Under a new plan announced by President Joe Biden, many Americans can be forgiven up to $10,000 in federal student loan debt. That amount increases to $20,000 if they qualify for Pell Grants. The federal government said:
Many borrowers and families may wonder “what do I have to do to claim this relief?” This page is a resource to answer those questions and more. More details will be announced in the coming weeks. To be notified when the process has officially opened, register on the Department of Education subscription page. You will have until December 31, 2023 to submit your application.
To go https://www.ed.gov/subscriptions and check the box for updating federal student loans.
Here’s what we know so far and what it means for people with outstanding student loans:
WHO QUALIFIES FOR STUDENT LOAN FORGIVENESS?
You qualify for up to $10,000 forgiveness if your loan is held by the Department of Education and you earn less than $125,000 individually or $250,000 for a family. If you received Pell Grants, which are reserved for college students with the most significant financial need, you can get up to $20,000 forgiven. If you are a current borrower and a dependent student, you will be eligible for relief based on your parents’ income, rather than your own.
WILL THE STUDENT LOAN PAYMENT FREEZE BE EXTENDED?
The payment freeze will be extended for the last time, until December 31. The freeze began in 2020 as a way to help people in financial difficulty during the COVID-19 pandemic and has been extended several times since then. It was scheduled to expire on August 31.
Interest rates will remain at 0% until payments begin. Under a previous extension announced in April, people who were behind on payments before the pandemic will automatically be brought up to date.
HOW CAN I APPLY FOR STUDENT LOAN FORGIVENESS?
No details on that have been announced, but keep an eye on the federal student aid website for more details in the coming days. See link above to sign up for notifications.
WILL STUDENT LOAN FORGIVENESS DEFINITELY HAPPEN?
The White House could face lawsuits over the plan, because Congress has never given the president explicit authority to write off the debt. The Biden administration is linking his authority to the coronavirus pandemic and a 2003 law intended to provide aid to members of the military. We don’t yet know how any legal action could affect the timeline for student loan forgiveness.
DOES GRADUATE STUDENT DEBT QUALIFY?
Yes, federal student loans taken out to cover graduate degrees are eligible for forgiveness.
WHAT IF MY STUDENT LOAN BALANCE INCLUDES TOO MUCH INTEREST?
The interest itself is considered part of the balance for purposes of this program. Forgiveness will eliminate $10,000 of the total balance you owe.
WILL I HAVE TO PAY TAXES ON THE AMOUNT I AM FORGIVEN?
No. Congress eliminated taxes on loan forgiveness through 2025. Some states may be able to tax canceled debt, according to the nonprofit Tax Foundation, but it’s not yet clear if that will happen.
DO PARENT PLUS LOANS QUALIFY?
Parent Plus loans are included in the forgiveness plan, subject to the same $250,000 income limit for families that applies to the remainder of the discharge.
Parent Plus loans differ from other federal education loans in that they can be used to cover expenses other than tuition, such as books and room and board for college students. As of March 2022, the parents of 3.6 million students owe more than $107 billion in Parent Plus loans, according to the Department of Education. That represents about 6% of the total amount of federal student debt held by Americans.
If a parent received a Parent Plus loan on behalf of a student and the same student received a direct loan, both would receive relief since the cancellation is per borrower, not per student. That means that every person who has federal student loans held by the Department of Education and meets the income requirements qualifies for discharge.
WHAT IS A PELL GRANT AND HOW DO I KNOW IF I HAVE ONE?
Approximately 27 million borrowers who qualified for Pell grants will be eligible to receive up to $20,000 in forgiveness under the Biden plan.
Pell Grants are special government grants for low-income Americans, who currently can receive up to $6,895 a year for about six years.
Nearly all Pell Grant recipients come from a family that earned less than $60,000 a year, according to the Department of Education, which said Pell Grant recipients typically experience more challenges paying off their debt than other borrowers.
Pell Grants themselves generally do not have to be repaid, but recipients often take out additional student loans.
“This additional relief for Pell borrowers is also an important part of racial equity in discharge,” said Kat Welbeck, Civil Rights Counsel for the Center for Student Borrower Protection. “Because student debt exacerbates existing inequalities, the racial wealth gap means students of color, especially those who are Black and Latino, are more likely to come from low-income households, have student debt, and borrow at higher amounts.
To find out if you have a Pell Grant, check the emails you received that describe your FAFSA.
HOW MANY PEOPLE WILL THIS HELP?
About 43 million Americans have federal student debt, with an average balance of $37,667, according to federal data. A third of them owe less than $10,000. Half owe less than $20,000. The total amount of federal student debt is more than $1.6 trillion.
WHAT IF I HAVE ALREADY PAID OFF MY STUDENT LOANS? WILL I HAVE RELIEF?
Debt forgiveness is expected to apply only to those who currently have student debt. But if you’ve made payments voluntarily since March 2020, when payments stopped, you can request a refund of those payments, according to the federal Office of Student Aid. Contact your loan servicer to request a refund.
WHAT PAYMENT PLAN DOES THE DEPARTMENT OF EDUCATION PROPOSE?
The Department of Education has proposed a payment plan that would limit monthly payments to no more than 5% of the borrower’s discretionary income, up from 10% today. Borrowers will need to apply for the payment plan if approved, which could take a year or more.
For example, under the proposal, a single borrower earning $38,000 a year would pay $31 a month, according to a government news release.
The amount considered non-discretionary income will also increase, although the department has not said by how much.
Discretionary income generally refers to what you have left over after necessities like food and rent, but for student loan repayment purposes it is calculated using a formula that takes into account the difference between the borrower’s annual income and the poverty line. along with family size and geographic location.
“The tricky thing about income-based payment is that it doesn’t take into account your other obligations, like paying rent,” said Kristen Ahlenius, a financial counselor with Your Money Line, which provides financial training. “If someone lives paycheck to paycheck and their rent takes half of their paycheck and then their car payment takes the other part, they have a choice. Unfortunately, income-based pay doesn’t take that into account, but it’s an option.”
Student Debt Relief offers a calculator to help determine your discretionary income.
WHAT HAPPENS IF I CAN’T PAY EVEN WITH LOAN FORGIVENESS?
Once payments resume, borrowers who are unable to pay are at risk of delinquency and eventual default. That can hurt your credit rating and mean you’re not eligible for extra help.
If you’re having trouble paying, check to see if you qualify for an income-driven repayment plan. You can find more here.
The plan Biden announced Wednesday also includes a proposal that would allow people with college loans to limit repayment to 5% of their monthly income. Proposals like this can take a year or more to implement, and it’s unclear what the fine print will be.
If you have worked for a government agency or nonprofit organization, you may also be eligible for the Public Service Loan Forgiveness Program, which you can learn more about here.
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