Biden's Student Loan Forgiveness Program, Explained

How will President Biden's student loan forgiveness program roll out? Here's what we know so far.

The Truth About Biden's Student Loan Forgiveness Program

Female student happy about biden student loan forgiveness

President Joe Biden's student loan forgiveness program will affect over 60 million in the coming months. Most will have their's reduced, while others will have their debt forgiven completely.

But there's been a lot of misconception about how this loan relief program will affect the general public. If you are a federal student loan borrower (or are simply curious about understanding how exactly it will work), here's what you need to know.

Key Factors in Biden's Student Loan Forgiveness Plan

In 2019, the Federal Reserve’s Survey of Consumer Finances found that the poorest 25 percent of the population were more likely to have had outstanding debt and, at about $32,000, owed more than any other group overall. Of that group, 36 percent had student loan debt.

Financing higher education was always based on the notion that having a degree benefits the person earning it; therefore, the federal government offers loans for school at a cheaper rate (less than 5 percent) than a private lender (up to 14 percent) does. The thought is that young borrowers fresh out of school will graduate, get a great job and easily pay everything back.

But it hasn't worked out that way. One in five people who have student loan debt are aged 50 or older — they may have borrowed on their own behalf or borrowed for a child. Not only that, they don't always walk away with a degree or a great job but are still saddled with debt.

So, Who Qualifies?

Those who will see $10,000 of their federal student loan debt forgiven are individual borrowers making less than $125,000 annually and heads of households or married couples who make less than $250,000 a year. Both undergraduate and graduate students are eligible.

People who have a high income are generally excluded from debt forgiveness.

Do I Have a Pell Grant?

A Pell grant is a type of federal financial aid for undergrads who have an "exceptional financial need." In 2020, nearly 6.5 million students received about $27 billion in Pell grants. The maximum grant award is currently $6,895.

Pell grant recipients are more likely to have trouble paying their student loan debts, and some people don't know if they have ever had one. They can find out by searching the "My Aid" page on StudentAid.gov or reviewing their financial aid paperwork.

A student qualified to receive a Pell grant will see debt forgiveness of up to $20,000. On a side note, people with parent PLUS loans or grad PLUS loans also qualify.

Do I Need to Fill Out an Application?

Approximately 8 million borrowers will be covered automatically because the U.S. Department of Education already has their income data — this means their balances will be reduced or eliminated by late 2022. We don't yet know who is automatically forgiven and who has to file an application.

The U.S. Department of Education will have its application website and corresponding information up and running within the next few weeks.

What If I'm in Default Already?

If loan collections activities were halted during the pandemic's federal student loan payment pause, which began in March 2020, your loans are still likely eligible for forgiveness.

The Department of Education’s Fresh Start program will also allow borrowers to return their defaulted loans to good standing. Eligible loans include direct loans, Federal Family Education Loan (FFEL) and Department of Education-held Perkins loans.

What About Other Types of Loans?

Loan forgiveness only applies to loans that are held by or on behalf of the U.S. Department of Education. Other federal loans and private student loans do not qualify.

However, there may be some workarounds; for example, borrowers with commercially held FFEL loans may have to consolidate those loans into the Direct Loan Program to get forgiveness. The Department of Education has not made any announcements about this yet.

What About the Loans I Paid Down Over the Past Few Years?

During the pandemic federal loan pause, half a million borrowers out of 43 million continued repaying their loans.

If they paid off all their debt since March 2020, they are likely to get student loan forgiveness.

What Happens When Payments Resume in 2023?

If a student has a loan balance owing more than $30,000 or $40,000, their monthly payments will resume in January.

Therefore, it's a good idea to take stock now of how much money you owe, what may be forgiven and what you'll be responsible for.

And What About Taxes?

Under this program, debt cancellation will not be taxable income on a borrower's federal income tax return. However, some states may tax loan forgiveness, particularly Arkansas, Minnesota, Mississippi, North Carolina and Wisconsin, among others.

This may be due to the concept of conformity, which means that when the federal government enacts laws, such as those affecting the Internal Revenue Code, some states will conform their relevant rules, regulations and statutes to the new tax treatment.