Federal Student Loan Forgiveness: Your Questions Answered

The Biden Administration recently announced that it plans to cancel up to $20,000 in federal student loan debt, which is likely to affect many of the nearly 43 million Americans who borrowed to attend college.

Additionally, under the plan, the pause on student loan payments that was instituted in 2020 as a response to the COVID-19 pandemic was extended again, through Dec. 31, 2022.

Student loan borrowers on average carry about $30,000 in debt, including federal and private loans, according to U.S. News data.

New details continue to emerge about the one-time loan forgiveness program, but a lot is still up in the air. Here are answers to some frequently asked questions.

— Who is eligible for forgiveness? What types of debt will be forgiven?

— How is relief administered? Do I need to sign up or apply?

— How is income eligibility determined?

— How does this affect Public Service Loan Forgiveness?

— What if I continued paying despite the repayment pause during the pandemic and now owe less than $10,000? Can I receive a reimbursement?

— Will debt relief be considered taxable income?

— What if I didn’t finish my degree? Do I still qualify?

— What does this mean for borrowers who took out private student loans?

— What if I’m in default on my loans?

Who is eligible for forgiveness? What types of debt will be forgiven?

Current students and borrowers who have federally held undergraduate, graduate and Parent PLUS loans that were distributed on or before June 30, 2022 are eligible for the relief, says Megan Walter, a policy analyst for the National Association of Student Financial Aid Administrators.

The White House announced that single borrowers earning less than $125,000 per year, or households earning less than $250,000, are eligible for $10,000 in loan forgiveness. Borrowers who fall under the income caps and received Pell Grants in college will receive an extra $10,000 — totaling $20,000 in forgiveness.

How is relief administered? Do I need to sign up or apply?

Nearly 8 million borrowers may be eligible to receive relief automatically because their income data is already available to the U.S. Department of Education, the White House announced in its press release. Walter says the Department of Education may have the necessary data for borrowers based on information submitted for income-driven repayment plans or for the Free Application for Federal Student Aid, known as FAFSA.

Borrowers whose income data isn’t already on file with the Department of Education can expect an application to be available by early October 2022. Once borrowers submit their application, they can expect relief within four to six weeks, according to the Federal Student Aid website.

The Department of Education advises borrowers to apply before Nov. 15, 2022, to receive relief before the payment pause expires at the end of December.

How is income eligibility determined?

Borrowers will have the choice to use either their 2021 or 2020 tax return information when applying for loan forgiveness, says Jared Walczak, vice president of state projects at the Tax Foundation, a nonprofit that focuses on tax policy. Even if borrowers have a single income above $125,000 or a household income above $250,000 at the time of the announcement, they can still qualify as long as their income in 2021 or 2020 was under the threshold, Walczak says.

For current students, the Department of Education will have income data for any borrowers who completed the FAFSA in 2021-2022, Walter says. For borrowers who were a dependent during the 2021-2022 school year, the Department of Education will use parental income information to calculate loan cancellation eligibility.

How does this affect Public Service Loan Forgiveness?

In October 2021, the Biden Administration announced a limited-time waiver that relaxed eligibility requirements for the Public Service Loan Forgiveness program, which had faced criticism and investigations for its high ineligibility rates. Borrowers that worked in certain nonprofit and public service sectors for 10 years or more, even if not consecutively, might be eligible for all of their student debt to be canceled or get credit toward forgiveness.

This, however, is separate from the one-time student loan forgiveness recently announced by the Biden Administration and will have no impact on a borrower’s eligibility for either $10,000 or $20,000 in forgiveness, according to the NASFAA.

What if I continued paying despite the repayment pause during the pandemic and now owe less than $10,000? Can I receive a reimbursement?

Relief is capped at the amount of your outstanding debt, according to StudentAid.gov. For example, a student who made payments to bring their balance down to $15,000 but is entitled to $20,000 in forgiveness would only receive $15,000 in relief. The Department of Education hasn’t indicated that it will reimburse borrowers for payments made during the pandemic pause, Walter says.

That said, borrowers can contact their loan servicer to request a refund for any payments they made since the pause began on March 13, 2020. Borrowers should be aware, however, that accepting a refund would result in that money being added back to the loan balance.

Will debt relief be considered taxable income?

While debt forgiveness is ordinarily taxable income, it will not be counted toward federal income taxes as part of the Biden Administration’s plan. The American Rescue Plan Act of 2021 allows canceled student loan debt to be federally tax-free through 2025, Walter says. However, in some states, borrowers could potentially have to pay state income tax on the amount of forgiveness they receive.

While most states align their state income tax codes with federal income tax codes for simplicity, adopting any changes made at the federal level, there are some states that must cross more red tape to make changes or have entirely separate tax codes, Walczak says. At least six states have statutes in place that could result in borrowers having to pay state income tax on their debt relief barring any last-minute legislative change. Those states are Arkansas, Massachusetts, Minnesota, Mississippi, North Carolina and Wisconsin, Walczak says.

What if I didn’t finish my degree? Do I still qualify?

Yes. Completion of a degree is not a requirement for debt relief, the Department of Education confirmed to U.S. News in an email.

What does this mean for borrowers who took out private student loans?

The Biden Administration’s debt relief plan does not apply to borrowers with private student loans. Borrowers who consolidated federal loans with a private company are also ineligible because their loans are no longer held by the federal government.

What if I’m in default on my loans?

It’s unclear whether or not borrowers in default are eligible for debt relief.

In April, the Department of Education announced the “fresh start” plan that seeks to help approximately 7.5 million borrowers avoid the negative effects of default and get back in “good standing” on their federal student loans. The initiative, according to the Department of Education, “will increase the long-term repayment success of borrowers with defaulted federal student loans by helping them access low monthly payments under affordable income-driven repayment (IDR) plans, as well as provide substantial benefits to borrowers over the coming months.”

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

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Federal Student Loan Forgiveness: Your Questions Answered originally appeared on usnews.com

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