HEROES Act: $10,000 Student Loan Forgiveness
If you’d rather watch than read, check out the YouTube version here!
I just got through reading the student loan sections of the proposed HEROES Act, and I’m going to share with you all of in this video, and it’s actually a bit more nuanced than a lot of publications are letting on.
You’re kind of just seeing “$10,000 forgiveness” kind of bandied around, but it’s a bit more nuanced than that, especially on the private student loan side.
So let’s start with the proposed protections and forgiveness for federal student loans and then I’ll talk about what the HEROES Act is proposing to do for private student loans.
So let’s go back to the CARES Act because that provides a framework for the HEROES Act and student loans.
The CARES Act automatically paused payments until September 30 on both the principal and interest for many federal student loans.
Until September 30, the CARES Act said no interest would accrue on those federally held loans so that if you don’t make payments during this time, your balance won’t get larger.
The CARES Act also provided for a suspension of involuntary collections.
However, not all federal student loans qualified for this under the CARES Act. Only direct loans or FFEL loans held by the Department of Education, that’s the old Federal Family Education Loans, when I graduated from college, I had the old $30,000 of FFEL loans because direct loans weren’t around yet.
So commercially-held FFEL loans, that is, FFEL loans not held by the Department of Education, as well as Perkins Loans, which are typically held by your college or university, these did not qualify under the CARES Act.
Now, the HEROES Act is saying that all those loans that didn’t qualify under the CARES Act now qualify for the same benefits as the direct loans and FFEL loans held by the Department of Education, so it proposes to change the definition of which loans qualify for the payment pause, and it says that you will receive a refund of any amounts you paid that you wouldn’t have paid if these loans were included in the original CARES Act.
The HEROES Act would also extend the payment pause on all these loans for another year, CARES Act says payments are paused until September 30, 2020, but the HEROES Act proposes to extend that to September 30, 2021.
And it also says that for the 30 days after September 30, 2021, there’s a transition period where if you miss a payment during that window, you won’t be charged a late fee and it won’t impact your credit.
The HEROES Act also proposes that the period during which no interest accrues would last until the later of September 30, 2021, or two months after the unemployment rate shows “initial signs of recovery,” and they define “initial signs of recovery” by some complicated formula that I’m not going to get into.
Also, the HEROES Act now allows you to consolidate your non-Direct loans into a Direct Loan so that your payments count toward public service loan forgiveness if you work for a qualifying employer after making 120 qualifying payments.
Previously, if you had a non-Direct loan, for example a FFEL loan, like I had when I graduated, you would first have to consolidate into a Direct Loan, doesn’t sound so bad, but here’s the kicker: under current law, any payments you made on your FFEL loan prior to consolidating into a Direct Loan, those payments no longer count toward the 120 qualifying payments for public service loan forgiveness.
The HEROES Act is now saying that those previous payments, those pre-consolidation payments would now count, they would combine with the payments made post-consolidation to accumulate payments toward the required 120, if you consolidate between whenever the HEROES Act passes, if it passes, and September 30, 2021.
Let’s move on to the big kicker. Student loan forgiveness for federal student loan borrowers, I’ll get to private student loans here in a minute, but for now let me just read you the text of the bill as it pertains to federal student loans.
“Not later than 30 days after the date of enactment of the HEROES Act, the Secretary shall cancel or repay an amount on the outstanding balance due (including the unpaid principal amount, any accrued interest, and any fees or charges) on the Federal student loans defined above, essentially, that is equal to the lesser of $10,000 or the total outstanding balance due on such loans of the borrower.”
So yes, the HEROES Act is proposing student loan forgiveness for federal student loans of up to $10,000 in principal, interest, and fees, and this would be tax-free, the HEROES Act specifically says that this would be tax-free, no taxable cancellation of debt income.
And of course the HEROES Act says all this would be implemented as though it were part of the original CARES Act.
Now let’s talk about what the HEROES Act says about private student loans. There is a $10,000 component here as well, but it’s a little different than the $10,000 cancellation for federal student loans, a lot of YouTubers and even here’s a Forbes article that kind of just lumps these things together under the words “student loan forgiveness,” but there’s an important nuance here that is completely missed by many YouTubers and by this Forbes article.
And that nuance is that while for federal student loans, the $10,000 is just declared to be cancelled — zap, it’s gone — with private student loans what the bill proposes is not a, snap, $10,000 forgiven, that’s not what it proposes with private student loans.
What the HEROES Act proposes for private student loans is that from the date the HEROES Act passes, if it passes, until September 30, 2021, the government will make payments on your private student loans up to a maximum of $10,000 in payments, and payments include principal and interest, whatever your normal monthly payment would be.
And then after September 30, 2021, any unused portion of the $10,000 amount will be applied to your outstanding private student loan balance, to the extent there is a balance remaining.
And, get this, these payments will count for your credit as though you had made them.
And this makes sense, these are private student loans, the government doesn’t simply have the power — like it does for federal student loans — to snap its fingers and cancel the balance of a debt owed to a private creditor, so the best it can do is make payments on the loans.
The HEROES Act also proposes that interest not be capitalized on private student loans all the way through September 2021, of course the bad part about interest being capitalized on a student loan is that it becomes principal, essentially, accruing interest itself, so when interest capitalizes to the loan balance, now you have interest accruing on interest, and we don’t like that.
And the HEROES Act also proposes that involuntary collections on private student loans shall cease through September 2021, it institutes the creation of essentially income-driven repayment plans for private student loan companies.
That is what the HEROES Act proposes for student loan borrowers, and if you’re concerned about your student loan situation, and if you have $20,000; $50,000; $100,000; $200,000; $400,000 plus in student loans, then even if this thing passes, you still have a long road ahead of you and $10,000 forgiveness would be nice, but it’s not going to dig you out of that hole.
The rules regarding student loan forgiveness and all the different repayment plans are very tricky, so to help people navigate them I recommend a group of folks who specialize in student loan planning.
This is not some shady student loan consolidation service charging you a ton of money for something you could do yourself through the Department of Education, these are professionals, CFPs, CPAs, CFAs, who offer consulting services, it is not free, you would pay them for the services they provide, but in my opinion there are none better when it comes to putting together a custom student loan plan to ensure that you are minimizing both your monthly payment as well as maximizing any student loan forgiveness you may be eligible for,.
I mean, they’ve worked with doctors who thought they were on the right track for student loan forgiveness, but it turns out they weren’t, so if you have massive student loan debt and want to make sure you’re playing your cards right, not just through this September or September 2021 as the Democrats want, but for the next 10, 20 years to maximize your cash flow and your net worth, check out that link in the description below to learn more.
I hope this video was informational and educational to you, I will be back later with another video.
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