Will you have to apply for student loan cancellation? Is debt forgiveness considered taxable income? Here’s what we know about Biden’s student loan forgiveness plan.
President Joe Biden announced on Aug. 24 that his administration would forgive between $10,000 and $20,000 of federal student loan debt for borrowers making less than $125,000 per year.
Federal Pell Grant recipients who meet the income requirements would be eligible for $20,000 in student debt forgiveness.
In the announcement, Biden also said he extended the student loan pause for a “final time” through Dec. 31, 2022.
VERIFY has received many questions from our readers about what the student loan forgiveness plan means for them, including if they have to apply for loan forgiveness and whether debt forgiveness will be considered taxable income, among others.
Here’s what we know right now about the Biden administration’s student loan forgiveness plan.
THE SOURCES
WHAT WE FOUND
Is the $125,000 income limit for individuals or married couples?
Borrowers are eligible for student loan forgiveness if their income is less than $125,000 for individuals, and less than $250,000 for married couples or heads of households, according to a White House fact sheet and the U.S. Department of Education.
Will you automatically receive student loan forgiveness?
Nearly 8 million borrowers may be eligible to receive automatic forgiveness because the Department of Education has relevant income data.
Jessica Thompson, vice president at the Institute for College Access and Success, told VERIFY that people who are enrolled in income-driven repayment plans have to update their family size and income information annually. However, some people haven’t needed to do so amid the current student loan payment pause.
If the department doesn’t have your income data, you can complete an application that the Biden administration will launch in the coming weeks. The application will be available before the loan payment pause ends on Dec. 31.
Anyone who would like to be notified when the application is open can sign up on the Department of Education’s website.
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Who qualifies for Pell Grants and how do you know if you received one?
Pell Grant recipients, who will receive $20,000 in student debt forgiveness if they meet the income requirements, make up more than 60% of the student loan borrower population, according to the White House. The Department of Education estimates that roughly 27 million borrowers with Pell Grants will be eligible for up to $20,000 in student debt relief.
Pell Grants are usually awarded to undergraduate students who “display exceptional financial need.” Unlike loans, Pell Grants do not have to be repaid except under certain circumstances.
The amount a borrower receives through a federal Pell Grant award is based on their Expected Family Contribution, cost of attendance at their school, status as a full or part-time student, and plans to attend school for a full academic year or less. Pell Grant amounts change yearly and the maximum award for the 2022-2023 school year is $6,895.
A borrower’s school can apply Pell Grant funds directly to their costs, pay the borrower directly, or combine these methods, the Department of Education said.
If you’re not sure whether you received a Pell Grant when taking out student loans, the easiest way to check is to log into your Federal Student Aid account at studentaid.gov, Thompson said.
It’s unclear right now if the Biden administration will launch another way for borrowers to verify this information.
Are current college students eligible for student loan forgiveness?
Current college students with loans are eligible for debt relief, the White House says in its fact sheet. If the borrower is a dependent student, they will be eligible for relief based on their parents’ income rather than their own ($125,000 for individuals or $250,000 for couples).
Thompson said the cancellation announcement specifically applies to current students who have taken out federal loans through July 2022.
Will student loan debt relief be treated as taxable income?
No, student loan debt relief will not be treated as taxable income on your federal income tax return, according to the White House.
This rule was established by the American Rescue Plan of 2021, which specified that student loan forgiveness would not be taxed through 2025.
If you have less than $10,000 or $20,000 in debt, will your loans still be forgiven?
The Department of Education explains that relief is capped at the amount of a person’s outstanding debt.
For example, people who are eligible for $20,000 in debt relief but have a balance of $15,000 will receive $15,000 in debt relief.
Does the student loan forgiveness plan change anything for income-driven repayment?
To address concerns about monthly payments, the Biden administration is proposing a rule to reduce the amount for monthly payments from 10% to 5% of a person’s discretionary income. This is your income after taxes and other living expenses.
The rule would also guarantee that no borrower earning under 225% of the federal poverty line will have to make a monthly payment on their student loan debt. Borrowers’ unpaid monthly interest would also be covered so nobody’s loan balance will grow as long as they make their monthly payments.
Additionally, loan balances would be forgiven after 10 years of payments, rather than the existing 20 years, for borrowers with $12,000 or less in debt.