Understanding the New Student Loan Forgiveness Plan

President Biden announced on August 24, 2022, that millions of federal student loan borrowers would see up to $20,000 of their debt canceled. Under the new Student Loan Forgiveness Plan, proposed by the Biden administration, if you have federal student loans that were disbursed prior to July 1, 2022, you may qualify for up to $10,000 or up to $20,000 in student loan forgiveness. If you have received any amount of a Pell Grant, a type of Federal aid available to low-income undergraduate students, you may qualify for up to $20,000 in debt forgiveness. If you were not the recipient of a Pell Grant, the maximum amount of relief you may qualify for is $10,000.

Who is eligible for forgiveness?

The debt forgiveness applies to borrowers who make less than $125,000 per year, or those married filing jointly or heads of households making less than $250,000 in 2020 or 2021. The income referenced is the adjusted gross income, or AGI, that is found on line 11 on your Form 1040 tax return.

The following types of federal student loans are eligible:

• Direct loans:
  • Subsidized loans
  • Unsubsidized loans
  • Parent PLUS loans
  • Graduate PLUS loans
• Federal Family Education Loan (FFEL) held by the U.S. Department of Education (ED) or in default at a guaranty agency
• Federal Perkins Loan Program loans held by the ED
• Defaulted Loans (all of the above loans)

Consolidated loans are eligible too, if all of the underlying loans that were consolidated were first disbursed before July 1, 2022.

All private student loans are excluded from the president’s plan.

For illustration purposes only, see the following example:

Example 1

If you have $60,000 in federal student loans and your income does not exceed the threshold, you will see your student loan debt drop to $50,000. If you paid for school with Pell Grants you would receive $20,000 in forgiveness instead, dropping your balance down to $40,000.

How do I apply for loan forgiveness?

The application will be available in early October and the deadline to apply for it is December 31, 2023. The borrowers who are enrolled in income-driven repayment plans may get automatic cancellation, because the ED already has the earnings information of close to 8 million individuals, but everyone else would need to apply for relief. It may take up to eight weeks for the debt to be discharged after the application is received by the ED. You can also sign up to receive a notification from the U.S. Department of Education when the application is available by signing up on the Department of Education subscription page.

Can the debt forgiveness fall through due to a legal challenge?

It is possible. The widespread forgiveness is being challenged by 22 governors through a letter to President Biden. No lawsuit has been filed yet, as a suitable plaintiff hasn’t been found yet - or someone with standing who can make the case that student loan forgiveness causes them “personal injury.”

What is the status of the payment pause?

Student loan payments have been paused since March 2020, when the CARES Act was passed by Congress. They were set to resume in September 2020, but the freeze was extended three times by former President Donald Trump and now a total of four more times by Biden. In his recent announcement, President Biden said he was continuing the moratorium “one final time” until the end of the year, with payments to resume on January 1, 2023. If you don’t qualify for forgiveness when monthly loan payments resume, you can contact your loan servicer to explore new repayment options if the payment presents a hardship.

What is the New Income Driven Repayment Plan?

The Biden administration announced its intention to create a new income driven repayment plan, which:

• Will lower the required monthly payments to 5% of the borrower’s discretionary income, from the 10% available under the most recent income-driven repayment plans today. This would only apply to undergraduate loans.
• Forgives loan balances after 10 years of payment, instead of 20, for borrowers with loan balances of $12,000 or less
• Raises the amount of income that is considered non-discretionary income

This plan currently is in the “proposal” phase.

What if I have paid off my student loans?

The forgiveness plan does not benefit individuals who paid off their student loans before March 2020.

However, there is an exception; if you made any voluntary payments since March 2020 when the payment pause was enacted, and it brought your student loan balance below the maximum amount of loan forgiveness, you would have been eligible for (either $10,000 or $20,000). In that case, you will “automatically receive a refund of any payments during the payment pause” if you apply and are approved for the student loan forgiveness plan.

For this automatic refund to happen, both of the following conditions must be met:

• First, you have to successfully apply for and receive debt relief under Biden’s one-time cancellation plan. 
• Second, the payments you’ve made since March 13, 2020, must have brought your loan balance below the maximum relief you’re eligible to receive, but did not pay off your loan in full.

If you don’t meet both requirements above, you can still receive a refund on the voluntary payments you’ve made since March 2020. According to the Federal Student Aid Office, refunded payments will, however, increase your loan balance and your monthly payments. Refunds can be requested until December 31, 2023.¹  

If you consolidated your loans after March 13, 2020, the Federal Student Aid Office notes that you cannot receive a refund on voluntary payments made before consolidation.

For illustrative purposes only, please see the following example:

Example 2

Let’s say you’re a borrower eligible for $10,000 in relief; had a balance of $10,500 before the payment pause on March 13, 2020; and you’ve made $1,000 in payments since then, which brings your balance to $9,500. You’re eligible to receive $10,000 in federal student loan forgiveness, meaning the Department of Education will discharge your balance of $9,500 and refund you $500.

Waiver

The other opportunity to have your student loans forgiven is the limited time waiver to qualify your student debt for the Public Service Loan Forgiveness (PSLF) program. If you are working for an eligible employer, you may be able to qualify for it, even if you have not yet served 10 years. However, this limited waiver expires on October 31, 2022, so you need to act fast, since it will not be available after November 1, 2022.²

The U.S. Department of Education expects many people to take advantage of these loan forgiveness programs.

To continue to stay up to date, visit here for the latest information regarding changes in eligibility and deadlines.

¹studentaid.gov/announcements-events/

²https://studentaid.gov/announcements-events/pslf-limited-waiver