On August 24, 2022, history was made as President Biden made one of the biggest announcements of his presidency to date: He plans to cancel up to $10,000 of federal student loan debt for each eligible borrower.
This has been a topic for Biden ever since before he took office. While on the campaign trail, Biden sympathized with those who were burdened by debt and pledged that he would endorse some form of student loan forgiveness. Just shy of two years into his presidency, that promise will now become a reality.
So, who qualifies for this $10,000 student loan cancellation? And what other changes are planned for federal student loans as a result of this latest relief initiative? In this post, we’ll explore the White House’s latest announcement and what this means for your student loan debt.
Student Loan Cancelation
The major keystone to President Biden’s announcement was that the Department of Education will begin canceling up to $10,000 of federal student loan debt for each eligible borrower. Recipients of a Pell grant will be able to double this amount and have up to $20,000.
Note that this relief applies to each borrower. Couples where each individual has a federal student loan may be eligible to have a combined $20,000 forgiven (or $40,000 if they had Pell grants).
Who Qualifies for This Debt Cancellation?
Biden’s latest announcement will be income based. Single filers must earn less than $125,000 and married couples or heads of households who make less than $250,000.
The government typically measures income based on your AGI or “adjusted gross income”. This can be found on your federal income tax return.
Unfortunately for people who earn more than this or who have already paid off their student loans, there is no benefit. While this has sparked plenty of debate, the White House has made it clear that this latest relief effort was not meant to be another round of federal stimulus. It’s intended to help those with a large portion of their monthly budget going towards student loan payments.
What If I Owe Less Than $10,000 in Federal Student Loans?
That would mean that basically your balance is completely paid off. Borrowers will not be receiving the difference between what they owe and $10,000 if it’s less.
How Do I Apply for This Cancelation?
Though details have not yet been made official, there will be some sort of application process through the Department of Education. Most likely you will need to verify your identity and prove your AGI. Check the Department of Education’s website regularly or wait to receive an official communication from the government with the next steps.
What If I Have Private Student Loans?
Sadly, this relief only applies to federal student loans and does not change anything for people with private student loans. Private student loans are contracts between you and a private lender – the same as your credit card or mortgage. As nice as it would be to get some relief, these contracts are outside of the Federal government’s jurisdiction.
What Else Is Changing for Federal Student Loans?
Although the major takeaway from Biden’s speech for most people was $10,000 of debt forgiveness, another perhaps more ambitious effort ahead of the Department of Education is to fix programs that the president characterized as “broken”.
What are these programs and what’s wrong with them?
Income-Driven Repayment Plans
The Department of Education currently has four income-driven repayment (IDR) plans. However, critics have long complained that these plans are unnecessarily complicated. In fact, many borrowers who otherwise may have qualified for lower payments or to have their complete balance eventually forgiven never bothered to apply for them because of how confusing the rules were.
This is going to change. The Department of Education will soon be proposing a new version of an IDR plan which is simplified and has the following major changes:
- Limits payments to 5 percent of your discretionary income (instead of 10 percent). Note that this is after considering necessary purchases like food, rent, etc.
- Forgives any balance remaining after 10 years of payments. Previous IDR plans would cancel your remaining balance after 20 years.
- No interest accruement for balances where little to no payment is required.
Public Service Loan Forgiveness
Another program that’s in major need of an overhaul is the PSLF (public service loan forgiveness). This is where college graduates who went to work in the public sector (i.e., teachers, military, government employees) would have their debt forgiven after ten years of qualified service.
As straightforward as that sounds, one of the major problems with PSLF has been a bad reputation for being too rigid. There were many complaints by people who clearly worked in public institutions or for the military and were denied PSLF because of some technicality. Going forward, the Department of Education has vowed to change its application review process and make it easier for eligible candidates to be approved.
Fighting Back Against Predatory Schools
Sadly, many people who applied for federal student loans were the victims of deception by for-profit schools. Organizations like ITT Technical Institute and DeVry University were identified by the Department of Education as having lured students into their programs with promises of better wages when they graduated. However, all many of them had afterwards was large student debt. Some of the more nefarious ones even shut down the school before the students even had a chance to earn their degrees.
The Department of Education has said that it’s committed to going after these predatory schools. Not only are they seeking justice for those who were wronged, but they also want to send a message to any organizations that this sort of wrongdoing will not be tolerated in the future.
Federal Payments Will Finally Resume
Since the beginning of the COVID-19 pandemic with the CARES Act, federal student loan payments and interest accruement have been frozen. No one with Federal student loans has been required to make a payment since 2020.
On multiple occasions, this moratorium was scheduled to be lifted only to then be extended for another four months at a time. The latest deadline would have expired on August 31st, 2022. However, it was extended once more to December 31, 2022.
However, the White House made it very clear that this will be the last extension. That means that borrowers with more than $10,000 can expect to begin paying down their balances once again.
To be as prepared as possible for these payments, it will be helpful to get your finances in order and ensure that your budget is ready to start making student loan payments again. A helpful way to do this will be to use a budgeting app like Buxfer to set limits for each of your expense categories. The app will then collect your transactions which will help you to monitor your progress in real-time.
Image credit: CNN