Biden To Forgive Up To $20K In Student Loan Debt – Forbes Advisor

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President Joe Biden has finally fulfilled a long-awaited campaign promise: Up to $20,000 of your federal student loan debt may be forgiven through an executive order, the administration announced on Wednesday.

To qualify, you must have federal student loans and earn less than $125,000 annually (or $250,000 if filing taxes jointly). You may also qualify whether or not you finished your degree.

In addition to forgiveness, the federal student loan payment pause has been extended until December 31, 2022—although Biden said that this is the last pause extension and payments will resume in January 2023.

“In keeping with my campaign promise, my Administration is announcing a plan to give working and middle class families breathing room as they prepare to resume federal student loan payments in January 2023,” the president said in a tweet.

The much-anticipated announcement comes just one week before the payment pause on federal student loans was set to expire. This is the seventh time the pause has been extended since it began in March 2020, when it was introduced to ease the financial burden of borrowers during the start of the Covid-19 pandemic. Interest rates on federal student loans were also set at 0% during this time.

Up to $20,000 in Student Loan Forgiveness

Up to 43 million federal student loan borrowers will qualify for some amount of forgiveness. To be eligible, individuals must earn less than $125,000 annually (or $250,000 per household). The amount of debt canceled depends on what type of financial aid you received in school:

  • Pell Grant recipients: If you received a Pell Grant at any point during your education, $20,000 of your federal student debt can be forgiven.
  • Non-Pell Grant borrowers: For borrowers who received other forms of federal financial aid, including direct unsubsidized and subsidized loans or PLUS loans, $10,000 of your federal student loans can be forgiven.

If you’re not sure what type of financial aid you received, log into the Federal Student Aid website to view your loans or grants.

Your loan forgiveness may be automatically processed if the Department of Education already has your income data (as it does for about 8 million borrowers). If not, a forgiveness application form will be available in the coming weeks. If you’d like to be notified when the application is available, sign up for email updates from the Department of Education.

While some loan forgiveness was previously taxable as income, any amount of student loan forgiveness you receive before 2026 should be tax-free, thanks to a provision in the American Rescue Plan.

Most federal student loan borrowers owe less than $25,000 on their debt, according to the Federal Reserve, and the median balance in 2021 was between $20,000 and $24,999 among those with any type of outstanding debt for their own education.

About a quarter of borrowers owe less than $10,000, and could have the entirety of their student loans erased. According to the administration, 90% of loan forgiveness will go to households earning less than $75,000.

New Income-Driven Repayment Plan Introduced

Wednesday’s announcement also included details about a new income-driven repayment plan. Eligible borrowers would be required to pay just 5% of their discretionary income towards undergraduate loans—which is less than the 10% required by most current income-based plans.

What counts as discretionary income will also be adjusted, ensuring that no borrower earning less than 225% of the federal poverty level (about $30,578 for 2022) will have to make a payment.

How interest is applied to your account will also be adjusted. As long as you make your monthly payments, unpaid interest won’t accrue on your account and your loan balance won’t grow.

Under the proposed plan, some borrowers will receive forgiveness much faster: Those with less than $12,000 in debt can qualify for forgiveness after 10 years, significantly faster than the 20 years required for other plans.

The Student Loan Forgiveness Debate Will Continue

It’s likely that Biden’s new policy will face legal challenges, which could delay forgiveness efforts. Several Republican senators have proposed legislation that would prohibit the president from forgiving federal student debt.

Widespread student loan forgiveness has long been a hotly debated topic. Though Biden supported up to $10,000 per borrower in student loan forgiveness during his campaign, prominent Democrats including Sens. Chuck Schumer, Elizabeth Warren and Raphael Warnock have repeatedly urged him to cancel at least $50,000.

Progressives argue that the administration should forgive as much debt as possible. Doing so could help close the racial wealth gap, as nonwhite borrowers carry disproportionately larger balances than white borrowers. And with the midterm elections rapidly approaching this fall, erasing significant amounts of student debt could be a galvanizing issue for young voters.

Opponents of loan forgiveness say that it’s unfair to those who didn’t go to college or have already paid off their student loans. They also argue that debt cancellation will disproportionately benefit the educated and wealthy, rather than helping those who most need financial assistance. Concerns about how large-scale forgiveness could worsen inflation have further complicated matters.

The timing of this announcement also drew criticism from both sides. With just a week before the student loan moratorium was set to expire, student loan servicers say that the uncertainty around when payments will resume has put the federal student loan program in a precarious position and “risks operational disruptions.” In addition, tens of millions of borrowers were left in limbo, unsure if they must make student loan payments in September.

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