Are you wondering if you’re eligible for Biden’s $10,000 student loan forgiveness plan? Across the nation, over 45 million people owe $1.6 trillion dollars for federal loans taken out for college. The debt forgiveness comes after many months of deliberating at the White House. We answer the 7 most popular questions on Biden’s $10,000 student debt cancellation plan, including eligibility requirements.
1) Who’s eligible for $10,000 student loan forgiveness?
The first eligibility requirement is that you must have a federal student loan. The second eligibility requirement is based on your income. Your income will be assessed based on what you reported in 2021 or 2020.
- If you’re single and make less than $125,000, then you are eligible for student loan forgiveness.
- If you’re married and file taxes jointly, and your combined income is less than $250,000, then you’re eligible for this $10,000 student loan cancellation.
If you received a Pell grant, you could get an additional $10,000 debt relief.
2) What types of student loans are eligible?
The only student loans that are eligible for Biden’s student loan forgiveness are federal student loans. These include federal PLUS loans for graduate students and parent PLUS loans. Private student loans don’t qualify for student loan forgiveness.
3) Does your FFEL loan qualify for student loan forgiveness?
Federal Family Education Loans (FFEL) may qualify for student loan forgiveness. If your FFEL loans were eligible for the payment pause that began in 2020 then they may be eligible for the $10,000 cancellation. If they weren’t eligible for the payment pause, then you may want to consider consolidating them into a federal direct loan. Once your loan becomes a federal direct loan, then you may be eligible.
4) If your debt is over $10,000, will your monthly payments be reduced?
It depends. Student loan servicers have not received instructions on when, and how to recalculate payments. They may decide not to change your payments if the decrease is only small.
If you’re already enrolled in an income-driven plan, your payments may remain the same, even though $10,000 of your debt is canceled. That’s because your payments are calculated based on your discretionary income and household size. If your loans have been on pause since March 2020, expect your payments to begin again in January.
5) Do you need to apply to have my $10,000 debt forgiven, or does it happen automatically?
It depends. If you’re enrolled in an income-driven payment plan and you already submitted your latest tax return to certify your income, you can just sit tight. Make sure your contact information is updated with your student loan servicer and sign up for text messages if possible so you can be alerted as soon as the $10,000 is forgiven. According to the Department of Education, close to 8 million borrowers are eligible to get automatic relief.
Otherwise, you’ll need to apply by early October. Sign up online if you want to get an email alert when it’s ready. The deadline for applications is on December 31, 2023.
6) When will you get that $10,000 cancellation?
Your student loan balance should decrease within one to one and a half months after you submit your application.
7) Will you have to pay taxes on the $10,000 in canceled debt?
You do not have to pay federal taxes on this canceled debt. However, you may have to pay state taxes depending on where you live. 13 states may impose state taxes ranging from $300 to $1,100 on forgiven student loans. These states may include Virginia, New York, Pennsylvania, and Wisconsin.
We advise consulting your tax professional or financial advisor to see if you need to pay taxes on the canceled debt.
Student loan debt in the US
According to the Education Data Initiative, the average federal student loan debt balance is $37,667. On average, a student loan in the U.S. will accrue $26,000 in interest alone over 20 years. Biden’s $10,000 student loan forgiveness plan means that approximately one third of borrowers will have their debt completely eliminated.
Student loan pause extended until December 31, 2022
Payments for federal student loans have been on hold since the COVID-19 pandemic began in March 2020. This pause has now been extended until December 31, 2022. This means that if you do have additional debt after the $10,000 student loan forgiveness then you will need to resume payments in January 2023. It’s important to re-adjust your budget if these repayments will resume again for you.
Permanent amendments to Public Service Loan Forgiveness may be coming
The Education Department is also proposing long-term changes to Public Service Loan Forgiveness (PSLF). The current waiver which broadened some of the eligibility and payment requirements has resulted in over $10 billion dollars in relief so far. This waiver is set to expire on October 31, 2022. If you think you might qualify for PSLF, make sure that you apply then.
Can those who have paid off their student loans get their money back?
The debt forgiveness will only apply to those who currently have student loan debt. However, if you have made voluntary payments since March 2020, then you can request a refund for those payments. Make sure that you contact your loan provider to request a refund.
What is a Pell grant?
A Pell grant is given to those who display exceptional financial hardship. The federal Pell grant program has helped millions of low-to-moderate income students attend college. A Pell grant is not a loan and typically doesn’t need to be repaid. If you were a recipient of a Pell grant then you may be eligible for up to $20,000 in student loan forgiveness. If you think you might be eligible for a Pell grant in the future, then you can start by filling out a FAFSA form to find out if you qualify.
What does Biden’s $10,000 student loan forgiveness mean for you?
If you are eligible to have $10,000 of your student loan forgiven, it’s going to make a difference to your debt and your finances. Make sure that you adjust your budget accordingly. If possible, think of how you can use the money that would have been used to pay off your student debt, to better your financial future. If you want help with your finances and are interested in having a comprehensive financial plan, feel free to schedule a discovery call with one of our financial advisors today!
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.