or you could do that would cause that separate interest to capitalize on top of your original loan balance. Now, what they're saying with this strategy is that they are going to automatically wipe away the accrued and capitalized interest for anybody who meets certain income requirements. So in both camps that we just talked about, if your student loans have grown since you went into repayment, or for some reason that interest capitalized onto the original loan balance, you can have all of that extra balance completely wiped away without having to formally apply. But you do have to make sure that you meet those income requirements, which in this case, this will be familiar. If you remember the original student loan forgiveness program for single borrowers, you have to earn $120,000 or less. For. For married borrowers who file their taxes jointly, you have to earn $240,000 or less. If that sounds familiar, it's the exact same income requirements for people who are trying to get ten or $20,000 forgiven under the original plan. So if you're looking at this as kind of a combination of two different things, the first being the student loan forgiveness program that they initially tried to have passed that ended up being struck down by the Supreme Court, and also something that they kind of instituted already with the save plan. If you're familiar with the save plan, you'll know that as long as you make the payment that's required to you under that plan, any remaining interest that would have accrued on your debt will be covered in full by the government on your behalf through an interest subsidy. So again, a lot of the stuff we're going to talk about in this episode are kind of combinations of things that they've implemented in pieces in other elements of federal student loans. This is what you see in this first element where you see a part of what was in the initial forgiveness plan and also a part of something that they've tried to institute with the save plan. The next element is automatically discharging the debt for borrowers who were otherwise eligible for programs like save, closed school discharge, or even things like public service loan forgiveness, but just happen to have not enrolled so we don't have to go through all those programs. But suffice to say, there are several different ways to have your student loans forgiven for things other than the typical 20 or 25 years of forgiveness that comes from being in an income driven repayment plan. Public service loan forgiveness is one of them. Closed school districts charge is one of them where if you were at Corinthian colleges or ITT tech, you could potentially have your student loans forgiven. But whatever the program that you're thinking of, what this element is essentially saying is there are plenty of people who may be eligible for forgiveness right now who do not or have not navigated the administrative process that's required to get your loans forgiven. And there's a lot of complicated steps that are involved in each of those programs. And if you look at the history of the Department of Education leaning on loan servicers to actually do the job of filing and processing these forgiveness applications for people who actually did go through the process, it's been terrible. So I see this as kind of a mea culpa that says to borrowers, we understand that the current system is complicated. We understand that it's not working for you. So we're just going to take on the burden ourselves of doing all that paperwork. And if we see that you would have been eligible, don't worry about it. Your loans are forgiven. Next up, eliminating student debt for borrowers in repayment for 20 years or more. This is very relevant to the income driven repayment plan. It's a little more complicated than they actually share in that bullet point. Essentially, if you have been in repayment for your student loans for undergraduate studies for 20 years or more, or if you have a consolidated loan that you've been repaying undergraduate loans under for 20 years or more, they'll be automatically forgiven if they're a direct loan. You would also have them forgiven after 25 years of payments if there were graduate school studies that were involved in those loan repayments. And if this sounds familiar, it's the exact timeline that you see under the income driven repayment plans. So they're saying that we're going to forgive it after this length of time, regardless of whether you actually signed up for an income driven repayment plan. If that sounds familiar, it's essentially what they're doing with the income driven repayment plan waiver that ends on April 30. So they're trying to do an end around to just make what they did under the income driven repayment plan waiver for a limited period of time, just the new law of the land. And if that were to come to pass, it would really eliminate a lot of the reason that people would sign up for income driven repayment plans in the first place. That reason being the ability to have remaining loan balances forgiven. And it would then make those plans something that you're really doing if you're just trying to strategize having the lowest loan payment possible. So, for example, if you can get forgiveness under any repayment plan, your now just going to go to whichever payment plan requires you to pay the least amount over the 20 or 25 years. For most people, that'll be an income driven repayment plan. But this now opens up the opportunity for people who, for whatever reason, don't want to be on an income driven repayment plan right now to do so without feeling like they're losing credit towards loan forgiveness.
Next up, helping borrowers who enrolled in low financial programs or institutions. This is something that's really been a bigger deal over the last few years. But the Department of Education has been trying to release statistics that show, like, the end value that a student has by enrolling in a certain institution. End VAlue being things like, you know, what's the average income that you received upon graduation five years out? What are you doing in terms of the amount that you're earning, so on and so forth? And they're trying to start attaching that in value to the user, to the amount of government funding that that school happens to receive. And if you have an institution that's clearly not providing value to their students, they could be stripped of the ability to offer certain student loans to their potential students who want to go to that institution. So it's essentially saying, we can't just shut you down. But we can make it harder for students to come here by not offering loans to this location. And in that roundabout way, we're trying to incentivize the school to kind of up their game. This then, is an extension of the current program that already exists, the closed school discharge program, where if your school has closed and you can prove that they defrauded students, you can apply to have your loans wiped away. This is formalizing that program and saying it's not just whether your school defrauded students, it's whether you can prove that you are just not substantively better off by attending that school, you would be eligible for having your loans forgiven. And then lastly, assisting borrowers who experience hardship in paying back their loans. We're not going to get too deep into this one, but they're essentially saying that if you can prove that you are financially unable to pay these loans in any realistic form or fashion, that they would potentially be able to have specific actions that would cancel student loans for people who are in these dire financial straits. And this, to me, is an extension of some things that they've done when it comes to the process for having your student loans discharged in bankruptcy and in the past, in order to have your student loans discharged in bankruptcy. Number one, it was very subjective. It was kind of up to the court to determine whether they think that you have what's called undue hardship. An undue hardship was the person who has the loans making a claim and trying to show to the court that there's no reasonable way to expect them to repay that debt. And you may say, well, yeah, I have undue hardship. I got a mortgage, or I got high rent or I got credit cards. But in most cases, the court was saying, no undue hardship really means that there's just some unimaginable situation where there's no feasible way that you could be to make a loan payment. And that test was almost never met. So Department of Education in this instance, is really trying to take it out of the court's hands and saying, instead of going to a judge and asking them to look at your finances, send all of that information to us, and if we decide that you've met the undue hardship test, we will wipe away that debt on our end, as opposed to you expecting or having to do it through the bankruptcy process. Now that was a lot, and it was a high level summary, but there's a reason I'm not going too specific into all of these elements, and I'll tell you that reason after the break.
[00:12:03] Speaker B: This is the escape student loan debt.
[00:12:05] Speaker C: Podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving home ownership.
[00:12:16] Speaker B: We'll be right back.
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[00:12:49] Speaker C: You're listening to the Escape Student Loan debt podcast.
[00:12:53] Speaker B: Subscribe
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[00:12:55] Speaker C: Dot welcome back.
[00:12:58] Speaker A: Alright, so why did I not go too deep into the details of this student loan forgiveness program? It is because, unlike the last case where I thought that there was a very good chance, based on what they were trying to do, of having it forgiven, in this case, I think that there's no chance for several reasons. The first has to do with the concept we talked about with the first version of student loan forgiveness, and that is legal standing. A big element of that case was who has the ability, who has the legal standing to say that they have the right to sue the Department of Education to block this program from occurring in the first place? And legal standing means that you have to actually prove that you are harmed by this being put into place in the first place. Now, I thought that the cases of the people in the first instance were completely flimsy. I still think they're flimsy.
[00:13:48] Speaker B: I think it's just the makeup of.
[00:13:49] Speaker A: The Supreme Court that allowed this to pass. But they did say that the state of Missouri could sue on behalf of Mohela, one of the student loan servicers. Now, I think it's ridiculous because Mohila itself didn't sue, but the state of Missouri said, hey, Mohila is an organization that's affiliated with us as a state, and part of the revenue that Mohila collects is going to be compromised by this program. So even though they didn't sue because they're technically affiliated with us, we can sue on behalf of Mohila and say we have standing now because of that. This means that Mohila, or any other student loan servicer who can look at this program and say, oh my goodness, this is even more forgiving than the most recent program, and you are compromising our ability to do the business for which we signed a contract with the Department of Education. So just in terms of the legal component of it, this has brought even more parties to the table who could conceivably say that they are harmed by this forgiveness program. Which just makes it even more likely that one or all of those cases would be approved, which would say to the Department of Education, you can't do this because it hurts party. XYZ the next reason I think this has no chance of being passed is because it's an administrative nightmare. I mean, we've talked about all of the different ways that this combines things that they've instituted from other elements of student loan forgiveness and federal student loans, because I want you to see just how many different programs it touches. This is something that has similarities to the income driven repayment plan waiver, the public service loan forgiveness waiver, the closed school discharge, income driven repayment itself. You're talking about the elements of the save plan that have not been able to be implemented immediately. Some of these are just now being implemented this coming July. I think we can all agree that every single one of these programs that I've talked about has had a tremendous amount of headaches just being processed as is, much less trying to lean on doing away with all of those old systems for people who are currently waiting for applications to be forgiven in the first place, and then now having all of those processes taken away from the student loan servicers brought under the Department of Education and done automatically without the borrower having to apply themselves. I don't even know how it would be feasible to set up a system to monitor and notify the Department of Education of people who are eligible for all of these different things. Nor would I have any way of figuring out how long it would take them to implement them. I mean, if you're looking at the save plan alone, they started that plan last year. It's going to take them almost a year just to drop payments from 10% for some borrowers down to 5%. So if it takes you that long to just change the percentage on a payment plan, how long could it possibly take to set up a system that would track all these pieces of information? I just don't see it as likely to happen. And that brings me to my last point. I don't even think that the Biden administration expects it to happen. I think this was released because it's an election year. This is something that's going to a rulemaking committee, and that process is going to take months and months and months. And by the time that rulemaking committee comes out with the final bit of recommended legislation. I am sure that it will be pared down substantially from what we see here, and even that will probably not get approved. But I think this press release, this program in and of itself is truly just something that was released in just enough time to be able to run off of it in terms of an election issue, but just far enough out in terms of how long it would take to come up with the final legislation so that by the time they're actually coming out with the final legislation and trying to get this thing approved, the 2024 election would have already been decided whichever way that you wanted it to be decided. So this is something I hate to do. A whole episode where I tell you all the tenets of this plan just in the second half say it's not likely to occur, but I'm sure you would rather have me done the episode than just acted like the program didn't exist at all. If something changes and my opinion changes on this, I will not only do a recap episode of what we talked about now, but I'll do updates to tell you why I think this has changed. But if you're wondering why we're not going to do a ton on this moving forward, it's for those reasons that I just mentioned. I think this is one where you see a release. You'll see some cool articles about it, but it's not one that I would use to get my hopes up in terms of whether or not you'll actually see your student loans wiped away. So I hope that was helpful for you. I hope this cleared up some things. If you're already starting to see those articles floating around and wondering if you would be eligible for this forgiveness that's being discussed, we'll be back in two weeks with more federal and private student loan data for you, and I hope to see you then.
[00:18:21] Speaker B: From escape student loan debt this was the Escape Student Loan Debt podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving homeownership.
