The New Student Loan (Forgiveness) Crisis

We have a student loan crisis brewing in America. No, not the $1.75 trillion (and growing) of collective student loan debt that’s hindered the future of two generations. That crisis is well-documented, and tragic. The crisis I’m talking about today has more to do with the recent student loan forgiveness program.

Let’s rewind a bit, shall we? In March 2020, as COVID wrecked everything we knew as “normal”, the Federal government enacted a freeze on all student loan payments (and interest accrual). This has since been extended eight times, and payments are scheduled to commence on 9/1/2023 (barring another extension).

In the meantime, the Biden Administration launched a program to forgive $10,000 of outstanding Federal student loan debt (or $20,000 if you had Pell Grants) so long as your income is less than $125,000 (or a combined $250,000 if married). Millions of Americans immediately applied in late 2022 when the online application went live. Then just as fast as it launched, it was paused. Several lawsuits were brought against the Federal government, claiming the government didn’t have the authority to issue widespread forgiveness in the way it was executed. This sudden turn of events emotionally crushed many, causing widespread anger and dissension. But this isn’t the crisis, either.

Unbeknownst to most people, this same student loan forgiveness program applied to people who actually paid off their loans since the freeze began in March 2020. So instead of applying to have their loans forgiven, they were applying to get a refund for the qualified $10,000 or $20,000 sums. It’s difficult to discern how many people qualified for refunds, but statistics show approximately 9 million people paid on their loans since the freeze began. Many of my clients fell into this group, as they took advantage of the freeze to finally free themselves of the burden of their debt by aggressively paying them off. Amazing work!

This is where things get weird. Instead of going through the Federal government and waiting for their approval (which was obviously paused with the lawsuits), their respective loan servicers were the ones processing these requests. Lo and behold, checks started arriving. Hundreds of thousands of Americans (or perhaps millions?) have been receiving refund checks for their student loans. According to the texts, calls, and DMs I’ve been receiving, these checks are still arriving in people’s mailboxes.

Here’s the crisis. Many of these people have excitedly received these checks, then quickly spent them. After all, $10,000-$20,000 is a LOT of money. But here’s the new reality: if the lawsuit succeeds and the loan forgiveness program dies, these checks will turn into new debt. I’ve had multiple clients reach out and tell me when they log into their student loan account, they now have an outstanding balance that mirrors the checks they received. And just like that, after all that work, discipline, and sacrifice, many borrowers find themselves unknowingly back in debt.

If this is you, or perhaps someone you know, here’s what I recommend:

• Don’t spend it. This isn’t your money (yet).

• Don’t send it back. If the forgiveness goes through, you’ll be glad you already have this money. There’s no telling how hard it will be to get your money down the road if you have to re-apply for it.

• Put it somewhere safe….and leave it there. A savings account or high-yield savings account should do the trick. Just set it aside, and leave it alone.

Once all this mess gets sorted out in the courts, you’ll hopefully have a clear road map on how to handle your situation…..one way or another. But please don’t sabotage your financial life in the meantime. You worked so hard to get here. Don’t let this blessing turn into a curse.