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Biden’s Student Loan Forgiveness Plan: What You Need to Know

Updated on September 15, 2022

By Katie Krumpter, NYLAG Senior Financial Counselor
 

On August 24, 2022, the Biden administration announced a plan for broad student loan cancellation. The administration expects that 20 million people will have their federal student loans fully cancelled. You may be wondering if you qualify and how the plan will be implemented. Based on what we know so far, here are some answers.  

Am I Eligible?  

Here is the eligibility criteria for loan forgiveness under the plan:  

  1. If your tax filing status is single, your income must be below $125,000 to qualify, or $250,000 if your filing status is married, filing jointly.
  2. If you received Pell grants while in college, you are eligible for up to $20,000 in debt forgiveness. If you did not, you are eligible for up to $10,000.
    • Example:
      • Without Pell grants: If you had no Pell grants while in college and have an outstanding loan balance of $7,265, you will receive $7,265 in forgiveness.
      • With Pell grants: If your balance is $27,250 and you had Pell grants, you would receive $20,000 in forgiveness, with a remaining balance of $7,250
  3. Under this plan, forgiveness only applies to federal loans – they an be Direct, Parent PLUS or Grad PLUS loans. It does not apply to private loans (including Federal Family Education Loan (FFEL) loans not held by the Department of Education.

When Will Loan Forgiveness Take Effect? 

For 8 million borrowers, the plan’s loan forgiveness will take effect automatically, as the Department of Education has their income information. For the roughly 35 million other borrowers who may be eligible, the Department of Education is expected to release an application by early October 2022 and borrowers will have until December 31, 2023, to submit it.  

Is There Anything Else I Should Know? 

  • To qualify, your federal student loans must have been taken out prior to June 30, 2022.  
  • This is one-time-only forgiveness. 
  • While this forgiveness is not taxable in most states, some states may tax borrowers on their student loan cancellation. 
  • There may be legal challenges to this plan, so stay up to date on the news as things develop.  

The New Proposed Income-Driven Repayment Plan (IDR) 

Income-driven repayment plans (IDR) allow most borrowers to have a monthly student loan payment that is affordable based on their income. This is the new IDR for undergraduate loans only.  Note: It is a proposal right now and is undergoing a 90-day comment period. 

What you should know 

  • Applies only to undergraduate loans 
  • Payment will be limited to 5% of discretionary income (previously 10%) 
  • It is proposed that the formula to calculate the discretionary income for payments on student loans is adjusted from 150% of the Federal Poverty Level (FPL) to 225% FPL.  
  • What this means for you: If this proposal is approved,  when your loan servicer calculates your new payment, you will be allowed to keep more money from being considered for repaying your loans. 
  • Under this proposal, your student loan balances will no longer go up because of accumulated interest, as long as you are on this payment plan.  
  • If your original loan balance was $12,000 or less, your loans will be forgiven after 10 years on this new proposed IDR.          
  • Borrowers with original loans greater than $12,000 will have them forgiven after 20 years, as in other IDRs.  
  • If you have a combination of undergraduate and graduate loans you will be on a version of this plan–where your undergraduate loans will be at the 5%/225% FPL rate and your graduate loans will be at 10%/150% FPL rate. 

 Resources: 
Department of Education Announcement: The Biden-Harris Administration’s Student Debt Relief Plan Explained 
Sign up for email updates on student loans from the US Department of Education  

Still have questions?

NYLAG Financial Counselors can help you understand your student loan options and help you with other financial issues.

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