Student Loan Forgiveness and Payment Restart
I'm guessing this isn't the first time you're hearing that the Biden administration is going to forgive $10,000 of federal student loans per borrower, or up to $20,000 for those who received Pell grants. The announcement was a little short on details about how this is going to happen, but it did clarify borrower relief in three areas:
A final extension of the pause on payments until Dec. 31, with payments restarting in January, 2023.
Loan forgiveness for borrowers whose 2020 or 2021 income was below $125,000 (single filers) or $250,000 (married or head of household). Most borrowers are eligible for $10,000 of forgiveness; students who were eligible for Pell grants will receive an additional $10,000 of forgiveness.
A new income-based repayment plan that caps payments at 5% of discretionary income for undergraduate loans (10% for grad school loans), raises nondiscretionary income amounts, and does not accrue unpaid interest.
While the $10,000 of forgiveness is getting the most attention, the repayment plan is likely to provide the most significant relief to borrowers over the long term, since interest accrual on loans in income-based repayment plans usually causes loan balances to increase over time and become un-repayable.
Assuming you fall within the income thresholds, how do you actually get your loans forgiven? One of two ways:
If the Department of Education has access to your income data-- for example, from certifying income for an income-based repayment plan or perhaps from the FAFSA-- then your loan may be forgiven automatically.
If your loan is not forgiven automatically, an application will be available on the Department of Education website sometime prior to the resumption of payments in January. You can subscribe to email updates on the relief process here.
Here is a brief Q&A on the loan forgiveness announcement:
Q: Are all student loans eligible for forgiveness?
A: All direct federal student loans-- including Direct Student Loans, Parent PLUS loans, and Grad Plus/Direct Graduate Loans and Direct Consolidation loans issued before July 1, 2022 are eligible. Private loans and non-federally-owned FFEL loans are not. Basically, if your loan payments have been paused due to the pandemic forbearance, they're eligible for forgiveness. If not, then probably not.
Q: Are current students eligible for forgiveness?
A: As long as their loans were issued before July 1, 2022-- meaning for any completed school year-- and their parents' incomes fall within the eligibility limits, current students' loans are also eligible for forgiveness.
Q: What if I owe less than $10,000?
A: Forgiveness is the lesser of your total loan balance or $10,000, or $20,000 for Pell-eligible borrowers.
Q: Do I need to do anything to get forgiveness?
A: The first thing you should do is verify that your loan servicer has your correct information. Log onto their site to verify your information. If you're unsure who your loan servicer is, you can look up your loans on the Federal Student Aid website using your FSA ID. You should also sign up for the Department of Education's email alerts on loan forgiveness, since those will let you know when to check for automatic forgiveness and how to get the application if needed. If you haven't done an income certification or completed a FAFSA in the last several years, you'll probably need to apply for forgiveness.
Q: Are any taxes due on the forgiven debt?
A: No federal income tax is due. However, some states may treat forgiveness as taxable. Check with your state's tax authority to verify whether you should set aside funds for taxes on loan forgiveness.
Q: What if I didn't graduate or my loans are in default?
A: They're still eligible for forgiveness.
Q: Are all loans eligible for the new repayment plan?
A: The announcement does not include language specific to Parent PLUS loans but rumor has it they would be eligible. A question would be whether they fall under the 5% of discretionary income rule for undergraduate loans or the 10% rule that applies to graduate loans.
Q: When will I find out my monthly payment?
A: Expect to hear from your loan servicer towards the end of the year with details on payment amounts and due dates.
Q: I paid off my student loans by continuing to make payments during the pandemic forbearance and now I don't have any loans to forgive. Is there any way to get my money back?
A: You can apply for a refund for any payments made during the pandemic forbearance. Subscribe to the Department of Education emails to stay up-to-date on the process for doing so.
Q: Someone called claiming to be my loan servicer and asking for personal information. What should I do?
A: Be on the lookout for scams like this. Loan servicers will communicate through official channels such as postal or email or their portal. And they already have your personal information. If you're unsure whether an outreach attempt is legitimate, don't reply to it. Instead, log onto your account and look for communications there.
Q: $10,000 of forgiveness doesn't seem like it addresses the problem of really big loan balances. Does this really help solve the student loan debt problem?
A: Pre-pandemic, about 2/3 of borrowers who were in default owed less than $20,000 in student loans. So yes, this does provide real relief to struggling borrowers. In fact, about 1/3 of federal student loan borrowers owe $10,000 or less, so this forgiveness will dramatically reduce the number of people making student loan payments. There's an important logistical issue, too: the combination of the complexity of restarting student loan payments after 2-1/2+ years combined with multiple student loan servicers-- the companies that manage student loan payments on behalf of the Department of Education-- exiting the business means that the system needs some relief, too, and removing a large portion of smaller borrowers will hopefully help to streamline the system for remaining borrowers. That means better access to loan relief provisions, income-based repayment options, and other service-related issues that have long stymied borrowers.
Stay tuned-- there's likely more to come on this topic!
