The past two years have been filled with headlines concerning student loans, from the Administrative Forbearance, and its countless extensions, to servicers ending their contracts with the Department of Education. Unfortunately, there are still plenty of unanswered questions around the student loan system in America. Here is what to watch for in the year ahead.
|Payments Resuming||New PSLF Servicer||Limited PSLF Waiver|
|Interest Rates||Midterm Elections||Negotiated Rulemaking|
Currently, the Administrative Forbearance of Federal Student Loans is set to expire on August 31, 2022 (as of April 5, 2022). As a result, payments will be due in May, and interest rates will reset from 0% to the pre-forbearance rate.
What initially began as a six-month reprieve in March 2020 has now allowed borrowers to forgo payments for over two years. The work of resuming payments will be a tall task for servicers. The situation is truly unprecedented, and some experts warn borrowers to expect some mistakes and delays.
Earlier this month, the White House Press Secretary said that "if [student loan payments] resume… Biden will continue working to ensure a smooth transition to repayment." For some, the word "if" is enough to spark hope that the Administrative Forbearance may be extended even further.
Here are several articles around Federal Student Loan Forbearance:
In July 2021, FedLoan Servicing, or the Pennsylvania Higher Education Assistance Agency, announced they would be terminating the agreement to service federal student loans. Although the announcement came as a surprise and promised to result in a significant change to the federal student loan landscape, FedLoan Servicing agreed to support a smooth transition for the 8.5 million borrowers that they service. FedLoan Servicing is working with the Department of Education and borrowers into 2022 while accounts are transferred to new Federal Student Aid servicers such as NelNet, Aidvantage, and Great Lakes.
In late December 2021, the Department of Education determined that MOHELA will be the new servicer for all borrowers enrolled in the Public Service Loan Forgiveness (PSLF) program. This news provides some welcomed clarity for many physicians and dentists pursuing PSLF who are unsure where their loans would be transferred. According to Federal Student Aid, the transfers will be complete later in 2022.
Last year, the U.S. Department of Education announced some major changes to the rules and qualifications around the PSLF program. As a result, borrowers could receive credit for past payments made on loans that would otherwise not qualify for PSLF.
Payments made under previously ineligible repayment plans or made toward ineligible loans may now count as qualifying payments toward the 120 payments necessary to achieve PSLF.
The waiver currently ends on October 31, 2022. This website from the Department of Education offers steps to take to see if you qualify.
The Federal Open Market Committee (FOMC) meets eight times a year to set the target rate for federal funds. These meetings and announcements from the Federal Reserve are felt throughout the financial markets. When the FOMC raises the target interest rate for federal funds or even hints at raising rates in future meetings, it often results in an increase of other interest rates, such as student loans.
Believe it or not, the interest rate for federal student loans disbursed between July 2020 and June 2021 was lower than the interest rate for federal loans dispersed between July 2019 and June 2020. Since 2013, federal student loan rates have changed annually. If the FOMC raises rates in 2022, we will likely see a rise in the interest rate for federal student loans dispersed in 2022-2023.
The interest rates offered by private student loan lenders and refinancing institutions will also be affected by what the FOMC does in 2022. According to almost every market analyst, rates are bound to rise and potentially significant throughout 2022. Meaning that borrowers hoping to refinance their student loans to lock in lower interest rates may need to act quickly and should be aware of how interest rates are moving in the year(s) to come.
As hard as it is to admit, politics play a role in many facets of the American economy, from fiscal policy to student loans. Many pundits are reporting that there seems to be mounting pressure on the first-term president to help his party's performance in the midterm elections by offering additional relief to student loan borrowers.
A reporter asked this question at a recent White House press briefing, "Is the president worried at all about slapping millions of student borrowers with their monthly obligations of hundreds or thousands of dollars toward their student loan payments several months ahead of an election cycle when he's then going to run around to those same college-educated voters and ask them to vote for Democrats in November?" Unfortunately, while the president did not cause the student loan crisis America is facing, he is forced to deal with it.
Draw your own conclusions on what impact the midterm elections might have on student loan policy, but it is hard to ignore the potential influence that they could have.
Congress passed the Negotiated Rulemaking Act of 1990 to encourage federal agencies to develop proposals for changes to regulations in collaboration with public input – mostly from affected parties. In June of 2021, the Department of Education began a negotiated rulemaking procedure to develop new standards and regulations around many different aspects of the federal student loan system.
Over the course of many meetings and negotiations, there have been some changes to report. But unfortunately, many advocates feel that the changes fall short in the areas of PSLF and IDR plans. For example, a large number of proposals were submitted, but the Department of Education admitted they could not enact many of them – likely due to the immense complexity of existing income-driven repayment plans. Also, the new language around PSLF is reported to still exclude employees at for-profit companies regardless of their job description. Doctors, who are public servants in the eyes of many, working at for-profit institutions fall into this category.
One bright spot was the agreement reached to eliminate all instances of interest capitalization not required by statute, including when borrowers enter repayment and when they exit forbearances, among others.
Watch for the Department of Education to begin publishing regulatory text by the end of 2022 and for these regulations to start taking effect toward mid-2023.
As always, the team at Spaugh Dameron Tenny wants to keep you in the know. Be sure to check back for future updates. If you are a client and have questions about your specific student loan strategy, please reach out to your advisor. And, if you are interested in learning how SDT can help you with your financial goals, please connect with us.
Will Koster is a financial planner with Spaugh Dameron Tenny. The experience of losing his father as a teenager helped Will find his calling in financial planning. He has a passion for working with dentists and physicians, helping them navigate their unique wealth creation journeys. In addition, Will has become the in-house expert on student loans after completing the Certified Student Loan Professional® training.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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