Second, high-income borrowers are generally excluded from receiving debt forgiveness.
Individual borrowers making less than $125,000 a year and married couples or heads of households making less than $250,000 a year will see up to $10,000 of their federal student loan debt forgiven.
If an eligible borrower also received a federal Pell grant while enrolled in college, the individual is eligible for up to $20,000 in debt forgiveness. Pell grants are awarded to millions of low-income students each year based on factors , including their family size and income and the costs charged by their college. These borrowers are also more likely to struggle to pay off their student debt and default.
Here’s what else borrowers need to know about the new student loan forgiveness plan:
What year is the income threshold based on?
Eligibility is based on the borrower’s adjusted gross income for the 2020 or 2021 tax year. Adjusted gross income may be lower than your total pay because it takes into account tax deductions and adjustments, such as contributions made to a 401(k) retirement plan.
How will the government know what my income is?
The Department of Education says it already had income information on nearly 8 million borrowers, possibly because of financial aid forms or previously submitted income-based repayment plan applications. These borrowers will automatically receive debt relief if they meet the income requirement.
Other borrowers will need to apply for student loan forgiveness if the Department of Education does not have information about their income.
When will I be able to apply for a pardon?
The app is expected to be available by early October. You can sign up to be notified when it’s available via the Department of Education’s subscription page. After you submit your application, you can expect your student loan relief within four to six weeks.
Will I have to pay taxes on the canceled debt amount?
Borrowers won’t have to pay federal income tax on student loan debt relief, thanks to a provision in the Saving America Act that Congress passed last year.
But some borrowers may have to pay state income tax on the amount of debt forgiven. There are several states that may tax the discharged debt if state legislative or administrative changes are not made beforehand, according to the Tax Foundation. The tax liability can be hundreds of dollars, depending on the state.
I am a current student. Am I entitled to forgiveness?
Yes, some current students are eligible. Eligibility of borrowers who have filed the Free Application for Federal Student Aid, known as FAFSA, as independent will be based on the individual’s household income.
Eligibility for borrowers who are enrolled as student dependents, typically those under the age of 24, will be based on parental income for 2020 or 2021.
I have student debt from graduate school. Am I entitled to forgiveness?
Yes, if your income meets the eligibility threshold.
I am a parent and I took out a Parent PLUS loan. Am I eligible?
Yes, if your income meets the eligibility threshold. A parent borrower with federal Parent PLUS loans for multiple children is still only eligible for loan forgiveness up to $20,000.
Could Biden’s pardon plan be struck down in court?
It’s hard to say right now what the chances are that a court will overturn Biden’s claims.
The Biden administration says Congress has given the education secretary “expanding authority to alleviate hardships federal student loan recipients may experience as a result of national emergencies,” such as the Covid-19 pandemic, according to a memo from the Department of Justice . It is not clear who could file a lawsuit, a procedural threshold requiring that an injury be inflicted on a plaintiff that justifies the lawsuit. It’s unlikely to be a borrower who didn’t qualify for forgiveness, but could potentially be a student loan servicer or collection agency, legal experts told CNN.
How will my payments change going forward?
Borrowers who have remaining debt after $10,000 or $20,000 is wiped can see their monthly payment amounts recalculated if they’re on a standard repayment plan. Under the standard repayment plan, borrowers pay a fixed amount that guarantees repayment of the loans within 10 years.
Borrowers already enrolled in an income-based repayment plan are unlikely to have their monthly payment amounts change due to forgiveness because their payments are based on household income and family size.
Borrowers are not required to make payments on their federal student loans as of March 2020 due to the pandemic-related government shutdown. Biden extended the pause through the end of this year, and payments will resume in January 2023.
How about Biden’s new income-driven payout plan?
Along with Biden’s announcement to cancel some federal student loan obligations, he also said he would create a new plan that would make repayment easier for borrowers.
There are currently several repayment plans available to federal student loan borrowers that reduce monthly payments by capping them at a portion of their income.
The new income-based repayment plan, which Biden is expected to propose, would limit payments to 5 percent of a borrower’s discretionary income, down from the 10 percent offered in most current plans, and would also reduce the of income that is considered discretionary. It will also amortize remaining balances after 10 years of repayment, instead of 20 years.
Biden also proposed that the new plan cover the borrower’s unpaid monthly interest. This can be very helpful for people whose monthly payments are so low that they don’t cover their monthly interest and end up seeing their balances explode, growing more 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 a timetable, but said it will propose a new rule to create a repayment plan. The department’s formal rulemaking process typically involves soliciting public comment and can take months, if not more than a year.
Can I get a refund for the amount I paid during the pandemic break?
yes Borrowers are not required to make payments on their federal student loans as of March 13, 2020 due to the pandemic-related pause. But if borrowers have made payments, they are allowed to contact their lender to request a refund.
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