7 New Details About How Student Loan Forgiveness Really Works

(NerdWallet) – The much-anticipated announcement of President Biden’s federal student loan cancellation last month created as many questions as it answered, prompting at least one major manager’s website loans to crash as borrowers scrambled to check their eligibility.

What’s clear: Individuals earning less than $125,000 and couples filing jointly earning less than $250,000 can receive up to $10,000 in student debt forgiveness — and that maximum can reach $20,000 if the borrower has already received a Pell grant.

What’s been troubling: Which loans will cancellation apply to first? Will payment amounts on any remaining student debt change after cancellation? And what about FFELP loans?

Here’s the latest on how student loan forgiveness really works.

1. When can I apply?

The student loan cancellation application will be available in early October, according to the Ministry of Education.

While around 8 million borrowers can see cancellation automatically, most will need to submit a request. The application will initially be available only online, but borrowers can expect to have access to a paper version at a later date.

Borrowers must request cancellation before the window closes on December 31, 2023. So if you have access to the online application, do not wait for the paper version, to ensure your application is processed as quickly as possible. . .

2. How can I prepare for cancellation?

There are two main steps you can take to prepare for cancellation:

  • Verify that you meet the income eligibility criteria.
  • Make sure your contact information is up to date on Studentaid.gov and with your service agent.

To qualify, your annual federal income for 2020 or 2021 must be less than $125,000 if you filed as an individual. If you filed jointly, the threshold is $250,000. If you earned above the maximum in one of the two years but reached the threshold in the other, you may qualify with the lower annual income.

While it might seem safe to assume that adjusted gross income is what qualifies as federal annual income, the Department of Education has not explicitly clarified.

3. How much will I get?

Here’s the Pell Grant qualification deal: If you’ve ever received a Pell Grant of any amount and meet the income requirements, you get $20,000 in waiver ($10,000 based on income requirements , plus an additional $10,000 to be a Pell Grant recipient).

The Pell Grant does not have to correlate with the time, school, or program you used your federal student loans for. For example, let’s say you received a Pell grant for your community college and did not use any loans. Ten years later, you went back and finished your undergraduate degree with loans. These loans may be eligible for forgiveness of $20,000.

This is especially critical for Parent PLUS borrowers. A Parent PLUS Loan is not necessarily eligible for the additional $10,000 for forgiveness simply because the child who received the loan was a Pell Grant recipient. For a Parent PLUS loan to qualify for additional relief, the borrowing parent must have received a Pell Grant for their own education at some point in time.

The additional $10,000 is not prorated based on your Pell Grant amount. A Pell Grant of any amount is eligible for the full additional $10,000.

4. Do FFELP loans count?

Some FFELP loans will be cancelled. Here are all the types of eligible loans:

  • All loans under the Direct Lending Program.
  • FFELP loans held by the federal government.
  • FFELP loans in default held with a guarantee agency.
  • Perkins loans owned by the federal government.
  • Other loans in default, including Stafford commercial service loans.

FFELP loans held by companies can count if you consolidate them into a direct loan. Consider the pros and cons of consolidation to make sure it’s worth it.

Check Studentaid.gov to check what types of loans you have. Here’s how to find this information on the portal.

  • Log on to Studentaid.gov.
  • Select “My Help” from the drop-down menu under your name.
  • Consult the list of your loans in the “Loan Breakdown” section.
  • Expand “View Loans” and select “Show Loan Details” next to each loan to see more details.

5. Will a payment refund increase the amount of my cancellation?

You can request a refund on student loan payments made during pandemic forbearance if the payments were not needed. However, Scott Buchanan, executive director of the Student Loan Servicing Alliance, recommends only asking for a refund if you’re in financial difficulty.

The Department of Education has not announced the official date it will use to determine your loan forgiveness balance, but Buchanan expects a clarification to be posted on the department’s website in the near future. next weeks.

“If you’re trying to get a refund to maximize or optimize your loan forgiveness, my suggestion to borrowers is to wait,” Buchanan says.

6. Will my payment change after cancellation?

Borrowers will have their loans re-amortized based on their post-cancellation balances. Monthly payments will likely decrease accordingly. However, the remaining payment term will remain the same.

“Ideally, if everything is still in order, if you can afford that (upfront) payment, continue to make that larger payment,” says Damian Dunn, Certified Financial Planner and Vice President of Financial Wellness Platform at Your Money Line company. Borrowers “know how painful student loan debt can be,” he says. “If they can get out of it faster, that’s even better.”

7. Can I choose which loans are cancelled?

Borrowers with multiple loans cannot select how they want their cancellation applied. Here is the order in which the loans will receive relief:

  1. Federal loans in default.
  2. FFELP loans belonging to companies in default.
  3. Direct loans and FFELP loans held by the federal government in good standing.
  4. Perkins loans owned by the federal government.

The Education Department will use the following order to cancel loans if you have multiple loans of the same type:

  1. Loans with the highest legal interest rate.
  2. If interest rates are the same, unsubsidized loans receive relief before subsidized loans.
  3. If the interest rate and the subsidy are the same, the most recent loans receive relief.
  4. If all other factors are the same, the loan with the lowest combined principal and interest balance receives relief.

How can I get updated information?

You can find the latest updates on the Ministry of Education website. Once the application is online, borrowers should call 833-932-3439 for assistance.

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