After a recent White House announcement, student loan borrowers are excited to have up to $20,000 forgiven! Read on to learn how to qualify for Biden’s Student Loan Forgiveness Program, when to apply, how much of your loans will be forgiven, and more!
Do I qualify for Biden’s Student Loan Forgiveness Program?
In late August, President Joe Biden announced that federal student loan borrowers may see up to $20,000 in student loan forgiveness. The announcement affects approximately 43 million borrowers, of which about 8 million can expect their debt relief to be automatic based on relevant income/financial data already available to the Department of Education. Here’s what the remaining ~35 million borrowers need to know about qualification.
Qualifying Criteria Biden’s Student Loan Cancellation Plan
- Individuals must earn less than $125,000/year and married couples/head of households must earn less than $250,000/year.
- Federal loans taken out for undergraduate, graduate, and/or professional degrees qualify.
- If you didn’t finish your degree, you still qualify.
- You must have current outstanding debt on federal student loans obtained before June 30, 2022. Parent PLUS loans are included.
- Current students who are dependents must use their parents’ or legal guardians’ income to determine eligibility.
- If you defaulted on your federal student loans, you may still qualify for debt relief.
Disqualifying Criteria for Biden’s Student Loan Cancellation Program
- If you only have private student loans, you do not qualify. Federal loans are the only loans affected by the plan.
- If you secured federal loans after June 30, 2022, or if you have already paid off your student loans, you do not qualify.
How much of my debt will be cancelled? How does the Pell grant affect this amount?
Borrowers that meet the minimum eligibility requirements shown above can expect the lesser of $10,000 or their complete federal student loan balance to be forgiven. For borrowers that received pell grants, a special type of need-based aid available to lower income undergraduate students, that forgiveness number goes up to $20,000.
How do I apply? When should I apply?
The Biden administration announced the cancellation plan on August 24th. In further updates, the White House has stated the application will be available on their website by early October. Borrowers can sign up for Department of Education Updates on their website to stay up-to-date.
The Department of Education has noted they expect forgiveness to take 4-6 weeks to post to borrowers accounts. We suggest filling out the application by November 15th or sooner so that, in theory, you’ll receive your cancellation amount before December 31st, 2022, when the Coronavirus Student Debt Relief Payment Freeze ends.
What if I already paid off my loans?
If you paid off your loans before March 13,2020 when the Student Loan Payment Freeze was enacted, unfortunately you won’t be able to receive any forgiveness. If, however, you paid off your loans after March 13, 2020, you are still likely eligible for forgiveness and a refund of the payments you’ve already made.
The Education Department made it clear that, during the freeze, borrowers can receive a refund for any payment made towards their loans. Based on that information, we recommend looking into whether requesting a refund from your loan servicer is right. In the ideal situation, you’d receive the refund in your bank account, the loan balance would increase by the amount of the refund, and, subsequently, the loan balance would be forgiven when the cancellation takes place. While the prospect of this is exciting to those who made payments during the freeze, we recommend reviewing your situation with an appropriately licensed finance/tax/legal professional before taking any action.
What if my income is too high this year?
If your income is too high this year, there still may be a chance for you to qualify for cancellation. The White House has stated the application will allow you to use your Adjusted Gross Income (AGI) from 2020 or 2021. This means that, even if your 2022 Adjusted Gross Income will be above the $125,000/$250,000 threshold, you’ll qualify if your 2020 or 2021 income was below it. Your AGI can be found on line 11 of the Form 1040 on your 2020 & 2021 Tax Return.
Will I owe taxes on the forgiven amount?
Thankfully, borrowers will not have to pay any federal taxes for loan balances that the Department of Education discharges. This is due to a temporary waiver placed on student loan forgiveness taxation by Biden’s 2021 American Rescue Plan. The expected timeline for forgiveness to be carried out is over the next few months. The waiver lasts through January 1st, 2026.
While loan balances discharged will not be federally taxed, it is important to take your state taxes into consideration. Borrowers in states such as North Carolina, Arkansas, Minnesota, Mississippi, and Wisconsin should take careful note this tax season as loan balances discharged may be taxable.
Will the decision get reversed?
Regardless of the strong differing political opinions that the Biden Administration’s cancellation plan elicited, there are no concrete reasons to assume the forgiveness will be overturned. While a reversal of the decision is still a possibility, we believe it’s unlikely.
I don’t have federal student loans, what are my options?
Unfortunately, federal student loans are the only loans that will be forgiven by this action by the Biden Administration. With private loans, you are largely at the mercy of your lender. If you’re looking to pay your loans off in the most efficient and effective way possible, we recommend meeting with one of our financial advisors to develop a debt payoff plan.
Sources
https://www.washingtonpost.com/education/2022/08/24/student-loan-forgiveness-plan-explained/
https://www.bestcolleges.com/news/how-to-qualify-for-biden-student-loan-forgiveness-plan/
https://www.cnbc.com/2022/09/12/when-to-apply-for-student-loan-forgiveness-key-dates-to-know.html
When Daniel is not giving financial advice or managing investments, he enjoys renovating properties, real estate investing, drinking coffee, hanging out with friends, spending weekend trips in his camper van, and exploring the outdoors on a hiking or biking trail in his hometown of Roanoke, VA and beyond.