Student loan ‘financial hardship’ forgiveness: New details revealed

By Eliza Haverstock | NerdWallet

Eight million borrowers facing “ongoing financial burdens,” such as those caused by unexpected medical bills, natural disasters or high childcare or family care costs, could qualify for federal student loan forgiveness — but that is not yet a done deal.

The Department of Education on Friday, Oct. 25, unveiled new details about the financial hardship proposal, including eligibility criteria and how borrowers can apply for the relief.

“For too long, our broken student loan system has made it too difficult for borrowers experiencing heartbreaking and financially devastating hardship to access relief, and that is wrong,” U.S. Secretary of Education Miguel Cardona said in a speech. statement.

The hardship proposal is part of President Joe Biden’s “Plan B” for student loan forgiveness, which is currently facing legal challenges. The president introduced “Plan B” in June 2023, after the Supreme Court blocked his original plan for student loan forgiveness of up to $20,000. The Ministry of Education started the regulatory process in October 2023.

The Ministry of Education aims to complete the plan by 2025, but lawsuits could affect the rollout. The department will formally publish the proposed regulations in the coming weeks. After publication, the public has 30 days to comment regulations.gov.

“While this is yet another legal way to forgive student debt, a downturn is expected, so it is critical that we move quickly to provide this much-needed relief,” said Kristin McGuire, Executive Director of Young Invincibles , a policy organization focused on issues affecting young people, in a statement.

Two paths to student loan forgiveness

If the hardship bill becomes law, borrowers would have two main routes to obtain this student loan forgiveness:

• Automatic forgiveness. If the Ministry of Education determines that you have at least an 80% chance of defaulting on your student debt within two years, it can automatically forgive your loans on a one-time basis. Determining hardship factors may include your income, assets, type and amount of student debt, and whether you received a need-based Pell Grant to pay for school.
• Application-based forgiveness. If you don’t qualify for the automatic one-time loan forgiveness, you can file an application that will holistically assess your likelihood of defaulting or experiencing serious, ongoing financial hardship.

Don’t count on forgiveness for hardship yet

For now, borrowers shouldn’t count on Biden’s student loan forgiveness “Plan B” — especially ahead of the Nov. 5 presidential election. The candidates, former President Donald Trump and Vice President Kamala Harris, hold starkly different positions on student loans.

“I have so little confidence that that actual forgiveness program will become a reality,” said Stanley Tate, an attorney who specializes in student loans. “Even if you had a president who you perceived to be a pro-forgiveness president, they would still face challenges from groups that have the right to challenge these things.”

On October 3, a federal judge in Missouri temporarily blocked Biden’s “Plan B” for student loan forgiveness, including this hardship proposal. A group of Republican-led states, including Missouri, Georgia and Alabama, filed the lawsuit in September.

“Our latest lawsuit challenges (the Biden-Harris administration’s) third and weakest attempt to mass cancel student loans in the dark of night without notifying Congress – or the public,” said Attorney General General Andrew Bailey of Missouri in a September statement. .

Forgiveness and relief options are now available

If you’re currently struggling with student debt, consider these existing options for relief and forgiveness instead:

• Income-driven repayment plans (IDR). IDR plans limit your monthly federal student loan bills based on your income and family size, to just $0. After 20 or 25 years, your remaining debt is forgiven.
• SAVE the lawsuit. The latest federal IDR plan, SAVE, is currently facing legal challenges. As a result, borrowers enrolled in SAVE will have an interest-free payment holiday until at least April. If you don’t have a SAVE plan, you can still get this interest-free deferral if you apply for the plan now. You always have the option to change plans later.
• Postponement or forbearance. You can temporarily defer your federal student loan bills by asking your servicer for a forbearance or forbearance. Deferrals are generally the better option because interest generally does not accrue, but you must meet specific eligibility criteria. If you have private student loans, ask your lender about ways to temporarily reduce or suspend your payments.
• Other forgiveness programs. Depending on where you live and your occupation, you may be eligible for other existing student loan forgiveness programs through federal, state, and local governments. Some private organizations and employers also offer reimbursement assistance. Public loan forgiveness can cancel student debt for government and nonprofit employees.
• Refinance if you have private student loans. If you have private student loans, your relief options are limited and you won’t have access to federal student loan forgiveness. Refinancing your private student loans to get a lower interest rate can lower your monthly payments and the total amount you pay. However, you can only qualify for the lowest advertised rates if you have a strong credit score and finances.

For more information about your relief options, please contact your student loan servicer. Your service provider can review your situation and make recommendations. You may also consider contacting vetted nonprofits that offer student loan assistance.

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Eliza Haverstock writes for NerdWallet. Email: [email protected]. Twitter: @elizahaverstock.