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President Joe Biden announced a broad vision for student loan debt repayment and debt cancellation on August 24, with details — and some backtracking — trickling out in the weeks that have followed.
Through executive order, federal student loan borrowers who meet income requirements will see up to $10,000 in debt canceled. If the borrower received a Pell Grant to attend school, the forgiven amount rises to $20,000.
About 43 million Americans have federal student loan debt. The White House says the plan cancels the full remaining balance for 20 million of them. Income requirements block relief for high-income households: Individuals must have earned less than $125,000 in the previous tax year, while married couples filing jointly must earn less than $250,000.
An estimated 95% of borrowers will benefit from cancellation, and about 90% of the benefits of cancellation will go to borrowers who earn less than $75,000. The Congressional Budget Office estimates the cost to the treasury at $400 billion over the next 10 years.
For some FFEL borrowers, the rules have changed
The process of cancellation has not yet begun in earnest, but the White House has already backtracked on guidance for borrowers who have old, commercially held Perkins loans and Federal Family Education Loans guaranteed by the government. Without warning, the language that seemed to qualify those borrowers for the cancellation program was changed Sept. 29.
Prior to that date, the StudentAid.gov website advised: "ED is assessing whether to provide relief to borrowers with privately owned federal student loans, including FFEL and Perkins Loans, and is discussing this with private lenders. In the meantime, borrowers with privately held federal student loans can receive this relief by consolidating these loans into the Direct Loan program. All eligible borrowers will have until Dec. 31, 2023, to submit an application for debt relief."
The website now reads: "As of Sept. 29, 2022, borrowers with federal student loans not held by ED cannot obtain one-time debt relief by consolidating those loans into Direct Loans."
Borrowers who already applied to consolidate loans, a step needed to receive loan cancellation, would still receive it, the Education Department said Thursday.
About 4.1 million federal borrowers have $108.8 billion in loans held by private lenders, according to the most recent federal data. The administration estimates about 770,000 borrowers will affected by the change, as the remainder may have other cancellation paths or otherwise not be eligible.
The White House did not offer specifics around the reason for the abrupt change in guidance, but lawsuits filed the same day by attorneys general in seven states assert that private lenders are harmed by the process and that their states are cheated of tax revenue.
In response to another lawsuit filed the same week, the Biden administration said it would provide a path to opt out of automatic loan cancellation for anyone who might object or face tax consequences.
In its August rollout, the Biden administration also announced the seventh extension of payment forbearance. Borrowers with federal student loans have not been required to make payments since March 2020. If the forbearance isn't extended past Dec. 31, borrowers will have gone 33 months without a payment.
Lastly, the Education Department proposed a new income-driven repayment plan that would reduce future payments and limit the growth of balances if payments are current.
What we know and don’t know so far:
Whom will cancellation most benefit?
Roughly 15.2 million borrowers have debt under $10,000, according to federal data. About 1.38 million of those borrowers have been in repayment for longer than 20 years, according to an April 2021 data request to the Department of Education made by Sen. Elizabeth Warren (D-Mass.).
The impact of $20,000 in forgiveness for Pell Grant recipients is hard to gauge because of the income requirements borrowers must meet to be eligible. However, the White House estimates about 60% of borrowers received this aid. Pell Grants are available for low-income students, and the White House says the majority of students with Pell Grants come from families with incomes under $60,000 per year. These borrowers tend to have higher debt than non-Pell recipients, $4,500 more on average, according to the Institute of College Access and Success, a nonprofit organization.
“From a racial-equity perspective, targeting more relief to Pell Grant recipients goes a long way toward advancing racial equity, which we welcome, but we can always do more on that front,” says Kyle Southern, associate vice president of higher education quality at The Institute for College Access and Success.
About 23 million borrowers will have debt remaining, the White House estimates.
How can I apply for the forgiveness program?
Both the $10,000 and $20,000 forgiveness amounts are means-tested. But the Department of Education doesn’t have income information for all borrowers at the ready. It estimates nearly 8 million borrowers will be eligible for relief automatically based on the current information it has.
For others, an application will be required to access the forgiveness. Bharat Ramamurti, director of the White House National Economic Council, said he expected the application to be released in early October. Borrowers will have until Dec. 31, 2023, to apply.
A White House spokesperson said the application will be a short online form that won't require any document uploads or a FAFSA ID.
How soon will I get relief?
Ramamurti suggested that relief would follow within four to six weeks of submitting an application.
It’s also quite possible, experts say, that there will be legal challenges to the executive order.
“This is something that might be struck down and never actually be implemented,” says Lanae Erickson, senior vice president for social policy, education and politics for Third Way, a nonpartisan think tank. “The timeline of all of this seems very rickety. There are going to be court challenges. If [Public Service Loan Forgiveness] has been any example, we know it’s going to take a while for people to be processed. It is not going to be instantaneous for borrowers to see this relief.”
What if I owe more than $10,000 in federal loans?
Any amount you owe above $10,000 — or $20,000 if you qualify for relief as a former Pell Grant recipient — still remains. You’ll have to continue making payments on your debt. Payments are set to restart for all federal student loan borrowers after Dec. 31.
How will this change my monthly payment?
Remaining balances will be reamortized. That means your monthly payment will change based on your new balance, but your remaining term to payoff will stay the same. Your servicer will let you know your new monthly payment, which is likely to be smaller.
What if I already paid off my student loans?
The debt forgiveness applies to borrowers with federal student loans disbursed by June 30, 2022. If your loans were paid off before the pause went into effect, you are not eligible for forgiveness. More information is expected in the coming weeks about how the Education Department will handle loans that were paid off during the pandemic.
Can I get a refund for other payments?
If you made payments during the pandemic that reduce your balance to below what you qualify for in cancellation, your payment refund will be automatic.
I’m headed to college or a current student. Will my loans be forgiven, too?
Yes, but only on loans disbursed by June 30, 2022.
“Nobody should be taking out a student loan tomorrow because of what they heard today thinking it’s going to be forgiven,” says Betsy Mayotte, president of The Institute of Student Loan Advisors.
I had a Pell Grant in college. How do I get relief?
Borrowers are eligible for up to $20,000 relief if they once received Pell Grants to attend school. The Education Department maintains records of all Pell Grant recipients. Borrowers will not need to prove their Pell Grant award.
You can find out if you received a Pell Grant by logging onto the National Student Loan Data System or Federal Aid website using your FSA ID. Your previous aid information should be on the Financial Aid Review page.
Will parent PLUS loans be included?
Yes, parents who took out PLUS loans to help their child attend college are eligible for forgiveness. Parent PLUS loans are also eligible for the additional $10,000 in cancellation if the parent borrower ever received a Pell Grant. If they did not, but the child who benefited from the loan did, the parent PLUS loan will not get the extra $10,000.
Are graduate loans included?
Yes, unsubsidized direct graduate loans and graduate PLUS loan debt are both included.
What if I have an FFELP loan?
Borrowers with Federal Family Education Loan Program debt owned by the government will see $10,000 in cancellation. If your FFELP loan is commercially owned by a private company, you will not qualify unless you applied to consolidate your debt into a direct loan by Sept. 29, 2022. This was a reversal of previous guidance regarding cancellation eligibility of commercially owned FFELP loans. Over 4 million borrowers have commercially owned FFEL debt.
Contact your servicer to confirm which type of FFELP loan you have.
What if I have a private loan?
Private student loan borrowers will not see debt cancellation. If you’re having difficulty repaying your debt, contact your lender to find out what options are available, such as forbearance or temporarily lowered payments.
I have multiple federal loans. Which ones will be forgiven?
Here is the order in which loans will receive relief:
Defaulted federally owned loans.
Defaulted commercially owned FFELP loans.
Direct loans and federally owned FFELP loans in good standing.
Federally-owned Perkins loans.
The Education Department will use the following order to cancel loans if you have several loans of the same type:
Loans with the highest statutory interest rate.
If interest rates are the same, unsubsidized loans get relief before subsidized loans.
If interest rate and subsidy are the same, newest loans get relief.
If all other factors are the same, the loan with the lowest combined principal and interest balance gets relief.
What if my loans are in default?
Defaulted loans are also eligible for relief.
The administration has also introduced a Fresh Start program that provides a path to good standing for 7.5 million borrowers. Defaulted borrowers who still have a balance after cancellation should consider this program.
Will my forgiven debt be taxed?
Not at the federal level. A provision under the American Rescue Plan Act, signed into law by Biden in March, made any student loan debt forgiveness tax-free from December 2020 through Dec. 31, 2025. But that applies only to federal income taxes. Taxation at the state level varies. The following states have tax laws that could result in student loan cancellation being taxed as income:
What if I want to opt out?
Most borrowers will need to submit an application in order to get cancellation. Borrowers who do not want to get cancellation can choose not to apply.
But automatic cancellation is expected for those enrolled in an income-driven repayment plan. Those borrowers can opt out of relief — some may want to, for tax purposes — but the Department of Education has not released details on how to do so.
What if I can’t afford the remaining balance?
Receiving debt cancellation may have put a dent in your overall burden, but it doesn’t immediately help if you still can’t afford your monthly payment when the pause ends Dec. 31. Ramamurti, of the White House National Economic Council, suggested borrowers worried about handling payments should try to apply for forgiveness well in advance, no later than Nov. 15.
If you have concerns about the debt that remains, your best option is to contact your servicer about alternate repayment plans or an additional pause.
You could enroll in an income-driven repayment plan that sets your payments at a portion of your income and extends the length of time to repay your debt. Or you might need to take a payment pause entirely, though interest will still collect and be added to the total you owe when you restart payments.
What’s the deal with the new repayment plan?
The Education Department additionally revealed its new proposed income-driven repayment plan — a fifth plan to complement the four existing ones — to cap payments at 5% of a borrower’s income. It’s unclear when this new payment plan might go into effect.
The current most accessible income-driven repayment plan is called Revised Pay As You Earn, or REPAYE, and caps payments at 10% of a borrower’s income. After 20 or 25 years the remaining debt balance is forgiven.
The new rule would reduce the cap and lower the time to forgiveness to 10 years of payments for those who originally borrowed $12,000 or less to attend college. And it would cover the borrower’s unpaid monthly interest so a borrower won’t see their balance grow due to interest while they’re making regular payments.
Under existing income-driven plans, growing interest can make it difficult for borrowers to make a dent in their balance even while they’re paying each month.
Will my credit be affected?
Your total student loan debt does not negatively affect your credit scores as long as you make payments on time.
Some borrowers whose debt is eliminated could actually see a small decrease in their credit scores, which sometimes happens when a line of credit closes. The longer your credit history, the better, and your student loan might be your oldest credit account. If your student loan account closes, your credit history will be shorter and that can have a slight negative impact on your credit score.
However, most loan approvals are dependent on your debt-to-income ratio, not just your credit history. Debt-to-income ratio represents the total of your monthly obligations, divided by your monthly income.
If $10,000 in forgiveness eliminates a loan payment altogether, your DTI would improve. If it simply lowers your balance — but not your payment — your DTI would not improve.
The Biden administration and the student debt crisis
The move by Biden comes after many months of speculation and deliberation between his administration and Congress as to who has the power to cancel student loan debt, how much debt should be canceled — or if it should happen at all.
Student debt has been referred to as a crisis in the U.S. Between 1985-86 and 2017-18, college costs have grown 114%, adjusted for inflation, according to the most recent available data from the National Center for Education Statistics. Wages adjusted for inflation, meanwhile, have barely budged over the same period — just under a 19% increase, according to the Federal Reserve Bank of St. Louis.
Nearly two-thirds (62%) of college graduates in the class of 2019 had student debt, according to The Institute for College Access and Success. The average amount they owed was $28,950.
The Biden administration has prioritized correcting the shortcomings of existing forgiveness programs resulting in debt cancellation totaling $32 billion for 1.6 million borrowers. That includes:
$10 billion for more than 175,000 public servants through the Public Service Loan Forgiveness program.
$9 billion for more than 425,000 borrowers who have a total and permanent disability.
$13 billion for 1 million borrowers whose institutions defrauded them or closed before they could get their degree.
“There’s a lot more work to be done, and tens of millions still have student loans, but for the estimated 20 million who will be debt-free, it will be life-changing,” says Mike Pierce, executive director and co-founder of the Student Borrower Protection Center, a nonprofit advocacy organization. “It shows that when people with student loans demand better from their government, the government listens to them, and that’s a good thing.”