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http://www.nytimes.com/2022/08/24/business/biden-student-loan-forgiveness.html
Biden’s Student Loan Forgiveness Plan: What to Know
What the president’s plan means for the millions of Americans with student debt
The plan is expected to benefit the majority of the more than 43 million people in the U.S. who hold a total of $1.6 trillion in student-loan debt.PHOTO: ERIN CLARK/THE BOSTON GLOBE/GETTY IMAGES
By Julia Carpenter, Gabriel T. Rubin
Aug. 24, 2022 1:32 pm ET
President Biden’s student-loan plan will reduce or wipe out the debt of millions of borrowers.
The plan eliminates up to $10,000 in federal-loan debt for individual borrowers with annual incomes of under $125,000 or couples who earn less than $250,000. Many borrowers will be eligible for total forgiveness up to $20,000 if they received Pell Grants, a form of federal financial aid awarded to students from low-income households.
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“We’re in unprecedented territory,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance. “This has never been done before.”
In addition to the loan forgiveness, the president will also be extending the pandemic-era student-loan pause on payments and interest through the end of the year. The measure began in March 2020 and has been repeatedly extended since. The Federal Reserve Bank of New York estimates the pause spared borrowers nearly $200 billion in payments during this period.
President Biden’s announcement brings a host of questions for borrowers and servicers alike: Who qualifies for forgiveness and for how much? Here are answers to some of the key questions based on the announcement.
Who is eligible for student-loan forgiveness?
Borrowers with federal student-loan debt are eligible for up to $10,000 in relief if they earn less than $125,000 a year, or under $250,000 a year for couples.
People who received federal Pell Grants in college will also be eligible for up to $20,000 in forgiveness. Around 6 in 10 borrowers with any federal loans also received a Pell Grant, according to the White House, and Pell Grant recipient graduates hold about $4,500 more in debt than other graduates, according to a 2020 analysis of federal data by the Institute for College Access and Success, an advocacy group.
Most student loan borrowers owe less than $25,000 on their loans as of May 2022, according to the Federal Reserve.
When will forgiveness take effect?
The timing remains uncertain, but the Education Department has promised more details in the weeks ahead, at minimum before student loan payments resume in January 2023.
Do I need to take action to receive debt relief?
Not yet. Wait until you receive a notification from your loan servicer, Mr. Buchanan said.
Beware of any friendly-sounding phone calls or suspicious-looking emails from addresses you don’t recognize.
“It’s a very complicated process and it’s going to take months to effectuate,” he said. “Don’t do anything until you see something happen to your account.”
Meanwhile, double-check the information you’ve already shared with your loan servicer and the studentaid.gov website. If you’ve recently moved or changed any contact information, you’re going to want to make sure that they have the most up-to-date addresses, said Mark Kantrowitz, a student loan expert.
What if I have private student loans?
Only federal debt is eligible.
What if the amount I owe is under $10,000?
If you owe less than $10,000 on your loan (or $20,000 for those who received Pell grants), then congratulations—you’ll now be student debt-free. President Biden’s plan will wipe out the debt of around 15 million borrowers.
Is the pause on student-loan payments extended?
Before today’s announcement, loan payments were expected to resume on Aug. 31. Now, borrowers will see the pause extended through the end of the year. Interest accrual and collections remain on pause as well.
Are Parent Plus loans eligible?
Yes. An individual student is limited in how much money they can take out in federal loans, but through the Parent Plus and Grad Plus Programs, families can borrow the total cost of attendance, including room and board and other expenses. This forgiveness applies to federal loans for both undergraduate and graduate programs, as well as to Parent Plus loans, White House officials said.
Is my debt forgiveness tax-exempt?
Debt forgiveness is often treated as income on taxes. But fortunately for borrowers, this canceled student debt is federally tax-exempt, as seen in other federal student debt forgiveness programs.
What if I have already paid off my loans?
As of the end of last year, fewer than 1.2% of borrowers continued making payments on their student loans, Mr. Kantrowitz said. But some of the borrowers took advantage of the two-plus years of optional, interest-free payments to wipe out their debt entirely.
This measure won’t apply to balances that have already been paid off.
Write to Julia Carpenter at julia.carpenter@wsj.com
What You Need to Know About Biden’s Student Loan Forgiveness Plan
President Biden’s move means the student loan balances of millions of people could fall by as much as $20,000. This F.A.Q. explains how it will work.
By Ron Lieber and Tara Siegel Bernard
Aug. 24, 2022Updated 8:07 p.m. ET
President Biden announced on Wednesday that the federal government would cancel up to $20,000 worth of federal student loans for millions of people. But not everyone with debt will qualify.
The action includes rules that will maintain the balances of debtors who currently have high incomes. Those who do qualify will need to navigate the balky federal loan servicing system and keep a close eye on their accounts and credit reports for any mistakes.
It also extends the pause on monthly student loan payments, which means that borrowers won’t have to resume payments until at least January, and provides details on a new proposal to create a more affordable income-driven repayment plan.
What follows are questions you may have about the cancellation program with answers that have come from the White House, the Department of Education and student loan servicers.
We will update this article in the coming days and weeks as more details become available.
Who qualifies for loan cancellation?
Individuals who are single and earn under $125,000 will qualify for the $10,000 in debt cancellation. If you’re married and file your taxes jointly or are a head of household, you qualify if your income is under $250,000.
Eligibility will be based on your adjusted gross income. Income figures from either 2020 or 2021 can render you eligible, but 2022 income will not.
If you received a Pell Grant and meet these income requirements, you could qualify for an extra $10,000 in cancellation.
Loans obtained after June 30 are not eligible for relief.
Which types of debt qualify?
Only federal student loan debt is eligible. This includes PLUS loans, whether parents or graduate students took them out.
Private loans are not eligible. Neither are many so-called F.F.E.L. loans, which stand for Federal Family Education Loan. If your F.F.E.L. loan was not eligible for the payment pause that began in 2020, it will not be eligible for the new cancellation.
I didn’t finish my degree. Does that disqualify me?
No.
What’s the first thing I need to do if I qualify?
Start by making sure that your loan servicer knows how to find you, so that you’ll be able to receive any guidance it provides and follow any instructions that it issues. Check that your postal address, your email address and your mobile phone number are listed accurately.
If you don’t know who your servicer is, consult the Department of Education’s “Who is my loan servicer?” web page for instructions.
Will the $10,000 in cancellation happen automatically, or do I need to submit a tax return or do something else to prove that I qualify?
It depends. If you’re already enrolled in some kind of income-driven repayment plan and have submitted your most recent tax return to certify that income, your servicer and the Education Department know how much you earn and you should not need to do anything else. Still, keep an eye out for guidance from your servicer.
What to Know About Student Loan Debt Relief
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Many will benefit. President Biden’s executive order means the federal student loan balances of millions of people could fall by as much as $20,000. Here are answers to some common questions about how it will work:
Who qualifies for loan cancellation? Individuals who are single and earn $125,000 or less will qualify for the $10,000 in debt cancellation. If you’re married and file your taxes jointly or are a head of household, you qualify if your income is $250,000 or below. If you received a Pell Grant and meet these income requirements, you could qualify for an extra $10,000 in debt cancellation.
What’s the first thing I need to do if I qualify? Check with your loan servicer to make sure that your postal address, your email address and your mobile phone number are listed accurately, so you can receive guidance. Follow those instructions. If you don’t know who your servicer is, consult the Department of Education’s “Who is my loan servicer?” web page for instructions.
How do I prove that I qualify? If you’re already enrolled in some kind of income-driven repayment plan and have submitted your most recent tax return to certify that income, you should not need to do anything else. Still, keep an eye out for guidance from your servicer. For everyone else, the Education Department is expected to set up an application process by the end of the year.
When will payments for the outstanding balance restart? President Biden extended a Trump-era pause on payments, which are now not due until at least January. You should receive a billing notice at least three weeks before your first payment is due, but you can contact your loan servicer before then for specifics on what you owe and when payment is due.
The department said Wednesday that close to eight million borrowers “may” be eligible to get this automatic relief.
For everyone else, it will make some kind of application available by the end of the year. “The Department of Education will work quickly and efficiently to set up a simple application process for borrowers to claim relief,” according to a White House statement.
How can I be sure that the cancellation has really happened?
Watch for messages from your loan servicer and be wary. Given how many millions of people are involved and that billions of dollars are at stake, there are bound to be hiccups. If you get a message that you suddenly have a zero balance or that your balance has fallen by $10,000 or $20,000, take a screen shot and print it out in case it somehow changes later.
And if your debt does go to zero, keep an eye on your credit report in the months afterward to make sure that your loan servicer is reporting that fact correctly. For instance, there should not be any notices of late payments that post after your balance shows as zero.
Will I have to pay federal taxes on the canceled debt?
No.
My debt exceeds the amount I am eligible to have canceled, and my loans have been on pause since that relief began in March 2020. Will payments start again on my remaining balance?
Not until at least January.
You should receive a billing notice at least three weeks before your first payment is due, but you can contact your loan servicer before then (online is more efficient) for specifics on what you owe and when payment is due.
I have more than $10,000 in debt. When and how will my monthly payment amount be adjusted?
Payments will be recalculated. Specifics haven’t been released yet, but we can make an educated guess based on what’s possible now.
When borrowers pay a solid chunk of debt and their balance declines, they can ask their servicer to recalculate their payments over the remaining loan term, resulting in a lower monthly payment, according to Scott Buchanan, executive director of Student Loan Servicing Alliance, an industry trade group. But if the $10,000 in forgiveness doesn’t put a dent into a borrower’s balance, servicers may not even be instructed to recalculate payments, which may remain the same.
Mr. Buchanan said the servicers hadn’t yet received any guidance on when or how payments should be recalculated.
Borrowers already enrolled in income-driven plans, however, won’t see their payments change — even if a portion of their debt is canceled. That’s because they make payments based on their discretionary income and household size.
Moving to a new plan may result in a lower payment: Mr. Biden has proposed a rule to create a plan that would cap those payments at 5 percent of income, down from 10 percent to 15 percent in most existing plans.
What if I want to keep paying the same amount and have it applied to the principal?
Send in the extra money with your on-time payment each month.
Let’s say your payment drops to $200 a month after forgiveness, but you had been paying $300. If you want to continue paying $300, the first $200 will be applied to the payment that’s due and the extra $100 should immediately be applied to principal (and not the next payment). “Every extra dollar you send above your payment amount goes to principal,” said Mr. Buchanan of the trade group.
But if there’s any accrued interest — say, because the previous payment was late — the extra money will apply to that first.
Given the loan servicers’ propensity to muck things up, be sure to log into your account to be sure the extra money is being applied to principal and not the next month’s statement.
What if I still can’t afford to pay my loans? What are my options?
There are several repayment options to consider, each with different eligibility rules, conditions and tedious details. In many cases, struggling borrowers will probably want to opt for an income-driven repayment plan, where the payment amount is tied to your income and can be as low as $0. After you make payments for a set period of years, whatever balance remains is forgiven by the federal government.
Other repayment plans may better suit your circumstances, and they can sometimes yield lower payment amounts. Those include the standard (with fixed payments), graduated (your payments rise) and extended (you pay over a longer time) repayment plans.
Options that pause payments altogether should generally be used only as a last resort: Requesting a deferment or forbearance will temporarily put payments on hold, but there can be significant added costs in the long run.
With forbearance, payments stop but interest still accrues. If the interest is not paid, it’s added to the loan’s principal balance. Deferment is similar, but subsidized loans — which generally have slightly better terms — won’t accrue interest while they’re paused.
Could you remind me how income-driven repayment, or I.D.R., works?
There’s a confusing assortment of plans available, and now there’s a new one coming. President Biden is proposing a rule to create a new plan that will substantially reduce future monthly payments for lower- and middle-income borrowers.
For now, the alphabet soup includes PAYE, REPAYE, I.C.R., and I.B.R. (which comes in two versions; the latest has slightly better terms for newer borrowers).
The rules are complicated, but the gist is simple: Payments are calculated based on your earnings and readjusted each year.
After monthly payments are made for a set number of years — usually 20 — any remaining balance is forgiven. (The balance is taxable as income, though a temporary tax rule exempts balances forgiven through 2025 from federal income taxes.)
Monthly payments are often calculated as 10 or 15 percent of discretionary income, but one plan is 20 percent. Discretionary income is usually defined as the amount earned above 150 percent of the poverty level, which is adjusted for household size. PAYE usually has the lowest payment, followed by either I.B.R. or REPAYE, depending on the specific circumstances of the borrower, said Mark Kantrowitz, a student aid expert. The new plan will change that calculus (more on that below).
There’s a dizzying variety of rules, and the existing plans aren’t a cure-all. Even though some borrowers may be eligible for a $0 payment, the plans aren’t always affordable for everyone. The formulas aren’t adjusted for local cost of living, private student loans or medical bills, among other things.
How will the new plan work?
The proposed I.D.R. plan would reduce payments on undergraduate loans to 5 percent of discretionary income, down from 10 percent to 15 percent in many existing plans. Graduate debt is also eligible, but borrowers would pay 10 percent of discretionary income on that portion. If you hold both undergraduate and graduate debt, your payment will be weighted accordingly.
Borrowers with original loan balances of less than $12,000 would make monthly payments for 10 years before cancellation, instead of the more typical 20-year repayment period.
The new plan would also allow more low-income workers to qualify for zero-dollar payments thanks to a tweak in the payment formula, which would benefit all borrowers enrolled: The administration plans to increase the amount of income deemed necessary for basic expenses, which means it’s shielded from the calculation. As a result, no borrower earning under 225 percent of the poverty level — or what a $15 minimum wage worker earns annually — will have to make a payment, the administration said.
There’s more: Unlike other existing income-driven plans, borrowers’ loan balances will not grow as long as they make their monthly payments, even when they are not required to make any payments because their income is too low.
That will provide a much-needed dose of mental relief to borrowers who diligently make payments yet still see their balances balloon over the decades because they’re not paying enough to cover the interest.
When can I sign up?
Those details haven’t been released yet. The administration has the authority to create new plans on its own, but it will still need to clear some procedural hurdles. Then, the loan servicers will have to get their systems ready.
Where can I get help choosing the best repayment plan?
Analyzing the plans can be excruciating, but there are tools and services that can help. The loan simulator tool at StudentAid.gov will guide you through the options and help you decide which plan best fits your goals — finding the lowest-payment plan, for example, versus paying loans off as soon as possible.
It’s easy to use. When you sign in, it should automatically use your loans in its calculations. (You can manually add other federal loans if any are missing.) You can also compare plans side by side — how much they’ll cost over time, both monthly and in total, and if any debt would be forgiven.
Besides your servicer, groups like the Institute of Student Loan Advisors, known as TISLA, can provide free guidance on what options may work best for you. For New York State residents, EDCAP, a nonprofit focused on student loans, also offers help. And some employers and other organizations have hired companies like Summer, which helps borrowers sort through the options.
Do I qualify for forgiveness if my loans were in default?
Yes. All defaulted borrowers who benefited from the payment freeze are eligible for relief.
My debt exceeds $10,000 and my loans were in default. What does this mean for me?
You’ll get a fresh start: Your loans are now deemed current, which means you can enroll into a repayment plan without having to jump through the extra hurdles usually required.
If you still cannot afford to make payments, call your servicer, who can assist with enrolling you into a more affordable repayment program, including income-driven repayment. If a defaulted borrower takes no action, it will simply buy them more time before they fall into default again, after roughly nine months of nonpayment.
It often takes a year or more for an account to move into collections. At that point, the federal government can take your tax refund, up to 15 percent of your paycheck or part of your Social Security benefits.
This new status also means defaulted borrowers are no longer cut off from receiving federal student aid, including Pell grants.
Has anything else changed with other forms of debt cancellation, like the existing income-driven repayment programs?
Yes. In April, the Education Department said it would make fixes to address past inaccuracies that would help borrowers enrolled in I.D.R. plans, including a one-time revision that would make more payments count toward loan forgiveness. That includes:
- Any months in which borrowers made payments will count toward I.D.R., regardless of the repayment plan.
- All payments made on loans that were later consolidated will count.
- Months spent in deferment before 2013 (with the exception of in-school deferment) will count.
- Forbearances of more than 12 consecutive months and 36 cumulative months will also count toward forgiveness, under both I.D.R. and P.S.L.F.
In 2023, the government will begin displaying payment counts on StudentAid.gov so borrowers can view their progress in their own accounts.
How does this overlap with the recent changes to eligibility for public service loan forgiveness?
The cancellation should happen independently of any process that you’re already going through to get partial or complete cancellation via P.S.L.F.
There is currently a limited-time waiver for public servants that will allow a number of people to get credit toward loan cancellation for past payments that would not have otherwise qualified. You can learn more about it by consulting the “P.S.L.F. Waiver” page on the Department of Education’s website.
The deadline for applying for the waiver is Oct. 31, though legislators are pushing for an extension.
How much will this cost the federal government — and taxpayers?
According to an estimate using a model that the Wharton School at the University of Pennsylvania developed, the cost of the $10,000 cancellation initiative alone could range from $300 billion to $980 billion.
Is there any chance that a lawsuit reverses the action?
A small one, but it’s difficult to say how small. It is not clear who would have the standing to bring a lawsuit, though there may be attempts anyhow.
Any elected official who sued would run the risk of infuriating constituents by adding five figures back onto their loan balances — but might also thrill others who find debt cancellation offensive.
Will debt relief become a regular thing?
Don’t count on it.
Critics of any type of blanket loan forgiveness argue that it will create a moral hazard, with future borrowers taking on more loans with the expectation that debts will be wiped away again and again. But repeated instances of cancellation are unlikely and would eventually destroy the program.
The federal government has done little to make college more affordable (or even less subject to fraud). There are a variety of Band-Aids that can be applied after students have accumulated more debt than they can handle — including the alphabet soup of income-driven repayment plans helping roughly nine million borrowers — but little preventive medicine. This latest move is no exception and, without more serious reform, will do little to prevent future borrowers from leaving campus with loads of debt to cover the ever-escalating costs.
Stacy Cowley contributed reporting.
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