Qualifications for Loan Forgiveness
Under certain circumstances, the federal government will cancel all or part of an educational loan. In August 2022, President Biden announced a plan to alleviate student loan debt burdens for borrowers who need it the most. According to The White House Fact Sheet, this new student loan forgiveness plan will impact around 43 million borrowers.
The current situation with this proposed plan is fluid. Track news and updates for the Student Loan Debt Relief Plan here: NASFAA Student Loan Debt Cancellation Web Center
What You Need to Know: Biden’s Student Loan Forgiveness Plan
The student loan forgiveness program unveiled by the Biden Administration is a three-pronged plan that will target overbearing student loan debt for some borrowers and address rising college costs.
Relief to Qualifying Borrowers
Eligible Pell Grant recipients will receive up to $20,000 in student loan debt cancellation for loans that are held by the U.S. Department of Education, i.e. federal student loans. Non-Pell Grant recipients can receive up to $10,000 in student loan forgiveness.
Borrowers who make over $125,000 annually ($250,000 for married couples) will not qualify. Additionally, student loan repayment will be paused one last time, through December 31, 2022, in response to the Coronavirus pandemic and its subsequent effects.
Modify Existing Student Loan Program
In addition to providing student loan forgiveness, the Biden Administration has proposed a new income-based repayment plan that will cap monthly loan payments at 5% of discretionary income rather than 10%, which is the current rate.
Under this new plan, borrowers may have their payments lowered by as much as $1,000 per month. This new proposal would apply to current as well as future borrowers.
The Administration also wishes to forgive student loans after 10 years, rather than the current 20, for borrowers with balances less than $12,000. This proposal will allow all community college graduates to be debt-free after 10 years.
Reduce college costs
Finally, President Biden promises to do what he can to bring college costs down. This includes increasing the maximum Pell Grant as well as making community college free.
It also means holding colleges accountable to student outcomes. This means that institutions who overpromise on graduation rates, employment tracks, and potential salaries after leaving will be held liable if graduates do not receive the value for their investment.
Who Student Loan Forgiveness Will Help
The Administration has made it clear that the new student loan forgiveness plan will not help individuals that do not need it. Those in the top 5% of incomes will see no student loan debt relief.
According to The White House Fact Sheet, these are the type of individuals that student loan forgiveness will provide relief to:
- About 60%, or 21 million, borrowers receiving relief are Pell Grant recipients.
- In total, the student loan forgiveness plan will provide relief to 43 million borrowers.
- Roughly 20 million borrowers will see their full student loan debt amount cancelled.
- Of those receiving debt relief, 21% are 25 and younger, 44% are 26 – 39, and 5% are senior citizens.
- Nearly 90% of debt cancellation benefits will go to borrowers earning less than $75,000 a year.
How to Get Student Loan Forgiveness
According to the Department of Education, just about 8 million borrowers will automatically receive student loan debt relief because their income information is already available to the Department. For the remaining borrowers that qualify, a simple application will need to be filed.
The Debt Relief Application is now accepting applications. The application will remain open until December 31, 2023.
The Department of Education advises debt relief seekers to sign up before November 15, 2022, to have plenty of time for debt relief to reach them before the loan payment pause lifts on December 31, 2022. However, the Department assures borrowers that applications will still be processed after December 31. Once borrowers have completed the application, they can expect relief within 4 – 6 weeks.
Watch President Biden Remarks on Student Debt Relief Portal – You Tube 10/17/2022
Taxes on Student Loan Forgiveness
Because of existing laws, some states may tax borrowers who receive student loan forgiveness, reports CNBC. Though student loan forgiveness was considered “non-taxable income” through the American Rescue Plan passed in 2021, it was only on a federal level. There are quite a few states that do not conform to federal tax laws, thereby making loan forgiveness taxable at the state level.
As of now, Mississippi and North Carolina have confirmed that borrowers who seek debt relief will be taxed on a state level. Other states in which student loan forgiveness may be taxable are Arkansas, California, Indiana, Massachusetts, Minnesota, and Wisconsin.
However, there is still time for some of these states to make amendments and work to ensure that residents are not taxed. Borrowers should closely follow General Assembly news in their respective states to determine the impact to their student loan forgiveness.
To stay up to the date on the latest on student loan forgiveness, visit the U.S. Department of Education.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) program was established in 2007 to help borrowers pay off their student loan debt easier and faster. Under the federal program, eligible borrowers can have their loans discharged after 10 years if they meet eligibility requirements. Review our outline of Public Service Loan Forgiveness requirements.
