What to know about Student Loan Forgiveness

In August 2022, Joe Biden pledged $10,000 in loan forgiveness to each borrower throughout his presidential campaign. 

The government will now forgive up to $20,000 in federal student loan debt for each eligible borrower, according to President Biden’s latest announcement. 

In addition, the federal student loan payment moratorium was extended as part of the statement. 

A summary of recent announcements and other events is provided below. 

As new information becomes available, this article will be updated accordingly.

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Latest News on Student Loan Forgiveness

On August 24th, 2022, President Biden stated that beneficiaries of Pell Grants would have $20,000 erased from their federal student loans, while those earning less than $125,000 per year ($250,000 for households) would receive up to $10,000 in forgiveness. 

Additionally, the federal loan payment suspension will last until the end of 2022; however, payments will then start up again. 

The strategy will be fully explained by the Education Department soon, along with information on the application that will be used to request the pardon.

Apart from the forgiveness part, Biden stated that the existing 10% limitation on income-driven repayment schemes would be reduced to 5% of discretionary income. 

Before its most recent statement, the Biden Administration had concentrated on canceling student loans taken out to attend for-profit universities that had been shown to be scamming student borrowers, such as Corinthian Colleges. 

On June 1, 2022, the Education Department will eliminate loans related to those institutions in a $5.8 billion group discharge.

The Public Service Loan Forgiveness program will undergo changes recently in order to “maintain the promise of PSLF,” according to a fact sheet from the Education Department. 

The development includes a one-time waiver that will enable payments from all federal student loan programs, even those that weren’t previously qualified, to be counted toward progress for Public Service Loan Forgiveness. 

On October 31, 2022, these modifications will cease to exist.

On August 19, 2021, the Department of Education announced that it would forgive $5.8 billion in debt for nearly 300,000 debtors who have a total or permanent disability. 

By comparing data from the Social Security Administration, the Department of Education would start locating debtors who qualified for automatic discharge.

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How to Apply for Student Loan Forgiveness

Due to the government already having the financial information on over 8 million borrowers, they won’t even need to apply for debt forgiveness. 

The government will introduce an online application system, which is expected to be available in October 2022, for those for whom the U.S. Department of Education lacks income information. 

For the application process, you won’t need to upload any data or supply an FSA ID.

On the studentaid.gov website, you can register to be informed when the application is available. 

Most applicants can anticipate relief within six weeks of submitting their applications. 

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Even if you believe you are one of the 8 million who theoretically do not need to apply, the government strongly advises you to do so. 

To ensure you receive relief prior to the start of your student loan payments again on January 1, 2023, you must submit your application by mid-November 2022.

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Other Current Developments in Student Loan Forgiveness

The U.S. Department of Education and the Justice Department are investigating whether the President has the legal right to use unilateral action to forgive up to $50,000 in federal student loan debt. 

The release date for these reports is not set in stone. 

Because Congress hasn’t yet confirmed important policy advisers in both agencies, there might be delays. 

Regardless of whether it is carried out through executive action or legislation, the White House’s Domestic Policy Council will think about how student loan forgiveness should be targeted.

Those who are borrowing money should be wary of schemes that demand payment in exchange for promising to forgive student loan debt. 

The cancellation of student loans will probably be automatic and free when it is enacted. 

The website StudentAid.gov will post an update from the U.S. Department of Education. 

Recently, the U.S. Department of Education took a few actions to reduce student loan debt for which they have undisputed legal authority:

1. Restoration of Total and Permanent Disability Discharges

Due to their failure to present the necessary documentation regarding their annual wages throughout the pandemic, several disabled borrowers who were eligible for a Total and Permanent Disability Discharge had their repayment obligations revived. 

For 230,000 borrowers with total and permanent disability discharges, the U.S. Department of Education will cancel the reinstatements and offer additional student loan debt relief.

2. Extension of the Interest Waiver and Payment Pause

Through January 31, 2022, borrowers having federal student loans that are held by the government are qualified for administrative forbearance and an interest waiver. 

Unfortunately, because these loans were held by guarantee organizations on behalf of the U.S. Department of Education, borrowers with defaulted loans in the Federal Family Education Loan Program (FFELP) were not eligible. 

More than one million FFELP borrowers will now be eligible for the federal student loan payment suspension and interest waiver thanks to a decision by the U.S. Department of Education.

Borrowers under the FFELP who experienced pandemic-related defaults will also have their loans reinstated and the defaults erased from their credit reports.

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Full Forgiveness of Debt for Approved Borrower’s Defense Against Claims of Repayment Discharge

In a mechanism put in place by the Trump administration, borrowers who had been duped only had a portion of their payments forgiven. 

The partial alleviation approach proved ineffective. 

According to a decision made by the U.S. Department of Education, all borrowers whose borrower defense claims were accepted will be fully discharged from their debt. 

72,000 borrowers who received predatory student loans will be impacted by this.

Tax-free Forgiveness of Student Loans

Regarding the tax aspect of student loan debt forgiveness, Congress also took action. 

Through December 31, 2025, all student loan forgiveness and debt cancellation will be tax-free under the American Rescue Plan Act of 2021. 

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This mainly affects the income-driven repayment plan forgiveness after 20 or 25 years, while the majority of other student loan cancellation options were previously tax-free. 

Nevertheless, it paves the way for future student loan forgiveness, whether it is carried out through executive order or new law.

In the Consolidated Appropriations Act of 2021, Congress granted tax-free status to employer-sponsored student loan repayment assistance programs, or LRAPs, through December 31, 2025. 

In relation to the discharge of student loans in bankruptcy, neither Congress nor the Biden administration is yet to take any action.

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Potential Developments Regarding Student Loan Forgiveness

The next step will be the release of findings by the Justice and Education departments of the United States on the legal viability of extensive loan forgiveness initiatives by the executive branch without the approval of Congress. 

These investigations are expected to come to the conclusion that the President lacks the legal authority to issue an executive order that would broadly waive student loan debt. 

This will compel Congress to take action. 

In the fall, as part of a budget reconciliation package, Congress might take student loan forgiveness into consideration.

The Biden administration has reaffirmed time and time again that the President would approve legislation that would cancel all borrowers’ federal student loans up to $10,000. 

Which loans qualify will also determine when they can be forgiven.

Assuming there are no complicated eligibility requirements and student loan forgiveness is restricted to debts held by the federal government, the procedure will be automatic and take place within a month or two of the President signing the bill into law. 

The procedure might become more difficult and take months if there are restrictions based on factors like income or other data that the U.S. Department of Education is not immediately privy to.

It will take a little longer for federal loans that are held commercially if they are eligible because the U.S. Department of Education would need to pay the FFELP lenders to settle the balances. 

If borrowers have private student loans, the process will take longer still since they must submit an application listing all of their debts, their loan id numbers, and the names and payment addresses of their lenders. 

The solely private student loan programs are not listed in the U.S. Department of Education’s records of loans.

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Consolidating Loans

If the loan forgiveness is only applicable to federally guaranteed student loans, borrowers having FFELP loans may want to consolidate them into a Federal Direct Consolidation Loan. 

Consolidating FFELP loans may also qualify them for the interest and payment suspension, which is valid until May 1, 2022. 

The major danger of consolidating debt is that it will restart the timer for monthly payments necessary to be eligible for a 25-year forgiveness period under an income-based repayment plan.

Additionally, if a student borrower consolidates, they will forfeit any savings they are currently receiving from the FFELP lender. 

For borrowers who enroll in AutoPay but do not receive any other discounts, Direct Loans offer a 0.25% interest rate decrease. 

Consolidation has no substantial drawbacks in any other respect.

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Refinancing Loans

It may be best for borrowers to hold off on refinancing federal loans into private loans in order to lock in current low-interest rates. 

Through August 31, 2022, there is practically no interest charged on loans that qualify for the payment suspension and interest waiver. 

Therefore, refinancing will raise the borrower’s expenses in the short run. 

With the Federal Reserve starting to raise its target Federal Funds rate, borrowers with high-interest rates may want to start looking at refinancing options for student loans.

On the other hand, if students refinance their private student loans into a new private loan, they do not run the danger of losing forgiveness. 

Instead of making additional payments on their loans, borrowers who are still employed and are able to do so should put the money in savings or use it to reduce other debt. 

It’s a fantastic chance to expand or start an emergency fund. 

Any borrower who anticipates receiving debt forgiveness should generally refrain from making extra payments when they are not compelled to do so because doing so would lower the total amount of forgiveness they will ultimately get. 

The money that was banked can be used by borrowers to make the necessary debt reductions after the specifics of student loan forgiveness are revealed.

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Programs currently in place to Erase Federal Student Loans

Borrowers may suspend making payments on federal student loans during the payment pause and interest waiver period, which was extended to December 31, 2022, if they anticipate receiving loan forgiveness under President Biden. 

However, a current program for forgiving student loans may make certain debtors eligible. 

For instance, debtors can apply for Public Service Loan Forgiveness (PSLF) if they hold a full-time position in a public service that qualifies. 

Once a borrower has made 120 qualifying payments, the loan is dischargeable.

Borrowers may continue to accrue credit toward PSLF during the payment suspension. 

They will keep getting qualifying payment credit as long as they keep fulfilling the conditions of eligibility and submitting the PSLF form. 

Consider an income-driven repayment plan if you won’t be eligible for loan forgiveness once the relief period expires. 

The annual income of the borrower determines how much money is paid each month under an income-driven repayment plan. 

The loan is forgiven after a set amount of time, such as 20 or 25 years.

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Conclusion

In conclusion, the federal government, states, businesses, and other organizations all provide a variety of student loan forgiveness and repayment help programs. 

However, because of the various eligibility conditions for each program, not every borrower would be helped by these initiatives.

Through student loan discharge programs, you can also be able to get help for students. 

This is very similar to loan cancellation and forgiveness and typically takes place when there is a change in your financial situation that makes it unnecessary for you to continue making loan payments.

References 

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