In August, Vice President Biden presented a plan to cancel up to $20,000 in federal student loan debt for millions of students, but there's a limit on student loan debt relief. First, the loan must be federally owned; college debts aren't covered.
Second, debt relief is unusual for high-income people, so forgiveness of up to $10,000 in federal student loan debt is available to people with earnings below $125,000 for individuals and $250,000 for married couples or heads of households. To get up to $20,000 in debt forgiveness, a borrower must have obtained a Pell grant.
Depending on family size, income, and the cost of attendance, millions of low-income students get Pell grants each year. This category of borrowers is more likely to default on their loans. So, borrowers, here’s what you should know about the new debt forgiveness program.
How much debt is getting canceled?
Biden stated last month that most federal student loan holders would be eligible for forgiveness: up to $10,000 if they didn't get a Pell Grant and up to $20,000 if they did.
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Do I have to do anything to get forgiveness?
The Education Department will introduce an application in October where debtors may seek loan forgiveness. The government claimed it already has earnings information for 8 million borrowers since they're participating in income-driven repayment schemes. This group may get automatic cancellations.
Who is eligible?
The assistance is restricted to debtors earning less than $125,000 per year or married couples or heads of households making less than $250,000. Check your tax returns to be sure you earned less in 2020 or 2021 (either will work). The U.S. Department of Education will evaluate AGI, not total compensation. Line 11 on Form 1040 shows your AGI for 2020 and 2021.
I’m a current student. Am I eligible for forgiveness?
Current students may apply. Borrowers who filed the FAFSA as an independent will be eligible depending on family income. Students under 24 who are dependents will be eligible depending on parental income in 2020 or 2021.
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I have student debt from graduate school. Am I eligible for forgiveness?
Yes, if your income meets the eligibility threshold.
I’m a parent and took out a Parent PLUS loan. Am I eligible?
Depending on your salary, a parent with several federal Parent PLUS loans may only have $20,000 forgiven. A parent might get up to $20,000 in debt relief if they obtained a Pell award. If just the kid won a Pell award, the parent might get $10,000.
Am I eligible for forgiveness if my loans are in default?
Defaulted federal student debts may be forgiven. After the cancellation, payments will restart in January 2023 as part of the Department of Education's "Fresh Start" policy for debtors with a lingering defaulted student loan amount.
What year is the income threshold based on?
Adjusted gross income for 2020 or 2021 determines eligibility. AGI might be lower than total pay since it includes tax deductions and adjustments, including 401(k) contributions.
How would the government know what my income was?
The Department of Education claims it already possessed income information for roughly 8 million borrowers, possibly via financial assistance forms or income-driven repayment plan applications. Those debtors will immediately obtain debt relief provided they fulfill the income requirements. Other borrowers will need to petition for student debt forgiveness if the Department of Education doesn't have their income information on file.
When will I be able to apply for forgiveness?
The application will be online in early October. Subscribe to be alerted when it's accessible on the Department of Education's website. After applying, debt relief takes four to six weeks. Loan servicers will notify borrowers when the reserve has been implemented.
Apply before December 31, 2023.
Will I have to pay taxes on the amount of debt canceled?
Last year, Congress enacted the American Rescue Plan Act, which exempts forgiven student loans from federal income tax.
Some debtors may have to pay state income tax on the amount of debt forgiven. According to the Tax Foundation, several states may tax discharged debt if legislative or administrative reforms aren't implemented beforehand. The tax burden might be hundreds of dollars, depending on the form.
Will the loan forgiveness trigger taxes?
Student debt forgiveness isn't taxable. According to a White House information sheet, the American Rescue Plan of 2021 made student debt forgiveness tax-free until 2025.
Before submitting your state tax return, get an estimate from a tax specialist.
Which loans qualify?
The overwhelming majority – around 37 million borrowers – will be eligible for forgiveness depending on their loan type (and income limit) since their debt is under the William D. Ford Federal Direct Loan Program. That covers Stafford Loans and subsidized and unsubsidized Direct student loans. Parent Plus and Grad Loans are eligible under Direct.
It gets trickier. The Education Department first claimed its loans qualified, but now 5 million borrowers with commercially owned FFELs may have been excluded. These debtors also missed the pandemic-era payment pause.
A representative for the Department said it is currently exploring methods to engage with private lenders to erase commercially held federal student loans. Once the government's student debt forgiveness application is open, these borrowers will have more than a year to apply.
To see whether you qualify, contact your loan servicer or visit StudentAid.gov. Fill out the "federal direct loan application." The program excludes private student debt.
How do I know if I ever received a Pell grant?
Most debtors may go to Studentaid.gov to discover whether they earned a Pell award while in college. The account dashboard and My Aid page show information concerning Pell awards. This is also where borrowers may see how much they owe and what debts they have.
Borrowers who earned a Pell award before 1994 won't view their information online, but they are still eligible for $20,000 in student debt forgiveness. If borrowers get at least one Pell award, they are eligible.
What if I owe less than is being forgiven?
The Education Department caps relief at a borrower's outstanding qualified debt.
How will my payments change going forward?
If borrowers have debt after $10,000 or $20,000 is taken away, their monthly payments may be adjusted. Standard repayment plans require borrowers to pay a predetermined sum over ten years. Income-driven repayment plan borrowers won't see their monthly payments alter because of the forgiveness. Pandemic-related delay in federal student loan payments began in March 2020. Biden has prolonged the hold until December, and payments will begin in January 2023.
What about Biden’s new income-driven repayment plan?
Biden also announced a strategy to make federal student loan repayments more bearable. Several federal student loan repayment options limit monthly payments at a percentage of income.
Biden's proposal would restrict payments at 5% of a borrower's discretionary income, down from 10% in most existing schemes, and lower the amount of income deemed discretionary. The remaining amounts would be forgiven after 10 years, not 20.
Biden also proposes covering the unpaid monthly interest. This might assist those whose monthly payments are so low that they don't cover their monthly interest rate, causing their amounts to inflate and become more significant than what was borrowed. When these modifications happen is unknown. The Department of Education hasn't stated when it will submit a new regulation to establish a repayment plan. The department's official rule-making procedure may take months, if not years.
When is the loan cutoff date for cancellation?
After June 30, 2022, student debts won't be forgiven.
How do I make sure I get forgiveness?
Taking a snapshot or screenshot of your student loan amount is advised. You may then make sure it lowers by the right amount when forgiven.
What’s the timeline here?
After receiving all the essential paperwork from a borrower, the Education Department warns that it might take eight weeks to discharge their loan.
The application deadline is Dec. 31, 2023.
What’s going on with the payment pause?
Biden also extended the federal student loan payment moratorium until Dec. 31. January payments continue. It's the seventh and perhaps last extension of Trump's pandemic relief strategy.
Can I get a refund for what I paid during the pandemic pause?
Yes. Pandemic-related delay stopped federal student loan payments on March 13, 2020. Borrowers who paid might get reimbursement from their loan servicer.
