On August 24, President Joe Biden’s administration confirmed what many people have been expecting for months: a debt relief plan to forgive or reduce the debt of millions of federal student loan borrowers.
Federal loans for undergraduate and graduate school are part of the plan.
Private loans won’t be wiped out, only federal graduate and undergraduate loans.
Approximately 43 million Americans have student loan debt, according to data from the federal government. On average, the loans carry a balance of $37,667.
A third of those loans are less than $10,000. Half are less than $20,000.
Under the new plan that President Biden announced, people with an annual income of less than $125,000 a year or less than $250,000 a year as a married couple or head of household could have up to $10,000 of their federal student loan debt forgiven.
For current borrowers who are dependent students, eligibility will be based on their parent’s income.
If they could get Pell grants, that amount would go up to $20,000.
A pell grant is a special government scholarship for people with low incomes. Currently, they can get up to $6,895 per year for about six years.
Most Pell grants don’t have to be paid back, but most people who get them also take out more student loans.
Parent Plus loans are forgiven under the plan, but only if a family makes less than $250,000. This is the same limit on family income that applies to the rest of the cancellation.
Parent Plus loans differ from federal education loans because they can be used for things besides tuition, like books and room and board.
Debt forgiveness is likely only to help people who already have student loans.
The Federal Office of Student Aid says that if you’ve made payments on your own since March 2020, when charges stopped, you can get a refund for those payments.
Contact your loan officer to ask for a refund.
If you don’t qualify for student debt forgiveness, you still won’t have to pay anything until the end of the year.
The Department of Education is also working on a plan to make it easier for people to repay their loans.
The interest rate will stay at 0% until you start making payments.
Under a change announced in April, people behind on payments before the pandemic will automatically be put back in good standing.
Congress got rid of taxes on loan forgiveness through 2025.
The nonprofit Tax Foundation says some states may tax canceled debt, but it’s unclear if that will happen.
Even though many people liked the debt cancellation plan, it was criticized.
Many people wanted higher amounts to be forgiven, like $50,000.
Some even wanted entire balances forgiven, no matter how big.
New York Federal Reserve reported in April that the total amount owed on federally owned student loans, including those that had been paid off, was $1.38 trillion in December 2021.
Congress has never given the president clear authority to get rid of the debt, so the White House will likely be sued over the plan.
We don’t know how that might change when student loans will be forgiven.
Officials say that the application will be out by the middle of October.
If borrowers enter their email at studentaid.gov, they will get an email when the application is ready. Processing the application is expected to take four to six weeks.
The break in paying back federal student loans ends on December 31.
Once the application form is available, borrowers will have more than a year to fill it out.
The Department of Education already has information about how much money each borrower makes. Therefore nearly 8 million borrowers may automatically qualify for help.
Once loan payments resume, the Department of Education has developed a plan that would cap monthly payments to no more than 5% of a borrower’s discretionary income, which is less than before.
If the plan is accepted, the borrower must apply for it, which could take a year or more.
A government press release says that a single borrower who makes $38,000 a year would pay $31 a month under the plan.
The department plans to raise the amount of income considered non-discretionary.
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