What borrowers should be planning given the current uncertainties.
Key things to know about the student loan forgiveness program as we head into 2023:
Implementation of the student loan forgiveness program has been halted by several lawsuits. It is unclear how successful the lawsuits will be in stopping the program from moving forward. At this time, borrowers are unable to even apply for the relief. For more information: Is $20K Student Debt Forgiveness Still Going to Happen? – NerdWallet
Payments and collections—currently set to resume January 2023 are also on pause until well into 2023. For more information:
What should borrowers be doing now?
As with any financial planning hurdle, it’s best to prepare for the worst-case-scenario and then celebrate if it is avoided. With this in mind, borrowers should proceed as if student loan forgiveness will not be implemented and that repayments will resume in January 2023. We recommend two actions:
Continue your financial planning as if none of your student loans will be forgiven. For example, if you have $60,000 in debt, and you were relying on it being reduced to $40,000 because of the program, assume that is not the case and you will be on the hook for the full amount. Build any financial planning projections and models on the assumption you will need to repay the full amount.
Starting in January, each month set aside the amount you would have been required to repay to your student loans. You can sweep those monies into a high-yield savings account while we wait for clarity on the implementation of the program. This strategy will give you flexibility in a number of ways. (1) If debt forgiveness proceeds, and you owe less than the forgiveness threshold, then you can allocate the money saved toward other financial goals. (2) If debt forgiveness proceeds and you owe more than the threshold—or if forgiveness is struck down—then you can use your accumulated savings to make a lump-sum payment right as the pause lifts, to make a dent in your principal before interest begins to accrue again.