Is student loan cancellation possible, and should you stop making payments?

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On the campaign trail, President Biden was vocal about his support for student loan relief policies — everything from extending the current federal forbearance period to increasing the value of Pell Grants. One of his more popular proposals among student borrowers was the push to cancel $10,000 of debt for all borrowers with federally owned student loans.

Borrowers with federal student loans may see this as a good time to stop making payments in order to maximize their potential forgiveness. But there are a few things to consider before going this route.

How likely is student loan forgiveness?

There are a few ways that widespread student loan cancellation could happen. First, Biden could sign an executive order to cancel student loan debt without congressional approval. He has launched an inquiry into the legality of this type of executive action, but he has also expressed doubt about his authority to cancel debt in this way. He is more likely to introduce a new stimulus package or wait for Congress to pass a resolution canceling student loan debt.

Student loan cancellation isn’t a popular topic among many congressional Republicans. It’s been removed from previous stimulus packages and isn’t included in Biden’s White House budget proposal for 2022. And while several prominent Democrats have advocated for up to $50,000 in cancellation, Biden has pushed back.

With no student loan forgiveness in the budget and no indication that Biden will pursue executive action, mass student loan forgiveness seems less likely than it did while Biden was campaigning.

With that said, his administration has worked on more targeted loan forgiveness, canceling the debt of borrowers with total and permanent disabilities and borrowers who were defrauded by their universities. The Department of Education is also considering improvements to existing student loan forgiveness programs, like Public Service Loan Forgiveness and income-driven repayment plans.

Should you still make student loan payments while waiting for forgiveness?

While canceling student loan debt is a priority for many lawmakers, it is still a long way off. It’s possible that Biden’s proposal to cancel $10,000 for all federal borrowers will pass — but it’s just as likely that the parameters for forgiveness will be limited. You’ll be caught in a bind if you assume that forgiveness is coming and end up defaulting on your loans as a result.

The good news is that interest charges and payments on most federal student loans are currently on hold through Jan. 31, 2022. If you have no emergency savings built up, or if you’re having trouble paying other bills, it’s worth it to pause your payments right now regardless of any forgiveness policies. If you have a small balance — say $2,000 — you may also choose to put your student loan payments away in a savings account and wait it out until either repayment resumes or your balance is forgiven.

After the forbearance period ends, though, it’s best to resume all payments with the assumption that your balance will not be forgiven.

What happens if you stop paying your student loans?

If you stop making payments on your student loans, the first consequence will be late fees. Late payments will also show up on your credit report and impact your credit score. On-time payments are the biggest factor in your credit score, so several late payments could devastate it.

After a few months of nonpayment, you’ll default on your student loans, which will also damage your credit score. If you don’t get out of default, the government could garnish your wages and seize your tax refunds. Your credit score will continue to drop, which will make it harder to get credit, apply for housing and more.

If you can’t afford your federal student loan payments, try switching to an income-driven repayment plan or applying for a deferment or forbearance plan. The first method will lower your monthly payment to a more manageable level, while the second will pause your payments entirely for a specified amount of time.

What are the best strategies for paying off student loans?

Since student loan cancellation is not set in stone, you’re still responsible for making payments when they’re due. And, importantly, if you have only private student loans, you likely won’t be eligible for any kind of student loan forgiveness.

Here are some of the best ways to deal with your student loans as the administrative forbearance period continues:

  • Pay private loans now. If you have a mix of private student loans and federal loans (or just private loans), you need to keep making those payments. Private lenders don’t operate with the same rules as federal student loans, meaning there’s no blanket forbearance period. During this time, any money you would be paying toward your federal loans can instead go toward your private loans, since they’re still charging interest.
  • Refinance your loans. If you have only private student loans, you might qualify for a lower interest rate and potentially lower monthly payments if you refinance. Student loan interest rates are at historic lows right now, making this a great time to refinance. But hold off on refinancing your federal loans — not only will you have to immediately resume making payments with interest, but you’ll also lose eligibility for any future loan cancellation.
  • Save potential payments. Since you don’t need to make federal student loan payments right now, that money could go toward immediate needs, like paying for your home, utilities and car. You could also consider putting those payments into a high-yield savings account. That way when your payments resume, you can pay however much you’ve saved as a lump sum.

If you’re struggling to pay your private student loans now, you’ll need to reach out to your lender and see what options you have for your individual circumstances and needs. You might qualify for hardship assistance; eligibility varies by lender, but many have coronavirus-specific options in place.

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Written by
Zina Kumok
Contributing writer
Zina Kumok has been a full-time personal finance writer since 2015. She’s a three-time nominee for Best Personal Finance Contributor/Freelancer at the Plutus Awards and a two-time speaker at FinCon, the premier financial media conference.
Edited by
Student loans editor