New Details Emerge on How Student Loan Forgiveness Will Be Applied

When the White House announced President Biden’s student loan forgiveness plan on Aug. 24, there were murky details and key questions left unexplained and unanswered.

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The U.S. Department of Education has clarified several elements of the plan, including when applications will be available, what loans qualify and how relief will be applied.

Who Is Eligible To Receive Debt Relief?

Any borrower who earned less than an adjusted gross income of $125,000 ($250,000 for married couple filing jointly or head of household) in either 2020 or 2021 will be provided with up to $20,000 in canceled federal student loan debt from the U.S. Department of Education if they are a Pell Grant recipient and up to $10,000 if they hold non-Pell Grant federal student loan debt.   

Your AGI is different than your total gross income, which is everything you make in a year before income tax or deductions. AGI is your net income that is taxable, after qualified adjustments or deductions such as student loan interest and retirement account contributions, per the IRS. To find your AGI on your 2020 or 2021 tax return, look at Line 11 on your 1040 form

When Can I Apply for Student Loan Forgiveness?

According to the original Aug. 24 White House press statement, the “application will be available no later than when the pause on federal student loan repayments terminates at the end of the year.” According to the update on the Federal Student Aid website, the debt forgiveness application forms will be available online the first week of October, and borrowers will have until Dec. 31, 2023, to submit their applications. Borrowers whose verified income information is already on file with the Department of Education will receive their relief automatically.

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The Education Department advises borrowers to sign up for forgiveness plan email updates on the department’s subscription page. Furthermore, it recommends that once the application is available, you should apply before Nov. 15 to receive you relief funds before the payment pause ends on Dec. 31. You should receive your loan relief 4-6 weeks after applying.

What Types of Loans Qualify for Debt Forgiveness?

You may have heard that federal student loans are eligible for relief under Biden’s loan forgiveness plan but private student loans are not. Generally, that is true, but the Education Department update clarifies some gray areas.

According to the Federal Student Aid website, most Department of Education-held federal student loans with an outstanding balance as of June 30, are eligible for loan relief. These include graduate and undergraduate Direct Loans, Parent PLUS and Grad PLUS loans and consolidation loans, if all of the underlying consolidated loans were disbursed on or prior to June 30.     

Additionally, some Federal Family Education Loans and Perkins Loans held by the Department of Education are eligible, as are defaulted loans controlled by ED, including commercially serviced Subsidized or Unsubsidized Stafford Loans.

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Non-federal private student loans are not eligible for debt forgiveness. That incudes any federal loans consolidated into private loans. The Department of Education is deciding whether to expand eligibility to privately owned federal student loans (like FFEL or Perkins loans not held by ED), although borrowers with these types of loans can consolidate them into the Direct Loan Program to take advantage of available debt relief under Biden’s plan.

How Will Student Loan Relief Be Applied?

As Forbes’ Adam M. Minsky writes, the Department of Education will be using a “waterfall” approach to process forgiveness on larger loan balances. Borrowers with multiple loans will have the relief applied in the following order:

  • Defaulted Department of Education-held loans
  • Defaulted commercial FFEL Program loans
  • Non-defaulted Direct Loan Program loans and FFEL Program loans held by the department
  • Perkins Loans held by the department

For those who have multiple loans in the same loan program (i.e., multiple Direct student loans), the Department of Education will apply relief like this:

  • Loans with highest statutory interest rate will get first priority.
  • If interest rates are the same, student loan forgiveness will be applied to unsubsidized loans prior to subsidized loans.
  • If the interest rate and subsidy status are identical, the department will apply the loan forgiveness to the most recent loan.
  • If the interest rate, subsidy status and disbursement date are all the same, the department will apply the loan forgiveness to the loan with the lowest combined principal and interest balance.
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Will My Remaining Loan Balance Be Re-Amortized?

If you find yourself with a student loan balance after you have received you debt relief, you might get the bonus of a re-amortization of your loan which could potentially reduce your monthly loan payments by hundreds of dollars, Forbes reported.  

According to the Department of Education, after debt relief has been established, the department “will recalculate your monthly payment based on your new balance, potentially reducing your monthly payment. Your loan servicer will communicate your new payment amount to you.”

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The president’s initiative could provide debt relief to 43 million borrowers, about 20 million of whom would have their full balance canceled. Opponents of the plan say it would disproportionately benefit wealthier Americans.

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About the Author

David Nadelle is a freelance editor and writer based in Ottawa, Canada. After working in the energy industry for 18 years, he decided to change careers in 2016 and concentrate full-time on all aspects of writing. He recently completed a technical communication diploma and holds previous university degrees in journalism, sociology and criminology. David has covered a wide variety of financial and lifestyle topics for numerous publications and has experience copywriting for the retail industry.
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