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Do I qualify for student loan forgiveness? What to know about Biden's debt plan.

USA TODAY logo USA TODAY 8/25/2022 Medora Lee, USA TODAY

LIFE OFF PAUSE: How the student loan payment pause changed people’s lives

President Joe Biden confirmed Wednesday what many have anticipated for months – a plan to forgive or reduce student loan debt for millions of debt-saddled borrowers.

If you earn less than $125,000 annually, he said, you're eligible to receive cancellation of up to $10,000 in federal student loans. If you received a Pell Grant, you can get up to $20,000 forgiven. If you're not eligible for any student debt forgiveness, your pause on repayments continues to be paused until year end. The Department of Education is also working on a proposal introducing a new repayment plan to ease the burden on borrowers.

Too Much Talent Band performs during a rally to urge President Joe Biden to cancel student debt near the White House in Washington, D.C., Wednesday, July 27, 2022. © Andrew Harnik, AP Too Much Talent Band performs during a rally to urge President Joe Biden to cancel student debt near the White House in Washington, D.C., Wednesday, July 27, 2022.

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Since the start of the pandemic in 2020, borrowers haven't had to pay a cent on their federal student loans. During this time, the pressure grew for the president to cancel the debt. It was one of the platforms Biden ran on for president in 2020. 

Though the plan was welcomed by many, it still garnered criticism. Many had sought higher forgiveness amounts – $50,000 or even all amounts, no matter how large. The total outstanding balance for federally owned (including defaulted) student loans in December 2021 was $1.38 trillion, the New York Federal Reserve said in April.

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What’s Biden’s student loan forgiveness plan? 

Individuals with an annual income of less than $125,000 (or under $250,000 for married couples or heads of households) are entitled to have up to $10,000 in federal student loans canceled. No private loans will be forgiven.

Those who received a Pell Grant in college will be eligible for up to $20,000 in debt cancellation.

For those who still have student debt, the repayment pause since March 2020 will be extended to the end of the year. Borrowers will resume payments in January.

What is a Pell Grant?

Federal funding that’s usually awarded only to students who display exceptional financial need and have not earned a bachelor's, graduate or professional degree. Sometimes, a student enrolled in a post-baccalaureate teacher certification program might receive a Pell Grant. 

Unlike a loan, a Pell Grant does not have to be repaid, except under certain circumstances. Those include a change in enrollment status or if you received outside scholarships or grants that reduced your need for federal student aid. 

How do people claim student debt forgiveness? 

The application will be available no later than Dec. 31, when the pause on federal student loan repayments terminates.

Nearly 8 million borrowers may be automatically eligible to receive relief because relevant income data is already available to the Department of Education.

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What's the cost of student loan forgiveness? 

A one-time maximum debt forgiveness of $10,000 per borrower will cost the U.S. government around $300 billion for borrowers with incomes less than $125,000, according to analysis published on Tuesday by Junlei Chen and Kent Smetters at the Penn Wharton Budget Model, based at the University of Pennsylvania. This cost increases to $330 billion if the program continues over the standard 10-year budget window.   

Before the announcement, the Government Accountability Office estimated that alone, the payment pause since the start of the pandemic cost the government $102 billion. That amount included suspending all payments due, interest accrual and involuntary collections for loans in default from March 13, 2020, to Aug. 31, 2022.

Who benefits most from the student debt forgiveness plan? 

Mostly higher-income households. Between 69% and 73% of the debt forgiven accrues to households in the top 60% of the income distribution, Chen and Smetters said. 

A New York Federal Reserve study in April, though, said that the income cap to the forgiveness "substantially reduces the cost of student loan forgiveness and increases the share of benefit going to borrowers who are more likely to struggle repaying their debts."

For example, an income cap of $75,000 for a $10,000 cancellation raises the share of forgiven loan dollars going to borrowers in low-income neighborhoods to 35% from 25% and the share going to lower credit score borrowers to 42% from 37%, it said. Income caps also increase the share of loans forgiven that were delinquent before the pandemic to 60% from 34%. 

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How many Americans have student loans outstanding? 

More than 43 million people have federal student loans outstanding, according to the Education Data Initiative, which collects data and statistics about the U.S. education system. 

The total outstanding balance for federally owned (including defaulted) student loans in December 2021 was $1.38 trillion, the New York Federal Reserve said in April. Most (67%) of student loan borrowers are under 40 years old, however only 57% of balances are owed by those under 40. That means those with larger balances are more likely to be older, likely due to borrowing for graduate school, it said. 

The White House estimates that its initiative will cancel the full remaining balance for roughly 20 million borrowers. 

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What’s the average outstanding student loan debt amount? 

The average federal student loan debt balance is $37,667 while the total average balance (including private loan debt) may be as high as $40,274, Education Data Initiative estimates. 

Is student loan forgiveness taxable? 

The debt relief isn’t counted as taxable income for federal income tax purposes, the White House says. 

Would canceling student loan debt increase inflation? 

Some prominent economists, including former Treasury Secretary Lawrence Summers and Jason Furman, who was chairman of President Barack Obama’s Council of Economic Advisors, have been vocal critics, saying student debt forgiveness would stoke 40-year high inflation and may be unfair. 

“Student loan relief is not free,” Furman tweeted on Aug. 19. “Part of it would be paid for by the 87% of Americans who do not benefit but lose out from inflation. Part of it would be paid for by future spending cuts & tax increases—with uncertainty about who will bear those costs.” 

The Committee for a Responsible Federal Budget estimates Biden’s plan “would more than undo the deflationary pressures from the Inflation Reduction Act and add 0.15 percentage points of additional inflation in the near-term,” noted Sarah Foster, Bankrate analyst. 

The Federal Reserve has been on an aggressive rate-raising cycle to cool demand, but giving people  spending money could stymie that effort.

And those economists aren't the only ones worried. Hit already by hefty inflation, 59% of Americans are concerned student loan forgiveness will make inflation worse, according to a CNBC survey, conducted online by Momentive among a national sample of 5,142 adults from Aug. 4 to 15.

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What is discretionary income?

The money you have left after paying taxes and necessary cost-of-living expenses. It's different from disposable income, which is simply the amount of money you have left after paying taxes.

Knowing what discretionary income is is important because many federal student loan repayment plans are income-driven and have payments that are based on your discretionary income.

Biden to shrink discretionary income: What is it? Why it matters in student loan repayment.

If you qualify for student debt forgiveness, what should you do with any extra money?  

“Student loan forgiveness will likely decrease your monthly payment or get rid of it entirely,” said Dan Casey of Bridgeriver Advisors in Bloomfield Hills, Mich. Take that freed up money to pay off high-interest debt like credit cards, build up your emergency fund, or invest it in your retirement. Even though today looks brighter, the economy is still on shaky footing. 

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If you don’t qualify for student loan forgiveness, what should you do to prepare to start repaying in January? 

“If you haven’t made a student loan payment since the pause began, it’s important to understand how much you’ll owe each month,” Daniel Milan, advisor at Cornerstone Financial Services, said.  

Then, review the interest rates on your loans and start paying off the highest interest ones first, enrolling in autopay so you don’t miss any payments while you get back into the habit of paying regularly and consider refinancing if it lowers your payments.  

“Moving multiple loans into one loan can also help you keep better track of how much you actually owe,” he said.

What’s ahead for future borrowers? 

To “substantially” reduce future monthly payments for lower- and middle-income borrowers and protect more income from loan payments, the Department of Education is proposing a new income-driven repayment plan. 

Here are some things being proposed: 

  • Cutting the amount borrowers have to repay each month and curbing interest so a balance won't grow so long as borrowers make their required monthly payments.​​​
  • Loan balance forgiveness after 10 years, instead of 20, under many income-driven repayment plans for borrowers with original loan balances of $12,000 or less. This will allow nearly all community college borrowers to be debt-free within 10 years, the White House said. 
  • Starting next summer, the Department of Education can automatically pull borrower’s income information each year, avoiding the hassle of needing to recertify their income annually and make it easier for borrowers to stay enrolled. 
  • Public servants will also have an easier time claiming credits for time of service to go toward debt relief under the Public Service Loan Forgiveness (PSLF) program. The Department of Education has already made some temporary changes toward that end. To apply for forgiveness or payments to count toward forgiveness under the temporary changes, visit the PSLF Help Tool

A full list of proposed regulations will be published in the coming days on the Federal Register, and the public is invited to comment on the draft rule for 30 days. 

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Would Parents PLUS loans be forgiven?

Parent PLUS loans are federal student loans issued directly to parents, meant to supplement school, state, and other federal financial aid offered for a dependent undergraduate student enrolled at least half-time.

Though the White House didn't specify if these loans would be eligible for forgiveness, The Wall Street Journal and Washington Post have reported they will be.

What’s being done to keep the cost of college from spiraling? 

The Department of Education will publish an annual watch list of programs with the worst debt levels in the country, so students registering for the next academic year can steer clear of programs with poor outcomes. It will also request plans from colleges with the most concerning debt outcomes on how they intend to lower debt levels. 

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.  

This article originally appeared on USA TODAY: Do I qualify for student loan forgiveness? What to know about Biden's debt plan.



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