Money Rehab with Nicole Lapin - Will Student Debt Relief Actually Happen?

Episode Date: April 10, 2024

Today, Nicole unpacks Biden's latest student debt relief plan, what it means for you, and whether it will actually happen.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Remember during COVID when we were talking about student loans every other week because of the payment moratorium? I mean, what a throwback. It's not even Thursday. But you remember it, right? Debt interest was paused, and then it was going to resume, and then it was paused again, and then it was going to be canceled, and then a little bitty

of it was canceled. And wow, it was a roller coaster, and it gave me serious whiplash. And it looks like we might be back on the roller coaster because Biden just announced a new effort to help people pay off their federal student loans. This plan specifically takes aim at the powerful, powerful force of interest. Interest is amazing when it works in your favor, like with a savings account or in the stock market. But it is awful when it works against you, like when it's applied to debt. Interest is the reason your debt can snowball out of control and leave you owing more than you can handle. Biden is looking to put a stop to the downward spiral nature of student debt interest. The proposed plan would apply to

people whose debt has grown beyond the amount they originally borrowed because of the interest. Those people would have up to $20,000 of interest wiped away regardless of income. Meaning whether you make enough income to just scrape by or you have a baller status salary, you're eligible for this relief. But there is extra support for those making below a certain threshold. People making less than $120,000 a year or couples making less than $240,000 would qualify to have all of their interest forgiven. The goal here is for borrowers to pay the amount they took out and not more, or not much more anyway. Between those two buckets of eligibility criteria,

there are a lot of people that qualify. An estimated 25 million Americans would benefit from this plan, and of those 25 million Americans, 4 million would likely have their debt canceled entirely. Now, you might be getting 2020 flashbacks, and I don't wish that on you because they are never fun. But if you are, it's probably because Biden tried to cancel a significant amount of debt in 2020. At the time, it was the hope to cancel more than $400 billion in student debt, but the Supreme Court shut this down last year,

citing the fact that the move by Biden was an overreach of presidential authority. Since then, we've seen more updates on this front, like canceling debt for almost a million people who had been repaying student loans for over 20 years, or 153,000 people who were enrolled in the SAVE repayment plan. So that is a lot of people who have gotten help in some form or another, but not $400 billion worth of help. So why does Biden think it might work now when it didn't in 2020? Well, the legal precedent for his original plan in 2020 was the HEROES Act, which is a law that allows the government to waive student debt during a national emergency. Based on the HEROES Act, the Supreme

Court said Biden was overreaching. But this time, the Biden administration isn't using the HEROES Act as the legal backbone for their effort, but rather the Higher Education Act, which is a framework that the Biden administration thinks is less likely to get shut down by the Supreme Court this time, or at least that's the public statement anyway. But more on that in a sec. First, let's talk about the economic repercussions if this relief is realized. There are two trains of thought here. Critics say that this could add billions of dollars to the federal debt, which could likely increase inflation. The fairness argument also pretty much always comes into this conversation. Some say the plan neglects the people who diligently repaid loans, sometimes at the expense of a greater amount of stress and sacrifice, or bypassed college entirely.

Proponents of this plan say that this debt relief would help the economy by removing a financial ball and chain from Americans who want to buy a house, buy a car, travel, spend in other ways that would feed the economy. But before the fors and againsts battle it out too hard, it is worth asking, is this cancellation even going to happen? The president announced this relief plan while speaking in Wisconsin, which is a critical swing state for the 2024 presidential election. Student debt is a large priority for younger voters, and Biden is trying to appeal to those younger voters as the 2024 election gets more and more real. The New York Times reports that, quote, administration officials hope the president's

supporters will give him credit for trying, even if many of the borrowers do not end up seeing any relief before they go to the ballot box, end quote. Now, this reads to me like there is political incentive for Biden to announce any kind of program, even if he knows it can't pass, just to get political goodwill from Gen Z and millennial voters. So let me get back to the question I asked earlier. Why does Biden think sweeping debt relief will work this time when it hasn't before? Another possibility is he doesn't. Because remember, just because Biden says he wants this plan to happen doesn't mean that it will. This new plan hasn't been published in the Federal Register yet, which is basically the record of all of the

proposed new rules. And once it is, that will initiate a mandatory long public comment period before it can take effect. So in the meantime, what does this waiting game mean for you? Well, if you owe student debt, relief is awesome. I know that's controversial if you don't owe debt, but if you do, it is pretty easy to be a fan. And if it does make your financial life better, then I'm a fan too. But I do have to say all of this back and forth nonsense in Washington has made it really hard for me to give any good recommendations on how best to navigate the student debt situation. And however challenging it is for me and our team when we're trying to answer money rehabbers questions, it pales in comparison for how hard I'm sure it is for someone who is

asking that question. I always advocate for people to pay their debts, but it is hard for me to keep being the champion of that message for student loans if they're only going to get canceled. But what advice I can give is for any kind of debt, always stipulate when you're making payments that you want your payments to go to the principal and not the interest. If you can make sure that's set up, that will help you if Biden does get this relief passed, because you will have been making payments toward the chunk of your debt that will likely not get waived. For today's tip, you can take straight to the bank. There are a lot of people who qualify for their student loans to be waived under programs that already exist but who have not applied for relief yet. I mean a lot, about 2 million people. The student

loan office in the White House has a comprehensive list of the people who are eligible for some relief. I have linked that page in the show notes. Please, please, please check it. I do not want any money rehabber to be eligible for some sort of relief and just not know it. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with

me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.