Federal Student Loan Forgiveness: Your Questions Answered

By Cole Claybourn

A federal judge in Texas has struck down the Biden Administration’s plan to cancel up to $20,000 in federal student loan debt, which would have affected many of the nearly 43 million Americans who borrowed to attend college.

Student loan borrowers on average carry about $30,000 in debt, including federal and private loans, according to U.S. News data.

Here are answers to some frequently asked questions about the imperiled loan cancellation plan:

Who is eligible for forgiveness?

Current students and borrowers who have federally held undergraduate, graduate, and Parent PLUS loans that were distributed on or before June 30, 2022, are eligible for the relief.

How is relief administered? Do I need to sign up or apply?

The Education Department received 26 million applications after going live in October, White House press secretary Karine Jean-Pierre said after the Nov. 10 ruling. Now, visitors to the application page are greeted with a message saying, “Student loan debt relief is blocked.”

How is income eligibility determined?

Borrowers will have the choice to use either their 2021 or 2020 tax return information when applying for loan forgiveness. Even if borrowers have a single income above $125,000 or a household income above $250,000 at the time of the announcement, they can still qualify as long as their income in 2021 or 2020 was under the threshold.

How does this affect Public Service Loan Forgiveness?

Borrowers that worked in certain nonprofit and public service sectors for 10 years or more, even if not consecutively, might be eligible for all of their student debt to be canceled or get credit toward forgiveness.

This, however, is separate from the one-time student loan forgiveness recently announced by the Biden Administration and will have no impact on a borrower’s eligibility for either $10,000 or $20,000 in forgiveness, according to the NASFAA.

What if I continued paying despite the repayment pause during the pandemic and now owe less than $10,000? Can I receive a reimbursement?

Relief is capped at the amount of your outstanding debt, according to StudentAid.gov. For example, a student who made payments to bring their balance down to $15,000 but is entitled to $20,000 in forgiveness would only receive $15,000 in relief. The Education Department hasn’t indicated that it will reimburse borrowers for payments made during the pandemic pause.

Will debt relief be considered taxable income?

While debt forgiveness is ordinarily taxable income, it will not be counted toward federal income taxes as part of the Biden Administration’s plan. The American Rescue Plan Act of 2021 allows canceled student loan debt to be federally tax-free through 2025, Walter says. However, in some states, borrowers could potentially have to pay state income tax on the amount of forgiveness they receive.

What if I didn’t finish my degree? Do I still qualify?

Yes. Completion of a degree is not a requirement for debt relief, the Education Department confirmed to U.S. News in an email.

What does this mean for borrowers who took out private student loans?

The Biden Administration’s debt relief plan does not apply to borrowers with private student loans. Borrowers who consolidated federal loans with a private company are also ineligible because their loans are no longer held by the federal government.

What if I’m in default on my loans?

It’s unclear whether or not borrowers in default are eligible for debt relief.

Have there been legal challenges to the plan?

The November litigation is one of the multiple lawsuits brought forth to challenge the plan.

(Courtesy: US News)

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