With student-loan forgiveness on hold, millions wonder what’s next for their money

Some 22 million people have either applied for up to $20,000 in student-debt relief since applications became available on Oct. 14, or were automatically eligible for the program, the White House said. Days later, a federal appeals court temporarily stopped the administration from taking further action, casting doubt over whether the debt will be lifted.

The court is expected to decide in the coming days whether to block the administration’s program for a longer period while Republican leaders in six states challenge it. The White House, which has argued against the states’ legal standing to challenge the plan, said borrowers should continue applying for loan relief while the legal challenges linger in the court.

Prospects of a legal challenge have tempered borrowers’ hopes from the beginning, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group that represents loan servicers. He cautioned borrowers to hold off on making financial plans that hinge on debt relief until they see the money hit their account.

“Until the government actually does the thing, it’s a work in progress," Mr. Buchanan said. “I would not go out and buy a more expensive car because you think you’re going to have $10,000."

When the debt-relief plan was announced, Cindy Mallette was thrilled. Ms. Mallette, a 39-year-old content strategist at a tech company in Lago Vista, Texas, saw it as a chance for her and her husband to lower their debt-to-income ratio, which had been holding them back in their goal of buying a home. After hearing the news, they planned to start house-hunting in January.

Those plans are on hold for now. Ms. Mallette says she feels a bit defeated, unsure when or whether the cancellation of her roughly $13,000 in student debt might happen. As a Pell Grant recipient, Ms. Mallette would be eligible for up to $20,000 in debt relief under the administration’s plan.

“I’m not making any plans," she said. “We’re just going to plan to do things as we’ve done for years."

Also feeling whiplash are borrowers who continued paying down their loans throughout the federal freeze on payments and interest, which has remained in effect since the start of the pandemic in March 2020.

After realizing he would qualify for up to $20,000 in loan forgiveness, Ryan Banuelos, a 33-year-old accountant living in the Denver suburbs, immediately requested a refund from his loan servicer for payments he had made during the pause.

Mr. Banuelos received the more than $20,000 he had made in payments via paper check. Then his loan balance shot back up. He now has those funds sitting in a high-yield savings account until the fate of the program is clear. He doesn’t like the feeling of not knowing where to go next, but he doesn’t know how else he can move forward.

After working so hard to pay down this debt, he said seeing the loan balance restored—even temporarily—feels like a step back.

“Once I got those checks in the mail, it was emotional—not in a good way," he said. “I had a little cry session."

Dalié Jiménez, a professor at the University of California Irvine School of Law, said that the plan’s temporary halt may confuse some borrowers and dissuade them from submitting an application. She recommended that anyone who thinks they are eligible apply anyway, because the cancellations could still proceed.

An additional element of uncertainty is that the pause on federal student-loan payments during the pandemic is set to end Dec. 31. The White House estimated that about 20 million borrowers are eligible to have their balance drop to zero if the cancellations go through, but Ms. Jiménez noted that for borrowers who don’t know whether they will have debt canceled by next year, budgeting for the coming months might be difficult.

Borrowers should budget for several possible outcomes in the meantime, said Mr. Buchanan of the Student Loan Servicing Alliance. They can call their loan servicer to find out how debt relief might affect their future monthly payments, or try to calculate it themselves so they can prepare for when payments resume in January, he said.

Uncertainty is a familiar feeling to Americans with student debt, said Caitlin Zaloom, a cultural anthropologist at New York University and the author of “Indebted: How Families Make College Work at Any Cost." Many borrowers over the years have been surprised to learn of changes to their monthly payment and are used to navigating thickets of bureaucracy.

“This latest pause is levying another form of uncertainty on top of an already uncertain situation," Prof. Zaloom said.

Some borrowers say they wouldn’t be surprised if debt relief never materializes.

Although Daniela Capistrano, a 40-year-old who runs a creative and digital-strategy agency in the New Orleans area, filled out a debt-relief application last week, they said they are somewhat skeptical that debt cancellation would happen soon. In light of their previous frustrations managing student debt, which they said felt like being in purgatory, the present uncertainty around debt cancellation hardly feels novel.