The long awaited decision on student loan forgiveness is here! As I peruse Twitter (for work purposes, I swear I’m not procrastinating!!) Let’s break down exactly what we know right now about the loan forgiveness announcement and what it will mean for millions of borrowers.
Who qualifies for loan forgiveness?
- Income requirements: People who make up to $125,000 per year (individuals), or up to $250,000 (families) who have federal student loans. If someone else claims you as a dependent on their taxes, your forgiveness is based on THEIR income, not yours.
- Federal only: Up to $10,000 of forgiveness for Department of Education loans (these are federal and not private).
- Pell grants: Up to $20,000 in debt forgiveness for people who received Pell Grants.
- Income verification: In order to qualify, you will have to verify your income via a Department of Education application. This can be done through your student loan service provider (i.e. Nelnet, Great Lakes, etc.) If your income information is already on file, your qualifying debt will be forgiven automatically.
- Your remaining federal student loans will stay at 0% interest through the end of the year. This is the FINAL extension and pause on payments.
- A more generous income-driven repayment plan (was already in the works at the Department of Education) has been announced. This will cut monthly payments roughly in half for borrowers paying down undergraduate loans. The new plan caps loan payment on undergraduate loans at 5% of discretionary income (it was 10%). It also forgive balances under $12,000 after 10 years instead of 20. Lastly, it expands its definition of “non-discretionary” income which will help reduce monthly payments even more.
- The forgiven loans will not be taxable.
- If you are still a dependent (someone can claim you on their taxes), it is their income that counts and NOT yours.
- It’s a band-aid on a problem that still persists. The cost of college has increased rapidly and far faster than the Consumer Price Index (which measures the cost of goods and service) over the past 40 years. Colleges can charge essentially whatever they want and this in no way solves it.
- This won’t help inflation. It also won’t drastically increase inflation. According to estimates, it’ll cost the government $300 billion over 10 years. Considering the total federal budget is approaching $5 trillion dollars, $30 billion per year feels like small potatoes. The $300 billion estimate also does not include the surprise $20k forgiveness for Pell Grant recipients. Because of this, the cost is likely higher.
- This doesn’t help high schoolers heading into college over the coming months and years. Current college students can qualify for forgiveness, but those who are a year or two away are out of luck.
What to do now?
- If you think you qualify, or are unsure, you need to log onto your student loan service provider and make sure you have submitted any necessary paperwork (like income verification). If you haven’t, the application will be available “soon” (unclear when exactly!) Be sure that all your information is up to date with the loan service provider as well.
- Student loan websites are notoriously clunky, so be patient and persistent, and pick up the phone if you have to!
- Monitor your student loan account and loan balances closely. You’ll want to make sure if you qualify for forgiveness you actually receive it!
- After your loans are forgiven, check your credit report to make sure it’s being reported correctly and you don’t get any mistaken late payment dings on your credit score.
- There will be more information “coming soon” according to the Biden administration and Department of Education. We’ll keep you updated as it’s released!