Money Rehab with Nicole Lapin - Student Loan Cancellation and What it Means for You and the Economy

Episode Date: September 1, 2022

Nicole breaks down whether you're eligible for student loan cancellation (you may be surprised!), how to claim your relief, and what effect this will have on the economy.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today we're talking about the current hot topic in the finance world.

President Biden announced his plan to cancel up to $20,000 in student loan debt for eligible borrowers. Did I tell you? or did I tell you? A few weeks ago, I said right here on Money Rehab that we'd be seeing some sort of debt cancellation by the end of August. See? One of the benefits of being a seasoned money rehabber, you turn into a little bit of a psychic. First, I'm going to demystify the details of this plan, help you figure out whether or not you're eligible, and if you are, when your new outstanding debt sum will be IRS official. Then I'm going to get into the bigger picture and talk about what this means for the economy at large and what the critics are saying. Ready? Let's get into it. Now, the folks who are eligible

for student debt relief are, for the most part, people who have taken out federal student loans and are making under $125,000 a year. If you check that box, the amount of relief you're eligible for will come down to whether or not you received a Pell Grant. And dictionary note here, a Pell Grant is a type of financial aid available to low-income undergraduate students. If you did receive a Pell Grant, you're eligible for up to $20,000 of relief. If you did not, you're eligible for up to $10,000 of relief. In terms of applying this debt relief to your spending plan, it will not be automatic. You'll need to do some work in order to cash in on what you're eligible for. In the coming weeks, there will be an application process that you'll need to complete in order to

apply for your debt relief. On how much money you'll get? Well, that depends on how much you still owe. So if you're eligible for $10,000, but you only have $5,000 of student debt remaining, you're not going to get 10 grand from the government. You'll not receive more than what's left as outstanding debt. And if the opposite is true, you'll owe more than what you're eligible to receive. Then you'll need to start making payments again on the outstanding debt when the student debt payment pause finally, finally, finally ends January 1st, 2023. I don't think there will be more extensions after that. And let me nip a little fear in the bud here. No, you're not going to get taxed on the loan relief amount you receive. As The Hill points out, Congress eliminated taxes on loan forgiveness through 2025.

One thing to keep in mind, though, is that loan forgiveness will have an impact on your credit score. There is not a one-size-fits-all rule on how your credit score will be affected. In some cases, it might hurt. In others, it might help. We have someone really special coming on the show in the coming weeks who can really shed some light on this. But until then, just know that your credit score may be affected and factor that knowledge into any plans you have around applying for a loan or credit. However, as I alluded to earlier, not all federal borrowers qualify for this plan. If you took out a student loan before 2010, you might have taken out a federal family education loan, FFEL for short. These loans were guaranteed by the U.S. government, but owned by private companies like banks, for example. This is actually how the U.S. government engineered student loans from 1960 to around 2010. So because the U.S. government does not actually

own the debt from the FFEL loans, they have no latitude to cancel that debt. This extra sucks for FFEL borrowers because, as we know, this relief program is the second break for student loan borrowers in recent years. The first was the pause on payment requirements, of course, and interest accrual due to pandemic-related hardships. And again, because the government does not own the debt from the FFEL loans, they cannot enforce a payment pause. So FFEL borrowers didn't get that break either. However, if you are an FFEL borrower, you're not shit out of luck. There are roughly 5 million borrowers with an FFEL loan. If you're one of those, the education department told CNBC that you can call your servicer and consolidate into the direct

loan program to benefit from cancellation. More on that at the end of this episode and also, of course, in the show notes. Okay, so let's look at the macro, how this is going to affect the economy. And are we Team Biden on this plan? There are two large criticisms of this program, mostly coming from the political right, who by and large opposed any sort of debt relief in the first place. The first criticism is that this program will make inflation worse. Expert opinion is pretty split on this. And again, it pretty neatly divides down party lines with left-leaning leaders saying the impact to inflation will be minimal and right-leaning leaders saying this program will drive inflation higher.

The nonpartisan group, the Committee for a Responsible Federal Budget, says that debt relief would completely defeat the action taken in the Inflation Reduction Act. Remember, a key part of the Inflation Reduction Act was to make a historic down payment on deficit reduction around $300 billion, in fact, to fight inflation. It's anticipated that this student loan cancellation will cost the U.S. around $400 to $600 billion. So yes, that does work in opposition to the down payment facilitated by the Inflation Reduction Act. But another macroeconomic factor we're facing is a looming recession. And canceling student debt for millions of Americans does free up space in people's spending plans to spend more money and keep this economy running. And that does

benefit all of us. So we'll have to see how any effect on inflation will be balanced by the love the economy will see from a financially healthier population. The second criticism of the debt relief program is around who this program really benefits. And this is a particularly complicated point. People, mainly people in the Republican Party, have argued that the $125,000 income threshold is too high, and that this relief program really benefits too many people who don't actually need it. Several experts have pushed back hard on this claim. Axios reports that nearly 90% of those who will benefit from the debt relief program earn less than $75,000. And a significant percentage of student loan debtors didn't even get a four-year degree. So that means they also don't get the income boost

of a bachelor's degree. Axios also cites that people of color are disproportionately burdened by student loan debt. A typical Black borrower will still owe 95% of their student loans 20 years after starting college, compared to 6% for a white borrower. And women hold two-thirds of the student loan debt in the United States. Taken together, this data indicates how this plan can be helpful in closing the wealth gap. So this is really compelling evidence to me that this program will not only give economic relief to millions of Americans in need, but also take strides toward furthering socioeconomic equality. That's a win in my book. here for low blows. I cannot ignore the irony that many Republican leaders who have been so quick to criticize debt relief programs are indeed recipients of debt relief themselves. The White

House Twitter accounts have been dunking on these Republicans, like, for example, Marjorie Taylor Greene, a Republican representative from Georgia, who said that, quote, for our government, just to say, OK, your debt is completely forgiven, it's completely unfair, end quote. The White House Twitter account pointed out that Greene herself received forgiveness for more than one hundred and eighty three thousand dollars in covid relief loans. Yeah. And she's not the only one. Now, Republicans have argued that covid relief and student debt relief are not a fair comparison. And I do see that argument. COVID was completely unexpected, while student loans by nature are obviously expected. However, as nice as it would be for

these economic issues to exist in a vacuum, they don't. COVID relief was important because COVID made everything harder, including paying back student debt. But there's another facet to the criticism, which is where does this leave the people who broke the bank to pay off their debt? Listen, I am a progressive lady. You know this about me by now, but I won't align myself with Democratic talking points just for the sake of it. I will always give it to you straight regardless of the political angle. So here's what I'll say. This debt relief plan sucks for people who paid off loans. It sucks. It just does. I will say, if you made student loan payments during the student debt payment freeze, you can get a refund on those payments. If that's

you, check out the link in the episode description. But that is a small consolation prize for the people who busted their butts to pay off their debt in full. Here's the thing. Positive change always stings the generation that came before it. I'll say that again. Positive change always stings the generation that came before it. If you paid off your loans, you are part of the generation that brought awareness to the shitty situation and necessitated the change. Your experience was an important part of the process, but you didn't benefit from it, which is terrible. So you can be mad. You can be frustrated. If you missed birthday parties because you were working three jobs to pay off your student loans, you can be mad and you should be. If you decided where to go to college based on minimizing the amounts of loans you would have to pay later on, you can be mad and you should be. But just because you could

have benefited from this debt relief program and won't doesn't mean that no one else should. Did the women who spent the majority of their lives without the right to vote in 1919 disapprove of the 19th Amendment? Do you think all of the people who were fined for disobeying segregation laws wanted the Brown v. Board of Education decision to go the other way because they had already paid their fine? We have to be realists. The best thing for the majority of Americans isn't going to benefit you 100% of the time. And truthfully, it's a hard pill to swallow. But I think the only thing we can do here is to tell ourselves that it is what it is, that you were an important part of making other people's lives better, and that you have a lot to be proud of. Paying off student debt is a major accomplishment, and that is an accolade

you will always have. And I'm sure you have a beautiful credit score to show for it. For today's tip, you can take straight to the bank. If you have an FFEL loan, in order to make yourself eligible for the relief program, it may be best to do the consolidation directly on studentaid.gov. You'll want to fill out the federal direct consolidation loan application, which I have linked in the show notes. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson.

Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.