How advisers can help parents cash in on student loan relief

September 8, 2022 1:31 PM

Millions of American parents have taken out loans to pay for their children's college educations.

When President Biden signed an executive order canceling up to $20,000 worth of student debt, the most obvious beneficiaries were students. But many parents could share the relief as well, because millions of them have taken out loans to bankroll their children's educations.

"There are a significant number of parent borrowers, and they'll benefit from this," says Mark Kantrowitz, a student loans expert and author of the book How to Appeal for More College Financial Aid.

Due to the rising cost of higher education in the U.S. — the average school year at a private college now costs $38,185 — students applying for financial aid often max out what they can borrow from the federal government, but still can't pay their tuition. In many cases, their parents make up the difference by taking out loans themselves — leaving both generations in debt.

The numbers on this issue are sobering. According to a recent study by the think tank The Century Foundation, more than 3.7 million American families owe money on federal Direct PLUS loans — colloquially called "parent PLUS loans" — which help parents pay for their kids' undergraduate programs. Among those families, the median debt at graduation is roughly $29,600.

"Very few parents actually do borrow … to help their child get a bachelor's degree, but those who do borrow a lot," Kantrowitz says.

So for many families, Biden's executive order could offer some much-needed help. The plan provides relief in two ways: First, it extends the pause on federal loan repayments through December 31, 2022. And second, it forgives up to $10,000 in debt for those with loans held by the Department of Education. Those who received Pell Grants are eligible for an additional $10,000 in relief, for a total of up to $20,000.

Are parents eligible for this help? The answer is complicated. Some loans qualify, others do not, and many are somewhere in between. Plus, the government is still gradually explaining the details of the plan, so the answers may change over time — and to muddy the waters even further, Republicans opposed to the relief may challenge the order in court.

"Congress never contemplated that this was an authority the president had," says Scott Buchanan, director of the Student Loan Servicing Alliance. "We're developing a program that has no framework in the law."

Here's a look at which loans currently qualify for relief, and how financial advisers can help clients get it.

Parent PLUS loans

If you took out a federal parent PLUS loan for your child's education, you're in luck: The executive order covers this loan. In general, the order covers debts owed to the federal government — specifically, to the Department of Education — because those are the debts the Biden administration believes it has the authority to forgive on its own. Fortunately, Direct PLUS is a federal program, so its borrowers qualify — both for the repayment pause and for the forgiveness of up to $20,000.

"Any loan that was eligible for the payment pause and interest waiver is eligible for the forgiveness," Kantrowitz says. "That's the simple way of describing it."

Private loans

Next comes the bad news: Private loans do not qualify for relief. This includes both student loans co-signed by parents and loans taken out by the parents themselves — if they're held by a private lender, Biden's order does not cover them.

"Private loans are not related to the federal government in any way," Buchanan says. "The federal government has no financial interest in them, and the Department of Education doesn't regulate them. So they are outside of the scope."

The reason has to do with the limits of Biden's authority: The federal government is arguing that it can forgive debts to itself. But to pay off debts to outside lenders, it would need to spend additional money — which it can't do without Congress' approval.

"To forgive them, the U.S. Department of Education would actually have to make outlays. They would have to write checks to someone," Kantrowitz says. "Only Congress has the power of the purse."

FFEL loans

The answer for Federal Family Education Loans (FFEL) is as complicated as their history. The program began in 1965 as a way for the federal government to subsidize or guarantee private student loans. In 2010, the program ended — but many FFEL borrowers are still paying off their debts today.

The upshot is that some FFEL loans are held by the government, and some are held by private lenders. The federally held ones qualify for Biden's relief, but the privately held ones do not.

Still, for those loans that do not qualify, there's hope — and more complexity. Borrowers with a privately held FFEL loan can fold their debt into a federal Direct Consolidation Loan — which can be applied for on the Department of Education's student aid website. Through this consolidation, FFEL loans could become eligible for the Biden relief.

Perkins loans

For anyone still paying down a debt from the Federal Perkins Loan Program, Biden's order is unlikely to help. The vast majority of Perkins loans were issued by schools, not the federal government — although the government subsidized them — so almost none of them qualify for the new relief.

"Very rarely, a college will turn over its Perkins Loan portfolio to the U.S. Department of Education," Kantrowitz says. "But that's a really tiny percentage of them."

In its heyday, Perkins helped low-income students afford graduate and undergraduate schooling. Like FFEL, the program was formed in 1965 and is now defunct; it ended in 2017. The good news is — as with FFEL — Perkins borrowers can apply for a Direct Consolidation Loan, which could make them eligible for forgiveness.

What advisers can do

For those parents who do qualify under the executive order, advisers can help in a number of ways. The first is to make them aware of the relief, if they're not already.

"They should tell them to take advantage of it," Kantrowitz says. "It's free money."

Clients should also make sure both their loan servicer and the Department of Education have up-to-date contact information for them. (For the latter, this can be updated online.) To stay informed, they can also subscribe for student loan updates on the Department of Education website.

But advisers may also want to urge caution. The forgiveness measures are still being spelled out, and any subsequent court rulings could upend things.

"They should tell them to not count their chickens before they hatch, because the Republicans may file a lawsuit to try to block it," Kantrowitz says. "If they succeed… at the very least, it'll cause delays."

Buchanan echoed this advice.

"Wait until the forgiveness is applied to your account before you make any changes to your financial strategy," he says. "What I would hate for people to do is say, 'Oh gosh, I'm gonna get $10,000 or $20,000 … so I can afford to buy a more expensive home.'"

The better strategy, Buchanan says, is for borrowers to sit tight for now and keep checking their emails — and their account balances.

"It is going to take some time here for both the Department and the servicers to build this plan together," he says. "I think the best thing borrowers can do is go to the Department of Education's website and sign up for email updates … I would encourage people to do that, and then wait."