Second, high-income borrowers are generally excluded from receiving debt forgiveness.
Individual borrowers who make less than $125,000 a year and married couples or heads of households who make less than $250,000 annually will see up to $10,000 of their federal student loan debt forgiven.
Here’s what else borrowers need to know about the new student loan forgiveness plan:
What year is the income threshold based on?
How will the government know what my income was?
The Department of Education says it already had income information for nearly 8 million borrowers, likely because of financial aid forms or previously submitted income-driven repayment plan applications. Those borrowers will automatically receive the debt relief if they meet the income requirement.
Other borrowers will need to apply for the student loan forgiveness if the Department of Education does not have their income information on file.
When will I be able to apply for forgiveness?
Will I have to pay taxes on the amount of debt canceled?
Borrowers will not have to pay federal income tax on the student loan debt forgiven, thanks to a provision in the American Rescue Plan Act that Congress passed last year.
I’m a current student. Am I eligible for forgiveness?
Yes, some current students are eligible. Eligibility for borrowers who filed the Free Application for Federal Student Aid, known as the FAFSA, as an independent will be based on the individual’s own household income.
I have student debt from graduate school. Am I eligible for forgiveness?
Yes, if your income meets the eligibility threshold.
I’m a parent and took out a Parent PLUS loan. Am I eligible?
Could Biden’s forgiveness plan be struck down in court?
It’s hard to say right now what the chances are that a court overturns Biden’s action.
How will my payments change going forward?
Borrowers who have debt remaining after either $10,000 or $20,000 is wiped away could see their monthly payment amounts recalculated if they are enrolled in a standard repayment plan. Under a standard repayment plan, borrowers pay a fixed amount that ensures loans are paid off within 10 years.
Borrowers who are already enrolled in an income-driven repayment plan are not likely to see their monthly payment amounts change due to the forgiveness, because their payments are based on household income and family size.
Borrowers have not been required to make payments on their federal student loans since March 2020 because of the government’s pandemic-related pause. Biden has extended the pause through the end of this year, and payments will resume in January 2023.
What about Biden’s new income-driven repayment plan?
Along with Biden’s announcement about canceling some federal student loan debt, he also said he would create a new plan that would make repayment more manageable for borrowers.
There are currently several repayment plans available for federal student loan borrowers that lower monthly payments by capping them at a portion of their income.
The new income-driven repayment plan that Biden is expected to propose would cap payments at 5% of a borrower’s discretionary income, down from 10% that is offered in most current plans, as well as reduce the amount of income that is considered discretionary. It would also forgive remaining balances after 10 years of repayment, instead of 20 years.
Biden is also proposing that the new plan cover the borrower’s unpaid monthly interest. This could be very helpful for people whose monthly payments are so low that they don’t cover their monthly interest charge and end up seeing their balances explode, growing larger than what was originally borrowed.
But we don’t know when these changes will take effect. The Department of Education has not provided any sense of timing, but has said it will propose a new rule to create the repayment plan. The department’s formal rule-making process usually includes soliciting public comments and can take months, if not more than a year.