Student Loan Forgiveness: Best- and Worst-Case Scenarios To Plan For Your Financial Future

Biden G20, Nusa Dua, Indonesia - 15 Nov 2022
Alex Brandon / AP /

The uncertainty surrounding student loan forgiveness, including law suits in six states and a “stay” granted by the 8th U.S. Circuit Court of Appeals concerning the Biden administration’s loan forgiveness plan, leaves a lot of people wondering about their financial future.

Andrew Griffith — CPA (NY) and associate professor of accounting at the LaPenta School of Business at Iona University — outlined some of the best- and worst-case scenarios for student loan forgiveness, and how borrowers can prepare for any contingency.

Protect Your Credit in a Worst-Case Scenario

“The worst-case scenario,” he said, “is that the student loan borrowers seeking forgiveness will not see their loans forgiven and may have to pay interest and penalties on any missed payments.” He recommends continuing to make payments, if possible, to avoid that contingency.

“A potentially negative credit report entry can cause the interest rates for future borrowing to rise. Some insurance companies consider their subscriber’s credit report history when evaluating their rates, and some employers will not offer jobs to candidates with poor credit records. These risks are something that can be prevented by continuing the required payments,” Griffith said.

If you continue making payments, according to, and reach your 120 qualifying payments for a Direct Public Loan, you can apply for forgiveness under Public Service Loan Forgiveness or Temporary Expanded Public Service Loan Forgiveness. This option exists regardless of the status of current legislation under consideration. Plus, if you made payments during the payment pause — which spans from Mar. 13, 2020, to Dec. 31, 2022 — you may be able to get a refund on those payments. Those payments will still count toward your 120 payments required for forgiveness.

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Plan for a More Secure Financial Future

Griffith also spoke about the best-case scenario for borrowers. “Their debt is forgiven and none of it is taxable income at the federal level,” he said.

If this occurs, borrowers have an opportunity to prepare for a more secure financial future.

“You might feel like using your extra cash for luxury travel or a shopping spree. There’s nothing wrong about giving yourself a little treat, but you must not spend all your freed-up cash on non-essentials,” advised Aidan Kang, CFA and CEO of House of Debt.

“A budget is quite a useful tool,” he said. “It allows you to have a clear view of your needs, guiding you in your decisions. Review your financial goals and plans. Where have you been allocating your income? What other debts do you have and what financial milestones were you planning to hit? Re-evaluating can help you maximize the extra cash from student loan forgiveness.”

Nearly every expert recommended establishing an emergency savings fund if you don’t already have one.

Also, start focusing money on other debts. “Most of the people who would substantially benefit from student loan forgiveness are going to have plenty of similar destinations for their money,” said Melanie Hanson, editor-in-chief of EDI Refinance. “Whether they’re paying off car loans, medical debt, or more student loans, or starting to build their savings towards homeownership, putting this money towards long-term financial security is a good idea.”

Many experts also suggested ramping up — or starting — retirement savings accounts. “Investing for the long term through index mutual funds and similar securities is a great idea here. Maxing out your 401(k) or IRA contributions is a good idea if you take this route,” Hanson said.

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Putting more pre-tax dollars into a retirement account may also help if student loan borrowers are faced with a third, more likely, scenario.

Meet in the Middle — A Likely Scenario for Many Borrowers

Full student loan forgiveness may not be the most likely scenario, according to many experts. “Somewhere in between these two scenarios is the most likely scenario of some, but not all, of their student loan debt being forgiven. That forgiven debt is taxable income at the federal, state and local income tax levels on their income tax returns for the calendar year in which it is forgiven,” Griffith said.

If this occurs, borrowers should prepare for a larger than expected tax bill in the year their student loan debt is forgiven. It may be wise to consult with a tax accountant or tax attorney to discuss ways to reduce tax liability.

What Future Borrowers Can Learn From Student Loan Forgiveness

Hanson pointed out that even if student loan forgiveness directives pass, it’s still just, essentially, putting a temporary bandage on a larger problem.

“Until the actual costs paid by students for college attendance go down, we’re going to keep on cranking out deeply indebted graduates who will need financial help to make it in our existing economy,” she said.

Until that time, Griffith advised, incoming college students should research their options and evaluate career choices before taking out loans to pay for their education. “If one is borrowing money to pay for an education, that borrower needs to ensure that their desired program has a sufficient probability of resulting in immediate post-graduation employment opportunities with enough of an increase in compensation to be able to pay off their student loans in less than five years. If this is not the case, a different program needs to be considered,” he said.

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