ALL THE THINGS You Need to Know About Student Loan Forgiveness

Student loans are no joke. The average monthly payment is roughly $460, according to an analysis by the Education Data Initiative—and it takes the average borrower 20 years to pay off their balance. Let’s let that sink in - some borrowers are still paying off their own student loans by the time their children are preparing to go to college.

But millions of borrowers scored a win last month when the Biden administration announced its loan cancellation plans. Certain borrowers will now be eligible for up to $20,000 in loan forgiveness. For some perspective, Student Loan Hero puts the average federal student loan debt at $35,287.

Wondering if you qualify? Here's a rundown of everything you need to know about student loan forgiveness. There’s been a ton of debate in the media about whether this is a good thing. Some critics say this is a useless bandaid and that the real problem is the inflated cost of education coming from bloated institutions. Others say borrowers should be responsible for the debt. It’s too early to say but the stats show us that this break could have a massive positive impact on lower-income borrowers who typically don’t benefit from tax breaks like lower capital gains rates or Paycheck Protection Program forgivable loans.

How Much Can be Forgiven?

If you received a Pell Grant, up to $20,000 in federal student loans can be forgiven if you meet certain income requirements. (More on this in a minute.) Pell Grants are typically given to undergraduate students who demonstrate exceptional financial need and haven’t earned a prior college degree. Eligible borrowers who aren’t Pell Grant recipients can cancel up to $10,000 in federal student loans.

Loan forgiveness will result in a cancellation of your debt. In other words, don’t expect the federal government to cut you a check. Instead, your balances will either decrease or evaporate altogether if they’re below the forgiveness threshold.

Do I Qualify for Student Loan Forgiveness?

To qualify for student loan forgiveness, you must:

  • Hold federal student loans (private loans are not eligible)

  • Have annual income that’s below $125,000 for individuals; $250,000 for married couples and heads of households

The news expands on other student loan forgiveness programs that are already out there for certain borrowers. The Public Service Loan Forgiveness Program, for example, is geared toward folks who work for non-profits or the government. Their federal loan balance will be forgiven if they make 120 qualifying monthly payments while working full-time for a qualifying employer. You must also be enrolled in an income-driven repayment plan.

The new student loan forgiveness initiative is temporarily widening eligibility here. Until October 31, 2022, borrowers can receive credit for past repayments that otherwise didn’t qualify.

How Do I Get My Student Loans Forgiven?                             

You might not have to do anything. The U.S. Department of Education already has income data for some 8 million borrowers. If you’re one of them, your student loan cancellation will go through automatically. (Yes, please.) If not, you’ll have to verify your income data. 

The government will be releasing an application in early October that will allow you to provide your income details to see if you qualify. You can sign up here to be notified of when it’s ready. The U.S. Department of Education is advising folks to apply before November 15.

What If I Don’t Qualify for Student Loan Forgiveness?

If you earn too much or have private student loans, you’ll be left out of the student loan forgiveness party. Some borrowers might qualify but still have debt left over afterwards. Here are some additional ways to get some student loan relief.

  • Take advantage of the student loan pause: Federal student loan payments have been put on hold during the pandemic. The temporary pause has been renewed multiple times and is currently set to expire on December 31, 2022. That gives borrowers a few more months of relief. Time will tell if it will be renewed again in 2023.

  • Consider an income-driven repayment plan: As is, these plans require borrowers to pay no more than 10% of their monthly discretionary income on undergraduate student loans. The current administration is floating the idea of bringing that number down to 5%. The new rule would also make it so that borrowers earning less than 225% of the federal poverty level wouldn’t have to make monthly payments at all. We’ll have to wait and see if these changes go through. The administration is also proposing that federal student loan balances that were originally $12,000 or less be forgiven after 10 years of payments. (The current time limit is 20 years.)

  • See if you qualify for Public Service Student Loan Forgiveness: As mentioned up top, those who qualify for Public Service Student Loan Forgiveness can temporarily get credit for past repayment periods that otherwise didn’t count toward forgiveness. If you work for a qualifying employer, it might be worth checking out.

  • Check your employee benefits: Your employer may be willing to help you pay down your student loans. Research from the Employee Benefit Research Institute found that 17% of employers have some sort of student loan assistance program in place. It can’t hurt to ask.

When word spread about the new student loan cancellation guidelines, it pretty much broke the internet. We get it—it’s a financial game changer for a lot of people. Whether you qualify or not, you’ll want to factor in your student loans when crafting your long-term financial plan. Give us a shout if you need a professional eye.

AJ Grossan