Biden’s Student Loan Plan: What We Know (and What We Don’t)

NEW YORK — President Joe Biden said on Wednesday that many Americans could be forgiven up to $10,000 in federal student loans. That amount rises to $20,000 if they qualify for Pell scholarships. Here’s what we know so far and what it means for those with outstanding student loans:

WHO IS ELIGIBLE FOR STUDENT LOAN FORGIVENESS?

You are eligible for a waiver of up to $10,000 if your loan is administered by the Department of Education and you earn less than $125,000 individually or $250,000 for a family. If you received Pell scholarships, which are reserved for students with the greatest financial need, you can get up to $20,000 waived. If you are a current borrower and a dependent student, you qualify for an exemption based on your parents’ income, rather than your own.

WILL THE STUDENT LOAN FREEZE EXTENDED?

The payment freeze will be extended one last time, until December 31. The freeze started in 2020 as a way to help people struggling financially during the COVID-19 pandemic and has been extended several times since. It was supposed to end on August 31.

The interest remains 0% until the repayments start. Under an earlier extension announced in April, people who were in arrears before the pandemic will automatically gain a good reputation.

HOW DO I APPLY FOR FORGIVENESS OF A STUDENT LOAN?

Details on that have not been disclosed, but keep an eye on the federal student aid website for more details in the coming days.

IS GRADUATE STUDENT DEBT ELIGIBLE?

Yes, federal student loans taken out to cover graduates are eligible for forgiveness.

WHAT IF MY STUDENT LOAN BALANCE CONTAINS A LOT OF INTEREST?

The interest itself is considered part of the balance for the purposes of this program. Forgiveness will remove $10,000 from the total balance you owe.

DO I HAVE TO PAY TAXES ON THE AMOUNT I’M FORGIVEN?

No. Congress abolished loan forgiveness taxes through 2025. It’s possible that some states may tax forgiven debts, according to the nonprofit tax foundation, but it’s not clear yet if that will happen.

ARE PARENT PLUS LOANS ELIGIBLE?

Parent Plus loans are included in the forgiveness plan, subject to the same $250,000 household income cap that applies to the remainder of the cancellation.

Parent Plus loans differ from other federal education loans in that they can be used to cover expenses other than tuition, such as books, and room and board for college students. According to the Department of Education, parents of 3.6 million students owe more than $107 billion in Parent Plus loans as of March 2022. That represents about 6% of Americans’ total amount of federal student debt.

WHAT IS A PELL GRANT AND HOW DO I KNOW IF I HAVE ONE?

About 27 million borrowers eligible for Pell grants are eligible to receive up to $20,000 in forgiveness under the Biden plan.

Pell scholarships are special government scholarships for lower-income Americans, who can currently receive up to $6,895 per year for about six years.

Nearly every Pell Grant recipient came from a family earning less than $60,000 a year, according to the Department of Education, which said Pell Grant recipients typically have more trouble repaying their debt than other borrowers.

Pell scholarships themselves generally do not have to be repaid, but recipients usually take out additional student loans.

“This extra relief for Pell borrowers is also an important piece of racial equality upon cancellation,” said Kat Welbeck, civil rights attorney for the Student Borrower Protection Center. “As student debt exacerbates existing inequality, the racial wealth gap means students of color, especially blacks and Hispanics, are more likely to come from low-wealth households, have student debt and borrow in greater amounts.”

To find out if you have a Pell scholarship, please refer to any emails you have received describing your FAFSA award.

HOW MANY PEOPLE WILL THIS HELP?

About 43 million Americans have federal student debt, with an average balance of $37,667, according to federal data. A third of that owes less than $10,000. Half owe less than $20,000. The total amount of federal student debt is over $1.6 trillion.

WHAT IF I HAVE ALREADY PAID MY STUDENT LOANS – WILL I SEE RELIEF?

The debt waiver is expected to apply only to those who currently have student debt. But if you’ve voluntarily made payments since March 2020, when the payments were interrupted, you can request a refund for those payments, according to the Federal Office of Student Aid. Contact your credit manager to request a refund.

WILL FORGIVENESS OF A STUDENT LOAN DEFINITELY HAPPEN?

The White House could face lawsuits over the plan because Congress never gave the president explicit authority to forgive debts. The Biden administration links its authority to the coronavirus pandemic and a 2003 law designed to help members of the military. We don’t yet know what legal action may affect the student loan forgiveness schedule.

WHAT REFUND PLAN DOES THE DEPARTMENT OF EDUCATION PROPOSE?

The Department of Education has proposed a repayment plan that would limit monthly payments to no more than 5% of a borrower’s discretionary income, up from 10% now. Borrowers must apply for the repayment plan if it is approved, which can take a year or more.

For example, under the proposal, a single borrower making $38,000 a year would pay $31 a month, according to a government press release.

The amount deemed non-discretionary will also be increased, but the ministry has not said how much.

Discretionary income usually refers to what you’re left with after covering necessities like food and rent, but for student loan repayments, it’s calculated using a formula that takes into account the difference between a borrower’s annual income and the federal poverty line, together with family size and geographic location.

“The tricky part about means-tested repayment is that it doesn’t take into account your other obligations, such as your rent payment,” says Kristen Ahlenius, financial advisor at Your Money Line, which provides financial literacy training. “If someone lives paycheck to paycheck and his rent takes half of his paycheck and his car payment takes the other, they have to choose. Unfortunately, income-driven repayment does not take this into account, but it is an option.”

Student Debt Relief provides a calculator to help determine your discretionary income.

WHAT IF I CAN’T PAY EVEN WITH FORGIVENESS OF THE LOAN?

Once payments resume, borrowers who are unable to pay run the risk of being delinquent and ultimately defaulting. This can damage your creditworthiness and mean that you are not eligible for additional support.

If you’re having trouble paying, check if you qualify for an income-based repayment plan. You can find more information here.

The plan that Biden announced Wednesday also includes a proposal that would allow people with undergraduate loans to limit repayments to 5% of their monthly income. Proposals like this could take a year or more to implement, and it’s not clear what the fine print will be.

If you’ve worked for a government agency or non-profit organization, you may also qualify for the public loan forgiveness program, which you can read more about here.

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Seung Min Kim, Michael Balsamo, Chris Megerian, Collin Binkley and Zeke Miller in Washington contributed to this report.

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