Federal Student Loan Forgiveness: Your Questions Answered

The Biden Administration announced Aug. 24 a plan to cancel up to $20,000 in federal student loan debt, which would affect many of the nearly 43 million Americans who borrowed to attend college. The plan has since come under several legal challenges, causing the U.S. Department of Education to stop accepting new applications and halt distribution of any forgiveness.

Student loan borrowers on average carry about $30,000 in debt, including federal and private loans, according to U.S. News data. The Biden Administration’s plan would bring debt relief to millions of borrowers and cancel the remaining balance for roughly 20 million borrowers, according to the U.S. Department of Education.

However, the plan could cost taxpayers upward of $300 billion to $400 billion over the next decade, according to the Education Department.

While the Education Department says it’s confident in the legality of its forgiveness plan, the program’s fate is undetermined. The Supreme Court announced on Dec. 1 that it will hear arguments for and against the plan in February. The plan is blocked until then.

As it awaits a decision, the Education Department announced on Nov. 22 it would extend the payment pause on most federal student loans to June 30, 2023. The administrative forbearance was instituted in 2020 in response to the COVID-19 pandemic and has been extended multiple times.

Loan payments are now set to resume 60 days after either the forgiveness program is implemented or the Supreme Court rules on the matter. The new extension, according to a statement from the Education Department, “will alleviate uncertainty for borrowers as the Biden-Harris Administration asks the Supreme Court to review the lower-court orders that are preventing the Department from providing debt relief for tens of millions of Americans.”

Here are answers to some frequently asked questions about the imperiled loan cancellation plan.

(This page will be updated as more information becomes available.)

[READ: More Student Aid May Be Available if You Received Pandemic Unemployment Benefits]

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.

The plan recently was changed to no longer include borrowers who have Perkins loans or Federal Family Education Loans held commercially rather than by the Education Department. This could leave more than 4 million borrowers without relief, since they must have applied to consolidate those loans into a federal direct loan before Sept. 29, 2022, to be eligible for forgiveness, according to new guidance posted by the Education Department on StudentAid.gov. The plan originally gave these borrowers until Dec. 31, 2023, to consolidate and apply for the forgiveness.

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

The Education Department received 26 million applications after going live in October, White House press secretary Karine Jean-Pierre said after the Nov. 10 ruling. Now, visitors to the application page are greeted with a message saying, “Student loan debt relief is blocked.”

“Courts have issued orders blocking our student debt relief program,” the message reads. “As a result, at this time, we are not accepting applications. We are seeking to overturn those orders.”

The message adds that the Education Department will hold the applications already submitted and invites borrowers to subscribe to email updates and to check back for updates.

The application itself is quick. Borrowers are asked to complete a few basic personal identification questions, including their Social Security number, and to review the eligibility requirements before signing and certifying the application. Borrowers do not have to attach any proof of documentation that they qualify, but they do sign the form acknowledging they will provide proof of income if asked.

Nearly 8 million borrowers may be eligible to receive relief automatically because their income data is already available to the Education Department, the White House announced in its press release. Walter says the Education Department 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.

The Education Department encouraged all who might qualify to fill out the application, even if their information might automatically be available.

Under the original timeline, once borrowers submitted their application, they could expect relief within four to six weeks, according to the Federal Student Aid website.

The Education Department advised borrowers to apply before Nov. 15, 2022, to receive relief before the payment pause expires at the end of December. However, current litigation could affect that timeline.

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 Education Department 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 Education Department 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.

[Read: Create a Student Loan Repayment Plan: 9 Tips]

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, some states make changes or have entirely separate tax codes, Walczak says. At least seven states have statutes that could result in borrowers having to pay state income tax on their debt relief, barring any legislative change. Those states are Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin, Walczak says.

California does not tax student loan forgiveness if it is part of an income-based repayment plan, but other forms of loan forgiveness are subject to income tax, Walczak says. He says California legislators are planning to amend that policy to include similar provisions for federal student loan forgiveness.

Walczak says other states may make similar amendments to their tax laws in order to help those who receive forgiveness.

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 Education Department 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.

[Read: Is College Worth the Cost? Factors to Consider]

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 Education Department 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 Education Department, “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.”

What Legal Challenges Does the Plan Face and Where Do Things Stand?

On Nov. 10, a federal judge in Texas struck down the Biden Administration’s plan. The administration immediately appealed the ruling, in which U.S. District Court Judge Mark Pittman had written that the plan is “an unconstitutional exercise of Congress’s legislative power and must be vacated.”

In his 26-page decision, Pittman said that the Heroes Act of 2003, which the president cited in taking the executive action to provide the loan forgiveness, doesn’t provide clear authorization by Congress.

In late September, six states announced a joint lawsuit against the Biden Administration in an effort to stop the plan, alleging that the administration is overstepping its executive powers and that it would cause harm to the states.

The first student loan debt relief lawsuit was filed by the Pacific Legal Foundation, a California-based libertarian group, on behalf of a borrower living in Indiana who argues the plan will cost him more than $1,000 in state taxes on canceled amounts, as Indiana is one of seven states that could potentially tax loan forgiveness as income.

Another lawsuit, filed by Arizona Attorney General Mark Brnovich, argues that the student debt relief plan is unconstitutional and will interfere with his office’s employee recruitment, hurt the state’s economy by reducing taxes collected and increase the state’s law enforcement costs.

On Oct. 21, a federal appeals court issued an administrative stay that temporarily blocked the administration’s loan forgiveness plan, which preceded the Pittman ruling. The Eighth Circuit Court of Appeals is considering the motion for the aforementioned six states.

The current litigation puts into question whether the loan forgiveness plan can be implemented before January 2023, when student loan payments are set to resume after the pandemic-induced pause, or at all.

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

Update 12/02/22: This story was previously published at an earlier date and has been updated with new information.

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