9 things to know about Biden’s $10k student debt forgiveness plan
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UPDATE: On October, 21, a federal appeals court put a temporary, administrative hold on President Biden’s student loan forgiveness plan while it considers a challenge to the policy by six Republican-led states.
Still, the administration is encouraging borrowers to continue applying for relief despite the hold. “Amid some Republicans trying every which way to block the Biden Administration’s debt relief program, the department is moving full speed ahead with preparations for the lawful implementation of our program so we can deliver relief to borrowers who need it most,” writes Education Department secretary Miguel Cardona in USA Today.
Chegg Life will continue to update this story with information as it develops.
After years of debates, protests and will-he-won’t-he speculation, President Biden announced in August a new targeted, one-time student loan forgiveness plan that forgives between $10,000 and $20,000 for middle- and low-income borrowers.
It’s a big deal. The plan is poised to wipe away hundreds of billions of dollars in student debt, fully cancel balances for 20 million borrowers, and decrease payments by hundreds of dollars for others. The policy isn’t exactly straightforward, however, and the rollout is shaping up to be complicated and contested.
The application for relief went live as a beta version on Friday, October 14. Although the final website is still to come later this month, you can submit your official application right now via the test site. (Essentially, the government is collecting applications now but won’t begin to process them until the final official site launch).
With no further ado: Here is the application. Right here!Here it is!Click here! Best of all, the first wave of users are saying the form and process so far is much easier, simpler and more efficient than they anticipated.
Before you hop in the portal, here are all the facts you need to know about the forgiveness plan and how to take advantage of it.
Many people — but not everyone — are getting relief
According to the government, the relief will impact 43 million borrowers.
To be one of them, you have to have federal direct loans that were taken out before June 30, 2022. Most importantly, you have to have earned less than $125,000 (or $250,000 as a household) in either 2020 or 2021 (one or the other is okay if your income fluctuated).
If you meet the income threshold and received a Pell Grant while you were in college, you are eligible for $20,000. In both cases, the relief is capped at the borrower’s outstanding debt (i.e. if you are eligible for $20,000 and have $13,000 in outstanding loans, you will only receive $13,000 in relief).
Private loans are not eligible
No private loans are eligible for forgiveness, even if they started out federal and were consolidated. However, almost every type of federal loan is eligible, including grad school loans, spousal loans, Parent PLUS loans, defaulted loans and government-held FFEL and Perkins loans.
You have to apply — and applications are due by December 31
After Biden’s announcement, many people’s first question was whether or not the $10,000 would automatically disappear from their balances. This prompted a mass login to student debt portals to check, crashing at least one company’s website.
For most people, the answer is no. Everyone must file an application in order to receive relief, and they don’t have endless time to do so. Borrowers have until just December 31 to apply. The administration recommends submitting applications before November 15 to receive relief before payments resume in 2023 since the forms will take four to six weeks to process.
The government is advising everyone to submit an application, however, they say that around 8 million people whose earnings information is already on file may be eligible for automatic relief. If you see your balance dip promptly, you might be one of the lucky 8 million, but it’s best to apply anyway to be safe.
Now that the form has been released, you should submit ASAP to avoid making more unnecessary payments. You can sign up for notifications from the Department of Education here, to get all future updates about the application process.
For those with remaining debt, payments resume in January 2023
Biden’s plan also extends the student loan payment pause, which has been in effect since March 2020, through the end of 2022. For the 25 million or so Americans who will have federal student loans left after cancellation, here are some tips on how to get ready for payments to resume in January.
If you kept paying your loans during Covid, you can get a refund
Some borrowers took advantage of the pause on payments and interests to pay down their balances quickly. If you did this, you can still receive the full amount of forgiveness you’re eligible for. According to the Department of Education’s Federal Student Aid website about the payment pause, "You can get a refund for any payment (including auto-debit payments) you made during the payment pause (beginning March 13, 2020).” You should contact your loan servicer to request your refund. Here’s a guide to how the refund process will work.
It’ll work like this: Let’s say you had a balance of $10,000 before the pandemic and paid back a total of $3,000 since March 13, 2020, so you have $7,000 left. Once you apply for the refund, $3,000 will be added back to your balance. Then, you can apply to have the total $10,000 balance canceled via Biden’s new plan.
The plan includes upgrades for driven repayment (IDR) and public service loan forgiveness (PSLF)
Existing federal programs for student loan forgiveness are notoriously difficult to qualify for. Biden’s announcement includes some upgrades to beef up their accessibility.
The Department of Education is making temporary improvements to PSLF, which grants forgiveness to public service workers after 120 qualifying payments, “long-term.” Specifically, the recently introduced rule that says partial, lump sum and late payments now count as qualified payments, as do those made during periods of deferment and forbearance.
Another new rule is capping monthly payments for borrowers enrolled in IDR, a program that lets middle- and low-income borrowers make monthly contributions based on their income for a set number of years, after which, what’s left is forgiven. The monthly payment amount will now be set at 5% of borrowers of monthly discretionary income versus 10-15%. The way discretionary income is calculated will shift to count less of borrowers’ income as discretionary, also minimizing monthly payments. In addition, loans for IDR candidates with original balances under $12,000 will now be forgiven after 10 years of payments instead of 20.
CNBC called these changes a “sleeper-hit” of Biden’s announcement, as lower monthly payments and shorter repayment plans will be “life-changing” for millions of low-income borrowers.
In some states, forgiven debt will be taxed as income
Whether or not student debt relief would be considered taxable income has been a longstanding question in the debate. We now have answers.
Borrowers will not owe federal taxes on the student loan relief they receive, thanks to a provision of the American Rescue Plan Act in 2021. Most states are also following suit and waiving state income taxes.
But a handful of states, including Indiana, Mississippi, North Carolina, Minnesota, Wisconsin and Arkansas have announced that they will collect taxes on loan forgiveness. This means a significant bill that may feel out of nowhere. For instance, in Indiana, where the tax rate is currently 3.23% per AP, borrowers who see $10,000 forgiven will pay $323 in taxes on their canceled debt, while anyone receiving $20,000 will be taxed $646.
Student debt activists are celebrating their victory, but want more
While no president has ever done anything like this before, and student debt cancellation activists are claiming the plan as a victory, some consider Biden’s plan insufficient.
“Biden’s announced cancellation policy does not go far enough. This action proves that Biden has the authority to cancel all federal student debt — and he’s choosing not to use it. Instead, he’s opting to leave huge numbers of borrowers buried in unpayable debt,” Debt Collective said in a press release. “What we need is full cancellation AND free public college for all.”
On both sides of the aisle, many are criticizing Biden’s plan for not meaningfully addressing the cost of higher education and the unregulated student loan industry. A press release says the Biden administration is “taking steps to reduce the cost of college” and “hold colleges accountable,” like withdrawing accreditation from institutions that accredit scam schools, but details are scarce.
Some experts say we shouldn’t celebrate prematurely, as Republicans try to block Biden’s plan
Meanwhile, on the right, Republicans like Mitch McConnell have called the plan “wildly unfair” and a “slap in the face” to those who saved for college, paid off their debts or made career choices to stay debt-free.
In addition, GOP politicians, think tanks and trade groups that benefit from student debt are working hard to challenge Biden’s authority to see the plan through. Biden based his policy on the powers granted to a president during a national emergency, which is what Trump used in 2020 to suspend payments. While legal scholars have argued that the president has the power to forgive loans with or without a national emergency, education expert Mark Kantrowitz says opponents will argue that emergency powers do not justify such a big expenditure.
As such, Vox calls the legal fate of the plan “a big unknown,” and Lanae Erickson, a senior vice president at policy think tank The Third Way, says advocates and policymakers should “communicate to borrowers that there is a strong chance it will never come to fruition.”
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