As the White House is considering canceling student debts, borrowers should run down their debts

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Student debt can affect so many aspects of a person’s life, from the career they’re pursuing to whether and when they can buy a home.

No wonder, then, that many people feel in limbo as President Joe Biden and other elected officials discuss the issue of student loan allocation.

CNBC has received hundreds of emails from borrowers asking questions about how likely an anniversary is, who would qualify for it, and when it might happen.

Here are some answers based on what we now know.

Can I Expect My Student Loans To Be Made?

Student loan borrowers are more likely to reduce or eliminate their balances.

President Biden has said he supports the cancellation of $ 10,000 per borrower, and now he has asked his education secretary to prepare a report on his legal authority to wipe up to $ 50,000 for everyone.

Apart from that: “You can’t rely on anything until the laws are signed,” says university expert Mark Kantrowitz.

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Currently, reports from the U.S. Department of Education and the Department of Justice are pending as to whether the president has legal authority to enforce lending through executive action, Kantrowitz said. It is still unclear when the results will be published.

Meanwhile, he added, “Borrowers should not take steep steps in anticipation of lending.”

When could forgiveness happen?

In theory, if Biden chooses to extend the loans through executive action, the borrowers could reduce or eliminate their balances fairly quickly. However, such a step can be accompanied by legal challenges, which can lead to delays.

Still, we may have a better idea of ​​what will happen this summer.

“If Biden decides he can do this by executive order, we expect to hear about it by June or July,” said Betsy Mayotte, president of the Institute of Student Loan Advisors.

If the White House elects to let Congress handle student loan forgiveness, the Democrats would likely use the budget vote process to accomplish this.

That’s because this process allows them to pass laws by simple majority, which is all they have. Other bills typically need 60 votes to move forward, thanks to Senate procedural rules. Republicans are largely hostile to the idea of ​​a college anniversary.

The next budget vote process is expected to take place in the autumn.

How Much Could Be Forgiven?

Right now, the main contention among student loan forgiveness advocates is how much debt should be scrapped: $ 10,000 or $ 50,000?

If all federal loan borrowers were to cancel their debt at $ 10,000, the country’s outstanding educational debt would fall from $ 1.7 trillion to around $ 1.3 trillion, according to Kantrowitz. And about a third of federal student borrowers, or 15 million people, would see their balances reset to zero.

The cancellation of $ 50,000 for all borrowers, on the other hand, would reduce the country’s outstanding student loan debt from $ 1.7 trillion to $ 700 billion. Meanwhile, 80% of federal borrowers or 36 million people would be completely gone.

Even under this more generous plan, not everyone would be entirely happy. One-fifth of federal student loan borrowers owe more than $ 50,000, and around 7% of borrowers owe more than six-digit amounts.

Should I still make payments with forgiveness on the table?

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Most federal borrowers don’t have to pay their bills until October, and interest is suspended during that time.

With $ 10,000 student loan forgiveness being the closest proposal to reality, Mayotte sees nothing wrong with people who owe below that amount and redirect their usual payments to savings blowing in August. “

“If it looks like we haven’t gotten any closer to forgiveness, pay the money,” she said.

Even if you owe more than $ 10,000, it can still make sense to take advantage of the government’s hiatus in paying student loans. With the extra cash, you can, for example, reduce high-interest credit card debt or build up your emergency savings.

Is there anything else I should do in the meantime?

Experts say there are some smart steps you can take in anticipation of student loan forgiveness.

Millions of people who took out student loans through the Federal Family Education Loans program prior to 2010 were excluded from the government’s offer to suspend their payments at no premium.

There is now some concern that these borrowers could also be excluded from student loan forgiveness.

As a result, these borrowers may want to consolidate their FFEL loans into the main direct loan program eligible for forgiveness, Kantrowitz said. The main disadvantage with this is that it will reset your repayment schedule. As you near the end, it may not make sense.

You cannot rely on anything until the legislation is incorporated into the law.

Mark Kantrowitz

University specialist

In the meantime, borrowers considering refinancing their federal student loans into private loans at a lower interest rate may want to wait, Kantrowitz said. For one, the interest rate on most federal student loans is 0% for an additional five months.

In addition, “they will feel stupid if they only refinance themselves so that the federal government announces the lending,” said Kantrowitz.

Could my private student loans be available?

“When it comes to private student loans, they are highly unlikely to be included in the award plan,” said Elaine Rubin, senior contributor and communications specialist at Edvisors.

Would my forgiven debt trigger a tax bill?

Student loan issuance is now tax-free thanks to a provision included in the $ 1.9 trillion coronavirus stimulus package that went into effect in March.

Previously, any student loan debt canceled by the government was considered taxable and charged at the borrower’s normal income tax rate.

According to a rough estimate by Kantrowitz, a cancellation of $ 10,000 would have triggered additional taxes of $ 2,000 for the average borrower. If $ 50,000 per borrower were to be canceled, the average person would have to write a check to the IRS for $ 10,000.

The borrowers would now be exempt from these bills.

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