Here is a Q&A with College Inside Track President Chris Wills regarding the Biden administration’s student loan forgiveness plan:
- Chris, there’s been a lot of publicity around the Biden-Harris Administration’s Student Loan Forgiveness Plan. I just received my first alumni parent text on the topic: “How do we get the Biden Loan Forgiveness Plan to apply to John?”
There is an income limit, so the first place to start is whether your student has an annual income of $125,000 or less (or $250,000 or less for married couples). If their income is higher, they do not qualify for debt cancellation. You can use your Adjusted Gross Income (AGI) from either your 2020 or 2021 tax return.
Next, would be to consider whether they would qualify for the benefits of the Public Service Loan Forgiveness Program (PSLF). If they work at a nonprofit, in the military, or in government, they may be eligible for expanded and more flexible terms that allow borrowers to receive credit for past periods of repayment that would otherwise not qualify.
You must apply by Oct. 31, 2022, to see if you are eligible for this benefit.
Finally, nearly all government-held federal student loans qualify. However, private student loans and Federal Family Education Loan (FFEL) program loans held by private lenders do not. FFEL borrowers can qualify if they consolidate their loans into the direct loan program. Discuss with your lender whether that is an option that makes sense.
- This is a three part plan. What’s essential for families to understand right now?
First, the current pause on student loan repayment will be extended one last time through the end of 2022. Starting in January 2023, payments will be due again.
During this pause, it is essential for borrowers with incomes that qualify for debt forgiveness (annual income of $125,000 or less for individuals and $250,000 or less for couples) to apply when the application is released by the Dept. of Education. The government says borrowers can expect relief within 4-6 weeks of completing the application, so if the application is completed by Nov. 15, 2022, student loan forgiveness would occur before repayment begins in January 2023.
- Is there anything to get excited about, with this plan? What’s the news?
Provided the government can pull it off, the speed of the forgiveness happening 4-6 weeks after applying should be an exciting proposition for many borrowers. Extending the repayment pause until the end of the year also means more freed up cash for daily living or to pay down other debts.
Remaining balances will be re-amortized, meaning monthly payments will be re-calculated based on the new balance after forgiveness, potentially reducing your monthly payment.
While not enacted yet, the Biden administration is also proposing changes to the income-driven repayment plan to reduce monthly payments for lower and middle income borrowers. For those on this plan, loan balances of $12,000 or less would be forgiven after 10 years (instead of the current 20 years). Stay tuned.
- Can you give a brief summary of the terms of forgiveness? What loans, whose loans, going back how long? Who is eligible for debt cancellation? Who is not? Any surprises here?
Borrowers who meet the income limit and received a Pell Grant while in college are eligible for up to $20,000 in loan forgiveness. Borrowers who meet the income limit but did not receive a Pell Grant are eligible for up to $10,000 in forgiveness. There are no time limits based on when the loans were taken out and defaulted federal student loans qualify.
Relief is capped at the amount of outstanding debt, so if you are eligible for $10,000 but have a remaining balance of $7,000, you will only receive $7,000 of forgiveness.
Only federal student loans held by the U.S. Department of Education are eligible for forgiveness; private student loans are not eligible. If you are unsure where your loan is held, contact your loan servicer or check your account at studentaid.gov
- What’s the news for holders of Parent Plus Loans?
Parent PLUS loan holders are also eligible for debt forgiveness, and qualify based on their own income and loan, while their children would separately qualify based on the same factors. If both the parent and student received a Pell Grant and separately meet the income limits, each would be eligible to receive up to $20,000 in debt cancellation.
- What are the next best steps for consumers who believe they are eligible for loan forgiveness?
The Department of Education plans to release an application for student loan forgiveness in October 2022, and some may automatically qualify because the government has the income data it needs from you. Because it is unclear, we recommend consumers sign up at the Department of Ed subscription page to be notified when the application is open.
- Is this a topic families should pursue with their financial advisors?