What Borrowers Need to Know About Targeted Student Loan Forgiveness

by Michelle Clifton, former financial aid officer at Babson College President Biden’s student loan debt relief announcement last week created questions surrounding who will be able to benefit from forgiveness and how to actually receive the relief. While there are still details to be released by the Department of Education (ED), let’s break down what we understand so far, knowing that information is subject to change based upon official ED guidance. Who is eligible for this one-time targeted student loan cancellation? Borrowers must have an annual income under $125,000 (for individuals) or under $250,000 (for married couples or heads of households) in order to qualify. It appears this will be based upon the borrower’s Adjusted Gross Income (AGI) on their tax return from either 2020 or 2021. It is unclear at this time if there will be any sort of appeal process for special circumstances such as one-time sources of income (e.g. unemployment, severance, capital gains, etc.). For currently-enrolled dependent college students, eligibility for forgiveness is based upon parental income, while independent student eligibility is based upon their own income. In most circumstances, the borrower of the loan must meet the income requirement—student income for student loans and parent income for Parent PLUS Loans. Married borrowers who both have loans can each receive the debt relief if their income is not too high. Which loans are eligible? Education loans must have been fully disbursed by June 30, 2022. This means that both borrowers in repayment and current college students who borrowed loans in prior academic years can qualify. Loans held by the Department of Education (ED-held) are eligible for forgiveness. This includes Federal Direct Loans such as Federal Direct Subsidized, Federal Direct Unsubsidized, Federal Direct Consolidation, Federal Direct Graduate PLUS, and even Federal Direct Parent PLUS Loans. Others loans that are also eligible include ED-held Federal Perkins Loans, as well as ED-held Federal Family Education Loan (FFEL) program loans (such as Subsidized Stafford, Unsubsidized Stafford, Consolidation, Graduate PLUS, and Parent PLUS Loans). Roughly half of FFEL loans are commercially held. These loans may need to be consolidated into the Federal Direct Loan program to receive forgiveness, however the Department of Education is working on a potential solution that does not involve consolidation. At this point, ED is suggesting that borrowers who do not want to consolidate sit tight to await a decision on forgiveness. Private student loans and new federal loans that disbursed after June 30, 2022 do not qualify. FFEL borrowers who consolidate after June 30, 2022 will not be disqualified from relief due to the consolidation date, as they will be looking at the original disbursement dates of the loan. How much one-time forgiveness is available? Borrowers who meet the income requirement and have the right type of loan can receive up to $10,000 debt cancellation. Borrowers who also received a Federal Pell Grant in college can receive up to $20,000 in relief instead! This includes Federal PLUS borrowers who received a Pell Grant for their own education. Borrowers who have less than $10,000 in debt or Pell recipients with less than $20,000 will receive relief up to the amount of their loan balance. Do borrowers need to apply? Borrowers who have recent FAFSA or income-driven repayment plan requests with their AGI on file may not need to apply, but should receive the relief automatically before the loan payment pause ends. For others who need to verify their income, an application should be released by the Department of Education by October. Borrowers have until December 31, 2023 to apply. How long will it take to receive forgiveness? The Department of Education stated that the debt cancellation process should take 4-6 weeks. Borrowers who would like their loan balances to be updated prior to entering repayment in January 2023 should complete the application prior to November 15, 2022. Will forgiveness be taxable? Student loan cancellation is nontaxable for federal income tax through 2025. However, some states may tax this cancelled debt as income. What should borrowers do now?

• Sign up to be notified of “Federal Student Loan Borrower Updates” (including when the application opens) by email through the Department of Education subscription page.
• If you have not already, create an FSA ID (username and password) through the Federal Student Aid (FSA) website and confirm the Department of Education has your up to date contact information. Make sure your servicer has accurate contact information as well.
• Confirm your loan type through the Federal Student Aid (FSA) website.
  • Log in to your studentaid.gov account > Dashboard > View Details > View Breakdown > View Loans > View Loan Details (arrow next to a loan where you'll see a more detailed loan name).
    • Direct Loans start with “Direct.”
    • Federal Family Education Loan Program loans begin with “FFEL.”
    • Perkins Loans include “Perkins” in the name.
    • A servicer name that starts with “DEPT OF ED” means the related loan is ED-held.
• Check to see if you received a Pell grant through the Federal Student Aid (FSA) website
  • Log in to your studentaid.gov account > Dashboard > View Details > My Aid > Grants > Grants Breakdown.
    • Look for Pell Grants and Total Disbursed (greater than $0).
• No need to call your servicer or school for loan or Pell grant history—it can all be found on the FSA website.
• Be aware of scams! e.g. Do not talk to anyone who calls offering to help with Biden loan forgiveness for a fee.
• Be patient! This process will take time.
• Keep an eye out for further updates as we are following this very closely.