President Joe Biden announced a much-anticipated student loan forgiveness plan in August, which includes up to $20,000 in federal student loan forgiveness for tens of millions of borrowers. The plan also includes an extension of the student loan payment pause and a proposal for a new income-driven repayment plan.
However, a wave of legal challenges has complicated the rollout of the program. Applications are currently paused and forgiveness cannot be processed as the government appeals court rulings that put a stop to the president’s plan.
You can find answers to your questions about eligibility, taxes and how forgiveness will actually be processed below.
Forgiveness Eligibility
Who qualifies for student loan forgiveness?
To be eligible for forgiveness, you must have federal student loans and earn less than $125,000 annually (or $250,000 per household). Borrowers who meet that criteria can get up to $10,000 in debt cancellation.
If you also received a Pell Grant during your education, you can qualify for up to $20,000 in forgiveness.
Not sure if you qualify? The Forbes Advisor student loan forgiveness calculator can help you determine your eligibility.
What types of student loans qualify?
Nearly every type of federal student loan qualifies for forgiveness, including direct subsidized or unsubsidized loans and graduate or parent PLUS loans. If your loans qualified for the federal student loan payment pause, they’re eligible for this forgiveness opportunity.
However, most Federal Family Education loans (FFEL) and Perkins loans that aren’t held by the federal government are ineligible for forgiveness. Borrowers with this kind of debt who applied for a direct consolidation loan before Sept. 29, 2022 should be eligible, but all other borrowers in this category currently cannot get forgiveness.
Private student loans are also ineligible for forgiveness.
Check Out: Best Student Loan Refinance Lenders
How do I know if I got a Pell Grant?
To check if you received a Pell Grant, log into your account on the Federal Student Aid site. Navigate to the “Aid Summary” page to view the loans and grants you’ve received, plus the current status of your accounts. Any Pell Grants you have will appear in this section.
What if I only received a partial Pell Grant or only had a Pell Grant for one year?
You can still qualify for up to $20,000 of forgiveness, no matter the size or frequency of your Pell Grants.
What if my student loans are in default?
If your loans are in default, you can still qualify for forgiveness. And thanks to the Department of Education’s Fresh Start program, borrowers have the opportunity to return any remaining defaulted federal loans to good standing. Loans that are eligible for Fresh Start include direct loans, Federal Family Education loans (FFEL) and Perkins loans that are held by the Department of Education.
Are parent loans or graduate-level loans eligible?
Yes, if you have parent PLUS loans or grad PLUS loans, you can qualify for forgiveness.
Are FFEL loans eligible?
Maybe. If your Federal Family Education loans (FFEL) were eligible for the student loan payment pause that’s been in effect since March 2020, you can qualify for forgiveness.
If they weren’t eligible for the payment pause, you might still qualify for forgiveness if you applied to consolidate your FFEL loans into a direct consolidation loan before Sept. 29, 2022.
About half of FFEL loans are currently held by private lenders. Borrowers with these loans are currently not eligible for forgiveness.
Am I eligible if I never graduated or am still in school?
Yes, if you never finished your degree or are still in school, you can still qualify as long as your loans were disbursed by June 30, 2022.
What if I used student loans for something other than a bachelor’s degree?
If you used federal student loans to pay for community college, a trade program, professional degree or other alternative certification, you’re still eligible for forgiveness.
Forgiveness Process
How much debt will be forgiven?
The amount of debt forgiven depends on whether or not the borrower received a Pell Grant; those who did will receive up to $20,000 in debt cancellation. Other borrowers (who meet the income threshold requirements) will receive $10,000 in debt cancellation.
If your student loan balance is less than the amount you qualify for, your relief is capped at the amount of your outstanding debt. For example, if you are eligible for $10,000 in relief but have an $8,000 balance, you’ll receive $8,000 in relief.
Do I have to apply for forgiveness?
Probably. Nearly 8 million borrowers may have debt forgiven automatically because the Department of Education already has their income data. Everyone else will have to submit their information via a simple application online that became available in October.
Note that the forgiveness plan is currently facing multiple legal challenges and the program is paused until these issues are resolved. The Department of Education has temporarily halted forgiveness applications while it appeals the decision of the courts.
When will loan forgiveness be processed?
Some 8 million borrowers will receive their debt cancellation automatically, since the Department of Education already has their relevant income information on file. Others will have to submit the simple online application. Once their application is submitted, borrowers can expect to see their debt cancellation within four to six weeks.
How will I know when my loans are forgiven?
The Department of Education will notify you when your application is approved, and your loan servicer will update you once your loans are forgiven. Keep an eye out for any correspondence from your servicer via email or mail, and regularly check your loan balance online.
What if I owe more than is forgiven?
Borrowers with loan balances greater than the amount forgiven will resume payments starting in January 2023. Your payments will be recalculated based on your new lower balance, which could potentially lower your monthly bill. Your loan servicer will notify you of your new monthly payment amount.
Will my monthly payments be adjusted after some of my debt is erased?
Monthly payment amounts will be recalculated by loan servicers after forgiveness is processed. Borrowers should stay up to date on this information by checking their loan servicer’s website and reading any emailed or mailed correspondence.
Will this kind of debt forgiveness happen again?
There are no indications that mass student loan debt forgiveness will happen again in the future. The Department of Education could continue to forgive debt held by students who were defrauded by predatory schools, like ITT Tech. But for now, it’s highly unlikely that this sort of broad forgiveness will reoccur.
Is Biden allowed to forgive student loans? Will forgiveness really happen?
There are growing questions around the legality of Biden canceling federal student loans. The plan is currently facing multiple legal challenges and forgiveness is blocked until these issues are resolved. The Department of Education has temporarily halted forgiveness applications while it appeals the decision of the courts.
Borrowers should refer to StudentAid.gov or subscribe to notifications from the Department of Education for the latest information.
Are student loan payments still paused?
The federal student loan forbearance (pause) period has been extended a final time through Dec. 31, 2022. After this date, federal student loan borrowers will resume monthly payments on their balances.
Check Out: Student Loan Forgiveness Calculator
Taxes
What tax year is the income cap based on?
Student loan debt relief is available to those whose adjusted gross income (AGI) from either the 2020 or 2021 tax year was under $125,000. Married couples who file taxes jointly and anyone who files as a head of household will qualify if their AGI is less than $250,000.
Do I have to pay tax on the forgiven amount?
Under the Biden administration relief program, forgiven student loans aren’t taxable. A provision in the 2021 American Rescue Plan Act (Biden’s Covid-19 relief bill) exempted student loan forgiveness from taxation until 2025.
What about state taxes?
In some states, you may be required to pay state income tax on canceled student loan debt. According to an analysis from the nonprofit Tax Foundation, 13 states—Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin—have the potential to tax forgiven student debt. To find out how the Biden administration’s student loan relief may affect your state tax bill, check with your state’s department of revenue or speak with a tax professional.
Will I receive a tax form for forgiveness?
Although debt forgiveness typically must be reported on an IRS Form 1099-C, “Cancellation of Debt,” the IRS has directed student loan providers to refrain from filing the form for any borrower who qualifies for the Biden tax exemption.
Will forgiveness affect my student loan interest deduction?
No. During the last few years, the Department of Education set the interest rate at 0% on federal student loans in response to the pandemic. So, there’s been no federal student loan interest to deduct. Once the interest and federal loan payments resume in January, you’ll be able to claim a deduction for the interest even if some of your debt is canceled.
New Income-Driven Repayment Plan
How will the new repayment plan work?
The proposed income-driven repayment plan will cap monthly payments to 5% of your discretionary income. Any unpaid interest will be covered by the Department of Education, meaning that interest won’t accrue and your loan balance won’t grow if you make your monthly payments.
If you borrowed $12,000 or less, any remaining balance is eligible for forgiveness after you’ve made regular payments for 10 years.
What counts as discretionary income?
Discretionary income is the amount you have left after paying for essentials like housing and food costs. In the context of federal student loans, discretionary income is the difference between your annual income and 150% of the poverty guideline for your family size and location.
However, the new repayment plan calculates discretionary income more favorably by raising the amount of income that is protected from repayment. This will guarantee that no borrower earning less than 225% of the federal poverty level (about $30,578 for 2022) will have to make a payment.
Who is eligible for this plan?
The eligibility criteria for this repayment plan have not yet been released.
The qualifications to enroll in existing income-driven repayment plans vary; some require you to meet certain income thresholds while others allow anyone with a federal student loan to sign up.
When can I enroll in this plan?
It’s not clear when this plan will be available for borrowers, but it almost certainly won’t be in effect until at least 2023. Currently, this plan is just a proposal and must go through several more administrative steps before borrowers can sign up.
Are there other income-driven plans I can enroll in if I can’t afford my loans?
There are five income-driven repayment plans available to federal student loan borrowers. The exact rules vary by plan, but you can expect payments to be capped at 10% to 20% of your discretionary income. After making payments for 20 or 25 years, any remaining balance can be forgiven. Not all types of federal loans are eligible for every plan.
If you’re not sure which repayment option is best for you, use Federal Student Aid’s Loan Simulator tool to see how different plans will affect your loans.
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