Following an announcement by President Joe Biden on the 24th of August, federal student loan borrowers will be entitled to debt forgiveness of up to $20,000 starting soon. Those who are so sure about this are about 8 million, and it is so because the Department of Education has their required income data. A population of about 37 million borrowers is still in darkness concerning their fate as far as debt forgiveness is concerned. The following questions with answers will help you attend to your worries.
Who Qualifies for Loan Cancellation Under the New Plan?
If you are a federal student loan borrower and meet the eligibility criteria, you qualify for it.
Eligibility for Biden’s Student Loan Cancellation Plan
If you are an individual or a couple, you must earn less than $125,000 and $250,000 per year, respectively. The same applies to a head of household who is supposed to earn less than $250,000 per year.
It would help if you had a current federal student loan debt, precisely dates before the 30th of June 2022. It can also include parent PLUS loans.
If you are currently a student who is a dependent, you shall use the income of your parents or legal guardians to determine whether you qualify or not.
You still qualify if, by any chance, you cannot complete your degree.
You still stand a chance if, in any case, you defaulted on your federal student loans.
You won’t qualify if you have private student loans only.
If you work in the military, nonprofits, or state, tribal, local or federal governments, you stand a chance of having all your student loans forgiven. This arrangement will be possible through the Public Service Loan Forgiveness (PSLF) program.
You will not qualify if, by any chance, you paid your student loans earlier than March 2020 or you got federal loans later than the 30th of June 2022.
The administration will refund you the payments you made on federal student loans as of March 2020, which was the start of the payment pause. It would be refunded if you also paid off the loans.
How Much Debt Will Be Canceled?
Non-Pell Grant recipients and those undergraduates who got a Pell Grant will be entitled to $10,000 and $20,000 in debt cancellation, respectively, from the Department of Education.
The borrower’s outstanding debt will directly translate to the relief they will get. For example, if the outstanding debt is $10,000, you will receive a replacement of $10,000 and not $20,000 for the case of a Pell Grant recipient.
How Do I Apply for Loan Forgiveness?
The first thing is to make sure that you know your loan servicer. If you have doubts, you can check the Federal Student Aid Website. Another thing is you have to ensure that your accurate contact information and income data are with the loan servicer and the Department of Education, respectively.
The administration will soon launch an application to ensure your information at the Department of Education is current. Stay tuned so that you can update your information.
According to the Department of Education, about 8 million borrowers will have their debts automatically erased.
It will be good news for those who got their income verified through the Free Application for Federal Student Aid (FAFSA) in the last two years because they will likely stand a chance for automatic forgiveness.
How Does the Plan Affect Future Loan Repayments?
According to Biden’s plan, repayments will begin in January 2023 after the pause has elapsed on the 31st of December 2022. The current income-driven repayment plan will experience changes through a proposed rule. Some of the changes will be:
- Borrowers of undergraduate loans pay 5% instead of 10% of their discretionary income monthly.
- Loan balances of $12,000 and below are to be forgiven after repayments for ten years and not 20 years.
- Borrowers will repay Graduate school debt at 10% of discretionary income.
- The administration would also raise the amount regarded as nondiscretionary income.
- According to the Department of Education, the administration will effect the changes soon.
Does My Pell Grant Amount Matter?
$20,000 is the amount that Pell Grant recipients are entitled to in debt forgiveness, and it doesn’t matter what amount you have received because the debt cancellation will still be up to $20,000. There are also no guidelines as to what amount you should have received to qualify for the whole cancellation amount. The time when a borrower received a Pell Grant also doesn’t matter.
Are My Canceled Loans Taxable?
In the case of loan balances discharged by the Department of Education, borrowers will not pay federal taxes.
A waiver which will expire on the 1st of January 2026, was extended by Biden’s 2021 American Rescue Plan so that the loans forgiven are not taxed as is the case with income.
However, word has it that borrowers in states like North Carolina, Wisconsin, Mississippi, Arkansas, and Minnesota will have to pay taxes on discharged loans.
What Can I Do If I Have an FFEL Loan?
So far, there is no information from the Department of Education regarding the fate of borrowers of Federal Family Education Loans (FFEL) as far as the forgiveness program is concerned.
Reports from loan experts indicate that FFEL loans will also qualify for forgiveness bearing in mind the Department of Education holds about half of the 9.6 million current FFEL loans.
Other reports indicate that the Department of Education will soon give guidance and that a solution is coming as far as FFEL borrowers are concerned.
What If I Paid Off My Loans During the Payment Pause?
It hasn’t been a requirement for student loan borrowers to make payments since March 2020. According to a report by the Office of Federal Student Aid, about 9.1 million borrowers have made payments at least once since April 2020. They will also be able to enjoy debt forgiveness.
When it comes to borrowers with remaining loan debt, they can apply for relief. If they have qualified for additional cancellation above the remaining balance, the Department of Education will refund that difference.
If you are a borrower and you paid the whole amount of their debt during the pause will have to contact the loan servicer so that the servicer can add to the outstanding balance after refunding. The Department of Education will then go ahead and do away with the debt.
