On Aug. 24, 2022, President Joe Biden announced his long-awaited decision on student loan forgiveness before monthly payments were set to resume. The highlight of his historic plan includes getting up to $20,000 of federal student loans canceled, but it also features provisions for extending the payment pause and improving some repayment programs. While some details of Biden's student loan forgiveness plan are still forthcoming, you should take a look at how each part of the plan can affect you financially and what you can do to prepare.
Student Loan Forgiveness Plan Purpose
According to the White House, around 45 million Americans have student loan debt that totals $1.6 trillion as of August 2022. Those in the lower and middle classes have particularly struggled to pay down their balances due to economic challenges from the pandemic, the accumulation of interest and overall rising costs of living.
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Many struggle with their payments, and some loans have fallen into default. Plus, some borrowers weren't even able to complete their degrees due to high costs and thus have the debt but no credentials to get ahead. Those who can afford to make their student loan payments may find themselves putting off major life decisions – such as buying a home or having children – since the payments still put a strain on their budgets.
Due to these numerous issues, the Biden administration proposed its student loan forgiveness plan to offer relief to those struggling with this debt and further assist with recovery from the pandemic. The goal is to help up to 43 million qualifying borrowers, and even wipe out all federal loan debt for nearly half. The White House briefing emphasizes how the targeted plan will help "advance racial equity" and offer the most help to low-income individuals who had received the Federal Pell Grant.
The highlight of his historic plan includes getting up to $20,000 of federal student loans canceled, but it also features provisions for extending the payment pause and improving some repayment programs.
Student Loan Debt Cancellation
While Congress has introduced widespread student loan forgiveness proposals before, the attempts didn't succeed. With one campaign promise being canceling student debt, the president looked into using an executive order. The U.S. Department of Education provided direction under the HEROES Act that applies in national emergencies, such as the pandemic. As a result, Biden decided to offer a maximum of $20,000 in federal student loan forgiveness for Pell Grant recipients and $10,000 for other borrowers meeting income requirements.
President Biden remarked, "Both of these targeted actions are for families who need it the most – working and middle-class people hit especially hard during the pandemic making under $125,000 a year. You make more than that, you don't qualify." Further, heads of household and married couples can make up to $250,000 and qualify. According to CNN, this program will cost around $300 billion to implement, and you won't receive more than your outstanding loan balance.
The National Association of Student Financial Aid Administrators clarifies that qualifying loans need to have been disbursed no later than June 30, 2022, and include both Parent PLUS loans and federally held loans taken out by the student. You can qualify even if you didn't ultimately finish your program. Note that if you attended school in the 2021-2022 school year as a dependent student, your parents' income will determine eligibility. Also, the loan forgiveness won't incur any federal taxes, but state taxes may still apply.
Extended Student Loan Payment Pause
Initially, the federal student loan payment pause began in March 2020 under President Trump as the pandemic began significantly affecting Americans financially. After six extensions throughout the Trump and Biden presidencies, the student loan payments were set to begin again in September 2022. However, continued economic issues like inflation have raised doubts about borrowers being able to resume their payments.
Therefore, as part of Biden's plan, the U.S. Department of Education will pause federal student loan payments for the final time through the end of the year. In addition, your loans will continue not to accrue interest during this time. Note, however, that this won't affect any private student loans you have, and you'd need to contact your private lender if you need to pause or reduce your payments.
This final pause will provide some time for the government to enact the cancellation program as well as prepare loan servicers and borrowers for resuming payments. You can also use this time to look into different options – such as income-driven repayment plans or ways to continue getting a forbearance or deferment during hardship – if necessary.
Changes to Repayment Plans
Biden's student loan forgiveness plan also proposes ways to reduce monthly payments moving forward for borrowers taking advantage of income-based repayment. CNBC explains a new plan where those with undergraduate loans only pay 5 percent of their monthly discretionary income versus the current 10 percent. A weighted rate would apply to those who also have graduate loans. Plus, the discretionary income used would be higher and what's left over after 2.25 times the federal poverty level.
The proposed income-based repayment plan would also lead to quicker loan forgiveness for certain borrowers and reduce the effects of interest. You'd get forgiveness after only 10 years with a $12,000 maximum original loan balance, while those with higher balances would need to wait 20 years. You also wouldn't have to worry about interest making your student loans grow as long as you make timely payments, since the Department of Education would cover the interest amount your monthly payment doesn't.
Biden's plan also helps those who are already enrolled in the Public Service Loan Forgiveness program or do so before Nov. 1, 2022. You could have otherwise unqualified payments – plus periods of forbearance or deferment if you were in the military or participated in service programs, like AmeriCorps – apply toward your progress. The Federal Student Aid website has a tool you can use to see if you'd benefit.
Checking If You Qualify for Debt Relief
If you're interested in whether you could benefit from Biden's plan, you should first locate your adjusted gross income on your last two past tax returns. CNBC reports that you can qualify based on the lower of your 2020 or 2021 AGI, so making too much last year isn't a deal breaker as long as your 2020 income qualifies.
After verifying your income, you should then check to see your current student loan amounts as well as any past Pell Grants awarded. While your student loan servicer will show your outstanding loans, logging into your account studentaid.gov will let you see both grants and loans easily in one place. When looking at your past loans, Time advises to make sure any Federal Family Education Loans listed aren't commercially held since forgiveness on such loans isn't yet clear.
If you ended up paying down your student loans during the pause, you might feel frustrated about not having a balance qualifying for maximum forgiveness or any at all. CNBC suggests you could ask your loan servicer to refund these payments and increase your loan balance. However, it advises federal student loan borrowers that the process can take several weeks and cautions that the Department of Education hasn't clarified how it will treat pandemic-era payments.
Taking Advantage of Loan Forgiveness
If you're eligible for student loan forgiveness, you likely won't need to take any action right now, unless you're planning to contact your loan servicer for a student loan payment refund. Instead, you can expect more instructions on the relief plan in the coming weeks.
The U.S. Department of Education says it will create an application online that you'll fill out with your income information, and it expects this to become available in early October. If you're among the estimated 8 million people who have an income-driven repayment plan and provided the government with your income data already, you may not even need to fill out this application to get debt forgiveness.
According to Federal Student Aid, you can request to receive a notification about the application's availability. It's recommended to submit your application before Nov. 15 for timely processing before payments resume, but the Department of Education will accept applications even into 2023. Note that it can take four to six weeks to get your debt forgiven after submission.
Responses to Biden's Forgiveness Plan
The administration's plan to forgive student loan debt has generated responses from the public and government leaders alike. Some sources, such as the Washington Post, see the federal government's plan as an important step toward alleviating crushing student loan debt and improving the finances of borrowers. However, others say the plan doesn't go far enough, is unfair, doesn't target the right issue or will increase costs for taxpayers.
CBS News reports that the Republican senators Mitch McConnell and Ted Cruz find the forgiveness plan unfair since many already paid back their debt or opted not to attend college. On the other hand, CBS Pittsburgh says the Ohio Democrat representative Tim Ryan argues that rising college costs are the bigger problem and that forgiving some debt won't solve the student loan crisis. Business Insider reports that the progressive Alexandria Ocasio-Cortez thinks the plan is a good start but wants a higher amount of debt forgiven.
Some also argue that the relatively high income limits will allow wealthier borrowers to benefit from the program. However, the White House estimates that 90 percent of the loan forgiveness will help people making under $75,000 annually rather than those with six-figure incomes. Other common concerns involve how the debt relief could further raise inflation and taxes as well as whether it's ultimately legal to cancel student loan debt without going through Congress.
- U.S. Department of Education: Biden-Harris Administration Announces Final Student Loan Pause Extension Through December 31 and Targeted Debt Cancellation to Smooth Transition to Repayment
- CBS News: Biden’s Student Loan Forgiveness Plan Criticized by Republicans and a Few Democrats
- CBS Pittsburgh: Rep. Tim Ryan Breaks From Biden on Student Debt Relief Plan
- The White House: FACT SHEET: President Biden Announces Student Loan Relief for Borrowers Who Need It Most
- Business Insider: AOC Vows To Keep Pushing for More Student-loan Forgiveness, Saying Biden’s Relief ‘Still Leaves a Question Mark for Those in the Highest Amounts of Debt’
- Federal Student Aid: The Biden-Harris Administration's Student Debt Relief Plan Explained
- CNN: Biden Announces Student Loan Forgiveness Plan
- The White House: Remarks by President Biden Announcing Student Loan Debt Relief Plan
- Congress: H.R.4797 - Student Loan Relief Act
- U.S. Department of Education: The Secretary's Legal Authority for Debt Cancellation
- National Association of Student Financial Aid Administrators: Updated: Biden Takes Executive Action on Student Loan Cancellation, Extends Repayment Pause
- CNBC: Do You Make Too Much for Student Loan Forgiveness? Here’s How to Figure Out Whether You Qualify
- CNBC: If You’ve Been Paying Your Federal Student Loans During the Pandemic, Here’s How You Can Get a Refund
- Federal Student Aid: Complete the Public Service Loan Forgiveness (PSLF) Form With the PSLF Help Tool
- Washington Post: Opinion – Biden’s New Student Loan Forgiveness Plan Is a Good Start
- CNBC: Biden Announces New Plan To Cut Some Student Loan Payments in Half