5 key takeaways from the new plan to cancel student debt

Here are 5 key takeaways from a new student debt cancellation plan.

Here’s what you need to know and what it means for your student loans.

Student loans

Days before President Joe Biden announced his decision on student loan forgiveness, a major new student loan forgiveness plan rocked Capitol Hill. Three members of Congress, Representatives Virginia Foxx (R-NC), Elise Stefanik (R-NY), and Jim Banks (R-IN), introduced major legislation on student loan forgiveness and repayment. Their new bill, which faces an uphill battle in a Democratic-controlled Congress, offers an alternative to Biden’s potential plan to cancel student loans and change the future of student loan debt. Here are 5 important takeaways from the new student loan forgiveness plan.

1. No Large-Scale Student Loan Forgiveness

First, the plan includes no large-scale student loan cancellation. More than 40 million student borrowers are waiting for an answer from Biden on student loan forgiveness. They are hoping for $50,000 in student loan forgiveness, but expecting $10,000 in student loan forgiveness. Leaked documents from the US Department of Education show who might be eligible for a large-scale student loan forgiveness. However, Biden has not decided whether he will embrace large-scale student loan forgiveness. Therefore, Biden could forgo a large student loan forgiveness. The bill reflects Republican sentiment toward student loan forgiveness: it is extremely costly, represents an unfair redistribution of wealth, and harms Americans who have not attended college or have no student loan. Progressive members of Congress disagree, saying large-scale student loan forgiveness will boost the economy, reduce disparities and provide a financial lifeline to millions of borrowers. Democrats say student borrowers are suffering financially from the Covid-19 pandemic and that student loans have prevented them from getting married, starting families, buying homes and saving for retirement.

2. End student loan forgiveness for these borrowers

Second, the new bill would end the student loan exemption for public servants. Specifically, the bill would end the Civil Service Loan Forgiveness Program effective July 1, 2023. Student borrowers who apply for Civil Service Loan Forgiveness before that date would likely remain eligible for waiver of their student loan. Like the large-scale student loan forgiveness, some Republicans believe eliminating public service loan forgiveness would save the federal government billions. Democrats want to continue the federal program to help police, firefighters, military, first responders, doctors, nurses and other public servants get student loan relief. Since becoming president, Biden has forgiven more than $25 billion in student loans, including $8 billion in student loans for public servants. Congress created the Public Service Loan Forgiveness program in 2007 with bipartisan support.

3. New income-based repayment plan

Third, the bill would create a new single income-based reimbursement plan, similar to income-based reimbursement (IBR). This new plan would replace the existing income-based reimbursement plans: IBR, Pay As You Earn (PAYE), Revised Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR). A single student loan repayment plan would reduce bureaucracy and confusion for student borrowers. Biden has made several changes to simplify the cancellation of student loans. The president could also propose a new income-driven repayment plan, but Biden recently delayed his new student loan plan. The new bill would also eliminate interest capitalization on student loans, which would save money for student borrowers. When student loan interest is capitalized, accrued student loan interest is added to your student loan balance.

4. Interest on student loans would be limited to 10 years

Fourth, in a big win for student borrowers, the bill would limit interest on student loans to 10 years. Specifically, student borrowers who are enrolled in an income-driven repayment plan would only have to pay their original student loan balance plus 10 years of student loan interest. Currently, student borrowers with an income-driven repayment plan get student loan forgiveness after 20 years for student loans. This could save student borrowers up to thousands of dollars in student loan repayments.

5. End the student loan payment pause

Fifth, the new legislation would end the pause in student loan payments. The student loan moratorium will end on August 31, 2022. However, this legislation would officially end the student loan moratorium if Biden extends student loan relief beyond August. Federal student loan payments have been suspended for more than 40 million student borrowers since March 2020. Congress passed the Cares Act, the $2 trillion stimulus package, with historic student loan relief, including no mandatory federal student loan payments and a 0% interest rate on student loans. Democrats have urged the president to continue suspending student loan payments, citing economic uncertainty and the Covid-19 pandemic. Republicans say Biden has canceled $400 billion in student loans and the ongoing pause in student loan payments has cost the federal government $150 billion. Are you ready for the restart of student loan repayments? Understand all of your student loan repayment options. Here are some of the best ways to pay off student loans and save money:

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