Biden To Forgive $10K In Student Loan Debt, More For Pell Grant Recipients

Biden To Forgive $10k In Student Loan Debt, More For Pell Grant Recipients

President Joe Biden has finally fulfilled a long-awaited campaign promise: Up to $20,000 of your federal student loan debt may be forgiven through an executive order, the administration announced on Wednesday.

To qualify, you must have federal student loans and earn less than $125,000 annually (or $250,000 if filing taxes jointly). You may also qualify whether or not you finished your degree.

In addition to forgiveness, the federal student loan payment pause has been extended until December 31, 2022—although Biden said that this is the last pause extension and payments will resume in January 2023.

“In keeping with my campaign promise, my Administration is announcing a plan to give working and middle class families breathing room as they prepare to resume federal student loan payments in January 2023,” the president said in a tweet.

The much-anticipated announcement comes just one week before the payment pause on federal student loans was set to expire. This is the seventh time the pause has been extended since it began in March 2020, when it was introduced to ease the financial burden of borrowers during the start of the Covid-19 pandemic. Interest rates on federal student loans were also set at 0% during this time.

Up to $20,000 in Student Loan Forgiveness

As many as 43 million federal student loan borrowers will qualify for some amount of forgiveness. To be eligible, individuals must earn less than $125,000 annually (or $250,000 per household). The amount of debt canceled depends on what type of financial aid you received in school:

  • Pell Grant recipients: If you received a Pell Grant at any point during your education, $20,000 of your federal student debt can be forgiven.
  • Non-Pell Grant borrowers: For borrowers who received other forms of federal financial aid, including direct unsubsidized and subsidized loans or PLUS loans, $10,000 of your federal student loans can be forgiven.

If you’re not sure what type of financial aid you received, log into the Federal Student Aid website to view your loans or grants.

Your loan forgiveness may be automatically processed if the Department of Education already has your income data (as it does for about 8 million borrowers). If not, a forgiveness application form will be available in the coming weeks. If you’d like to be notified when the application is available, sign up for email updates from the Department of Education.

While some loan forgiveness was previously taxable as income, any amount of student loan forgiveness you receive before 2026 should be tax-free, thanks to a provision in the American Rescue Plan.

Most federal student loan borrowers owe less than $25,000 on their debt, according to the Federal Reserve, and the median balance in 2021 was between $20,000 and $24,999 among those with any type of outstanding debt for their own education.

About a quarter of borrowers owe less than $10,000, and could have the entirety of their student loans erased. According to the administration, 90% of loan forgiveness will go to households earning less than $75,000.

New Income-Driven Repayment Plan Introduced

Wednesday’s announcement also included details about a new income-driven repayment plan, though it’s not yet clear when it could be instituted. Eligible borrowers would be required to pay just 5% of their discretionary income towards undergraduate loans—which is less than the 10% required by most current income-based plans.

What counts as discretionary income will also be modified, ensuring that no borrower earning less than 225% of the federal poverty level (about $30,578 for 2022) will have to make a payment.

How interest is applied to your account will be adjusted as well. As long as you make your monthly payments, unpaid interest won’t accrue on your account and your loan balance won’t grow.

Under the proposed plan, some borrowers will receive forgiveness much faster: Those with less than $12,000 in debt can qualify for forgiveness after 10 years, significantly faster than the 20 years required for other plans.

The Student Loan Forgiveness Debate Will Continue

It’s likely that Biden’s new policy will face legal challenges, which could delay forgiveness efforts. Several Republican senators have proposed legislation that would prohibit the president from forgiving federal student debt.

Widespread student loan forgiveness has long been a hotly debated topic. Though Biden supported up to $10,000 per borrower in student loan forgiveness during his campaign, prominent Democrats including Sens. Chuck Schumer, Elizabeth Warren and Raphael Warnock have repeatedly urged him to cancel at least $50,000.

Progressives argue that the administration should forgive as much debt as possible. Doing so could help close the racial wealth gap, as nonwhite borrowers carry disproportionately larger balances than white borrowers. And with the midterm elections rapidly approaching this fall, erasing significant amounts of student debt could be a galvanizing issue for young voters.

Opponents of loan forgiveness say that it’s unfair to those who didn’t go to college or have already paid off their student loans. They also argue that debt cancellation will disproportionately benefit the educated and wealthy, rather than helping those who most need financial assistance. Concerns about how large-scale forgiveness could worsen inflation have further complicated matters.

The timing of this announcement also drew criticism from both sides. With just a week before the student loan moratorium was set to expire, student loan servicers say that the uncertainty around when payments will resume has put the federal student loan program in a precarious position and “risks operational disruptions.” In addition, tens of millions of borrowers were left in limbo, unsure if they must make student loan payments in September.

Frequently Asked Questions (FAQs)

What types of student loans qualify?

Only federal student loans are eligible for forgiveness under this policy. Private student loans do not qualify.

What tax year is the income cap based on?

To qualify for forgiveness, borrowers must earn less than $125,000 annually (or $250,000 per household). Your tax returns from either 2020 or 2021 will be used to determine your income. If you met the requirements in either year, you could be eligible, according to media reports.

However, if you’re listed as a dependent on your parents’ tax returns, their household income will determine your eligibility.

What if I’m still in school or never graduated?

If you have federal student loans that were disbursed by June 30, 2022, you can still qualify for forgiveness if you haven’t completed your education.

What should I do if I’m eligible for forgiveness?

First, make sure your student loan servicer has your current contact information so it can notify you of any updates.

If you’re already enrolled in an income-driven repayment plan and have submitted your most recent tax information, the Department of Education should be able to process your loan forgiveness automatically. If you haven’t recently submitted your tax data (or have never provided it), an application form will be available soon for borrowers to fill out. Watch for notifications from your loan servicer or sign up for email updates from the Department of Education.

How will I know when my debt has been forgiven?

Keep an eye out for updates from your loan servicer and check your account regularly. With tens of millions of accounts due to receive forgiveness, it pays to be cautious in case mistakes are made. Keep a record of any correspondence with your loan servicer and take screenshots once your account balance reflects the forgiven amount.

You can also view your credit report after your forgiveness is processed to make sure the new loan amount is correctly reflected or the account is marked as closed if all your debt was forgiven.

What if I still owe money on my student loans?

If the amount of forgiveness you receive is less than what you owe, you’re still responsible for paying off the remaining balance on your loans. Payments on all federal student loans are set to resume in January 2023, and you should receive a bill several weeks before the first due date. Make note of the deadline so you can avoid a late payment. You may also need to re-enroll in automatic payments, if desired.

If you’re not sure how much your monthly payment will be, check your loan servicer’s website or contact it directly.

What if I can’t afford my loans once payments restart?

If you think you won’t be able to afford your payments once they resume, take action now by contacting your loan servicer to see what options are available.

You might benefit from an IDR plan, which bases your monthly payment on a small percentage of your discretionary income—typically 10% to 20%, depending on which of the four IDR plans you choose. This means your payments could be as low as $0 each month. After making payments for 20 or 25 years, any remaining balance will be forgiven.

If you’re not sure what plan is best for you, Federal Student Aid’s loan simulator tool can help you compare options.

The Biden administration has proposed a new income-driven plan, though it’s not clear when it will be available. Under this plan, you’d pay just 5% of your discretionary income, and unpaid interest wouldn’t accrue or cause your balance to grow. The way your discretionary income is calculated will also be more favorable, ensuring that no borrower earning less than 225% of the federal poverty level (about $30,578 for 2022) will be required to make payments. Lastly, you could receive forgiveness in just 10 years if you owe $12,000 or less.

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