The Supreme Court recently blocked President Biden’s plan to forgive federal student loan debt. Borrowers could apply for relief through the Department of Education website if it survives any further legal challenges.
These plans set monthly payments at a percentage of discretionary income and forgive any remaining balance after a set number of years, typically benefitting those with higher income and education levels and who are whiter than beneficiaries of other transfer programs.
What is forgiveness?
Forgiveness, cancellation, and discharge all refer to the same thing – being freed from payments on student loans. Due to a forgiveness plan or other circumstances, both principal and interest on your loans may be forgiven – including federal Direct Loans, FFEL Program loans, and the Department of Education Loans.
President Biden proposed to cancel debt for millions of borrowers through an expansive debt forgiveness plan; however, the Supreme Court found this move unlawful because it exceeded President Biden’s authority under 2003 laws and decreed otherwise.
Federal student loan repayment options available to you include income-driven repayment (IDR), income-based repayment (IBR), and income-Contingent Repayment (ICR). Your monthly payment should ideally range between 10%-15% of discretionary income. After 20-25 years of qualifying monthly payments, any outstanding balance may be forgiven (but any taxes due may need to be paid upon this amount).
Some employers provide student loan forgiveness or tuition reimbursement programs to reduce employee student debt burden. Many of these employer programs are tailored towards public service or nonprofit employees; however, private-sector companies may also offer them.
Borrowers working in military, law enforcement, firefighting, nursing, and social work may qualify for partial or complete federal student loan forgiveness through the Public Service Loan Forgiveness program. Under this program, any outstanding balance on Direct Loans, FFEL Program loans, and Loans is forgiven after 120 qualifying monthly payments while employed at either a government or nonprofit organization, according to Forbes’ reports.
Some states, like New York, offer loan forgiveness programs specifically to residents. Speak to your loan servicer about available options that apply to you.
Who is eligible for forgiveness?
If your federal student loans are managed by the Department of Education (ED), then loan forgiveness could be available. This applies to Direct Loans, both subsidized and unsubsidized loans, and Grad PLUS/parent PLUS loans. No matter when or how they were taken out or whether borrowers entered an Income-Based Repayment plan, forgiveness can only be offered after at least 20-25 years of loan payments.
As well as loan forgiveness programs, several state-based loan repayment assistance programs also offer employees an incentive to help pay down student debt. Most programs target specific occupations like doctors, nurses, and teachers but other jobs such as firefighters and law enforcement officers may also qualify. Generally, these programs only cover federal loans but may also cover private ones.
The Biden Administration’s new Public Service Loan Forgiveness program was meant to eliminate debt for many borrowers who worked in federal government, nonprofit, public charity, or military positions; however, due to legal challenges, ED has temporarily suspended accepting applications and dispersing forgiveness grants.
While legal issues surrounding student loan repayment remain open, borrowers should take action now by applying to this program while it still exists. They should contact their loan servicer for guidance in applying; typically, this service can be found online on the lender’s website.
Many borrowers will automatically qualify for relief as the Department of Education already holds their income information on file. Borrowers who are not automatically eligible should still complete an online application when it becomes available and have completed it before year-end to be eligible for relief in early 2023. Tax professionals should encourage clients to subscribe for notifications as soon as the forgiveness application becomes available so they understand its potential impact on their tax status.
How do I apply for forgiveness?
The Department of Education recently unveiled its student loan forgiveness application, providing millions of borrowers relief before federal loan payments resume in 2023. The process should take less than five minutes to complete and is available now on the Federal Student Aid website.
If you qualify for student loan forgiveness, taxes on any canceled debt could apply. According to the Biden administration, only 5% of borrowers who meet income requirements would not need to pay taxes on forgiven loans.
If you have questions regarding student loan forgiveness, it’s best to speak to your loan servicer. They can assist with enrolling into an income-driven repayment plan and determine if other forms of student loan forgiveness apply to you.
Be wary of companies offering “student loan relief” who charge borrowers for services they do not deliver. Such firms often make promises of loan relief that cannot be met, charging struggling borrowers expensive upfront fees to sign up with them.
If you decide to apply for student loan forgiveness, your application must be filled out accurately and submitted as early as possible. As results of applications usually take four to six weeks to reflect in loan balances, submitting early will increase the chance that relief arrives before January 1.
Borrowers with federal FFEL and Perkins loans that don’t belong to the Direct loan program — such as FFEL or Perkins loans — are currently disqualified from participating in the forgiveness action due to an update made to the Education Department website on Sept 29 stating borrowers who hadn’t consolidated private loans into Direct loan program by Sept 29 won’t qualify for one-time forgiveness action.
However, if you work for at least ten years in public service (federal, state, local, or tribal government or nonprofit organization), loans could be forgiven after 24 months under an income-driven repayment plan. To be sure you qualify, check with your loan servicer regularly and keep track of payments with an accurate record-keeping system.
What happens after I apply for forgiveness?
Forgiveness, cancellation, and discharge are nearly identical: your loan will be canceled/forgiven, so you no longer owe payments. Each process has different requirements that vary according to loan and circumstance;
Debt forgiveness programs such as Public Service Loan Forgiveness (PSLF) provide relief if you work in specific public service jobs for ten years and make 120 timely repayments on federal student loans. These programs aim to encourage people towards careers focusing more on benefitting society than educational profits.
As part of your repayment plan, enroll in one that provides the lowest possible monthly payments – such as the 10-year Standard Repayment Plan or Revised Pay As You Earn (REPAYE) Repayment Plan – to meet eligibility for loan forgiveness. Each year you should complete a Public Service Loan Forgiveness application to show that you remain on track toward loan forgiveness; keep your loan servicer updated about any changes in employment or income and seek advice from nonprofit student loan counselors about alternative solutions for reducing or clearing away debt.
If you have a permanent and total disability, the Total and Permanent Disability (TPD) program allows for federal student loan cancellation or forgiveness. This applies to both Direct and Stafford loans; however, for Direct loans, the form must be filled out by a medical provider as verification of disability status.
If you have private student loans, bankruptcy and undue hardship may allow for their cancellation; however, this option is rarely available and usually requires court proceedings to pursue.