After years of speculation and debate, President Biden has finally announced that he will honor a campaign promise to write off some student debt.
The plan could bring relief to more than 43 million borrowers with an average outstanding debt of $30,000. And while the move is controversial, we’re not here to talk about politics.
We are here to talk about you!
So, are you eligible for Biden’s plan to write off student loans? How much of your debt will be forgiven? How will this affect your monthly payments, and what relief is there for future borrowers?
Here’s everything you need to know about Biden’s plan to write off student loans!
TL;DR: Biden’s student loan write-off plan
On August 24, President Biden announced that the federal government would forgive $10,000 of student loan debt for qualified borrowers earning less than $125,000 as a single applicant or $250,000 as a household.
If you received a Pell Grant, you may qualify for an additional $10,000 in forgiveness.
Biden also proposed a new income-based repayment (IDR) plan that would cut student loan payments from 10% or 15% of your monthly discretionary income to just 5%.
Overall, the Biden administration estimates that the new plan will provide relief to up to 43 million borrowers. Here is the full White House newsletter.
Now let’s break it all down.
Who exactly fits?
Here are the requirements to get $10,000 student loan forgiveness:
- You are applying alone with an adjusted gross income of less than $125,000 on your 2020 or 2021 tax returns. For joint filers or heads of household, this amount rises to $250,000.
- You have taken out a federal student loan, including PLUS loans. Loans taken by you or your parents on your behalf qualify.
- You took out a loan before June 30, 2022.
If you meet the above requirements and received a Pell Grant, you may be eligible for an additional $10,000 in compensation totaling $20,000.
What types of loans are suitable?
Most types of federal student loan debt qualify. This includes:
- Direct loans (subsidized and non-subsidized)
- Direct PLUS loans, including Grad Plus and Parent Plus loans
- Direct Consolidation Loans
- Some (but not all) federal family education loans
The trick with Federal Family Education Loans (FFEL) is that some of them are owned by private companies. If your FFEL qualifies for a 2020 suspension of payments, it may qualify for forgiveness. If this not qualify for a suspension of payment, this is a sign that he is privately owned and cannot immediately qualify for the $10,000.
As they say, there is still hope. The Washington Post reports that the Biden administration is working with private FFEL lenders to see if they can bring their borrowers into the bailout program.
Will I receive the full amount? Or is there a sliding scale?
If you meet the above requirements, you will receive a $10,000 full forgiveness ($20,000 for a Pell Grant).
There is no sliding scale based on income or anything like that.
What steps should I take? Or is it automatic?
It depends.
If the Department of Education already has your income information for 2020 and/or 2021, you are automatically eligible. They already have income information for 8 million of the 43 million qualified aid candidates, according to the Biden administration.
If you qualify but are not sure if the DoE has your income information, you will soon be able to fill out a form to verify your qualifications.
The form is scheduled to be posted sometime between now and December 31, 2022, when the redemption suspension expires. You can subscribe here to updates from the Department of Education — be sure to check the first box for federal student loan borrower updates.
You’ll also want to double-check that your loan officer has up-to-date contact and address information. If you are not sure who your loan officer is, check here on the official DOE page.
When should forgiveness take effect?
Information about when exactly the forgiveness of $10,000 or $20,000 will take effect is being specified.
Theoretically, the forgiveness amount will work well before the end of the repayment suspension period on December 31st. This will give credit providers time to process fully paid loans and shuffle payment plans for borrowers with more than $10,000 in outstanding debt.
But given that the Ministry of Education has said it may release the qualification form as late as December 31, who knows?
My guess is that the form will be posted by the end of September so that the lending services have time to process the numbers (and give borrowers a happier holiday season).
How will student loan forgiveness affect my remaining monthly payments?
It depends on how your credit provider wants to interpret the loan forgiveness program. At the time of this writing, we’re not sure if most of them will choose:
- Reduce the amount you have to pay each month, or
- Keep your monthly payments the same and shorten the expiration date.
Ultimately, they may let borrowers choose, but then again, who knows? The New York Times asked Scott Buchanan, chief executive of the Student Loan Services Alliance, what borrowers should expect. His answer was basically:
“¯_(ツ)_/¯”
We know that if you are using an income-based repayment (IDR) plan, any forgiveness you receive will likely not reduce your monthly payments as your payments are based on income, not balance.
That being said, Biden has big changes in IDR plans.
What about income-driven repayment plan (IDR) updates?
If you are on an IDR plan such as PAYE, REPAYE, ICR, etc., you are probably used to paying 10%, 15%, or even 20% of your discretionary monthly income on your student loan balance.
While limiting your required payments is helpful, even 10% can be quite high for low-income borrowers struggling to make ends meet as the cost of living rises.
Read more: How short can you live in 2022?
That’s why the Biden administration proposed a new rule capping monthly payments at 5% of your monthly discretionary income, up from 10% or higher. The new rule will also raise the amount considered “non-discretionary” and forgive balances after 10 years of payments instead of 20.
The rule is expected to come into effect in the summer of 2023.
Do I have to pay taxes for student loan forgiveness?
Nope! Congress has eliminated taxes on loan forgiveness until 2025.
Will the student loan repayment period be extended?
Aha!
The student loan suspension that began in 2020 was originally scheduled to expire on August 31, 2022. It has now been extended until December 31, 2022.
Should I delay refinancing until forgiveness occurs?
Oh definitely.
Generally speaking, refinancing your federal student loans with a private lender only makes sense if you qualify for a much lower interest rate than what you’re currently paying, as is often the case when your credit score goes up.
But private loans often lack some or all of the federal loan protections, such as payment freezes and income-based repayment plans. That’s why refinancing federal student loans from a private lender should be a careful and measured decision.
Check out our full guide to student loan refinancing options for more information.
And even if you qualify for a lower interest rate — say 3% vs 7% — it’s not enough to make up for an instant $10,000 forgiveness. Wait for the Department of Education to charge your principal $10,000 and then reconsider your options.
I paid off my loans during the freeze. Is there any relief for me?
Actually yes!
If you are:
- Meet the requirements for loan forgiveness, and
- Student loan payments made after March 13, 2020,
you are indeed entitled to a refund! The Department of Education recommends that you contact your lending institution to request a refund and proceed with the matter.
I haven’t applied for student loans yet. Are there any benefits for future borrowers?
For borrowers who took out a loan after June 30, 2022 or plan to do so in the future, direct cash assistance is not provided. This means that if you borrow $50,000 this fall, you will not automatically receive a $10,000 principal rebate.
That being said, the Biden administration argues that three new policy adjustments could improve prospects for future borrowers:
- Establish an income-based repayment plan of 5% instead of the standard 10% to halve mandatory monthly payments.
- Fixing the “broken” government loan forgiveness program to broaden the pool of people eligible for forgiveness and generally simplify a complex and confusing system.
- “Holding schools accountable when they raise prices,” thereby strengthening overall accountability, “to ensure that student borrowers get a return on their college spending.”
To learn more about how to make college more accessible, check out:
bottom line
If Biden’s plan means you’re suddenly out of debt, you might have a little extra capital at the end of the month to invest.
So where should you put it?
Well, you are definitely in the right place to find out! Verify:
Featured Image: eamesBot/Shutterstock.com
