August 25th, 2022

Student Loan Debt Forgiveness Plan: How Does it Affect You?

On August 24, President Biden announced a 3-part plan to assist student loan borrowers.

Part 1 of the plan is to extend the pause on student loan repayments. Throughout the pandemic, the Department of Education has paused the collection of any student loan payments. The most recent pause was set to expire at the end of August. According to President Biden’s plan, the pause will now be extended to December 31, 2022. Although nothing prevents Biden from extending this pause again, his announcement on August 24 was that this would be the final extension of the pause and that borrowers should be prepared to resume payments in January 2023.

Part 2 of the plan is to provide debt relief to low-income and middle-income families. As part of this step, borrowers may be eligible to have some or all of their loan debt canceled. If the borrower was the recipient of a Pell Grant, then the maximum amount of the Pell Grant that can be forgiven is $20,000. If the borrower was not the recipient of a Pell Grant, then the maximum amount of the loan to be forgiven is $10,000. Borrowers are not eligible for this relief if their income exceeds certain limits. For borrowers who file their tax returns as a single person, their income must be below $125,000 to be eligible for this relief. For borrowers who file as married couples or heads of households, their income must be below $250,000. Although it was not expressly stated in President Biden’s announcement, the current guidance being published by federal agencies implies that these thresholds will be measured by information already on record with the federal government (i.e. your 2021 federal income tax returns). Later this year, the Department of Education will develop an application for borrowers to use if the federal government does not already have their income data or if the borrowers are not sure whether the federal government has their income data.

Part 3 of the plan is to make the student loan system more manageable for current and future borrowers. To accomplish this, the Department of Education intends to create a new income-driven repayment plan that will substantially reduce future monthly payments for lower-income and middle-income borrowers. The new plan would require borrowers to pay no more than 5% of their discretionary income monthly on undergraduate loans, which is a reduction from the 10% threshold for current income-driven repayment plans. The new plan would raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, resulting in anyone earning less than 225% of the federal poverty level (which is the annual equivalent of $15/hour) having no obligation to make a monthly payment. The new plan would forgive loan balances after 10 years of payments (rather than 20 years), but only if the loan balance is $12,000 or less. Finally, the new plan would cover the borrower’s unpaid monthly interest, so that the borrower’s loan will not grow as long as they make their monthly payments.

The Department of Education will update its website as more details are released about these plans.


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