Thanks to a new plan announced last week by President Joe Biden, millions of federal student loan borrowers could soon see up to $20,000 in debt erased. Not every student loan borrower is eligible for loan relief. First, only federally owned student loans are eligible. Private student loans are excluded.
Second, high-income borrowers are generally excluded from loan forgiveness. Individual borrowers earning less than $125,000 a year and married couples or heads of households earning less than $250,000 a year will have up to $10,000 of their federal student loans forgiven.
If an eligible borrower also received a federal Pell Grant while in college, they are eligible for up to $20,000 in loan forgiveness. Pell Grants are awarded to millions of low-income students each year based on factors including their family size and income and the costs charged by their colleges. These borrowers are more likely to have trouble repaying their student loans and end up in default.
Here’s what borrowers need to know about the new student loan forgiveness plan:
From what age is the income limit based?
Eligibility is based on the borrower’s adjusted gross income for the 2020 or 2021 tax year. Adjusted gross income may be less than your gross wages because it takes into account tax deductions and adjustments such as contributions to a 401(k) retirement plan.
How will the government know my income?
The Department of Education said it already has income information for about 8 million borrowers, likely due to financial aid forms or previously submitted applications for an income-based repayment plan. These borrowers automatically receive loan relief if they meet income requirements.
Other borrowers must apply for student loan forgiveness if they do not have income information on file with the Department of Education.
When can I ask for a pardon?
The app is expected to be available in early October. You can sign up to be notified when it becomes available via the Department of Education subscription page.
After submitting your application, you can expect to receive student loan relief within four to six weeks.
Do I have to pay tax on the canceled loan amount?
A provision of the America’s Rescue Plan Act passed by Congress last year would require borrowers not to pay federal income tax on forgiven student loan debt.
However, some borrowers may have to pay state income tax on the forgiven loan amount. According to the Tax Foundation, there are several states that may offer debt-free taxes unless state legislative or administrative changes are made beforehand. Depending on the state, the tax liability can be hundreds of dollars.
I am a current student. Do I deserve forgiveness?
Yes, some current students are eligible. For borrowers who have filed the Free Application for Federal Student Aid, known as the FAFSA, eligibility will be based on the individual’s own household income.
Eligibility for borrowers who are enrolled as dependent students, usually under the age of 24, will be based on a parent’s income in 2020 or 2021.
I have student loans from graduate school. Do I deserve forgiveness?
Yes, if your income meets the eligibility threshold.