The Biden-Harris Student Debt Relief Plan created a lot of buzz when it was announced on August 24, 2022. In addition to the much-publicized debt cancellation plan, there are several other components, and it’s time to take action to capitalize on various opportunities. Read on for important deadlines and action steps and consult with your loan servicer to determine your best course of action.
Limited Public Service Loan Forgiveness Waiver
Application Deadline: October 31, 2022
The Public Service Loan Forgiveness (PSLF) program has been in place for quite some time. It’s designed for those with direct federal loans working for a qualified employer (government or not-for-profit entity), and it allows forgiveness of remaining student loan balance after 120 qualifying monthly payments. But, the original plan’s rules were confusing and many didn’t qualify.
If you worked for a government or not-for-profit entity and didn’t qualify for the PSLF program in the past, you have until October 31 to apply for the waiver. You can find details about the waiver here: Limited PSLF Waiver Factsheet and PSLF Waiver Information. Any application received after October 31 won’t qualify, so be sure to apply by this strict deadline.
Debt Cancellation Plan
Action Step: The application is now open: Student Loan Debt Relief Application!
Debt cancellation is probably the most publicized component of the Student Debt Relief Plan. This program provides $10,000 in loan forgiveness for those whose income (as reported on their 2020 or 2021 tax return) is less than $125,000 for single filers and $250,000 for joint filers. Those who received Pell Grants and are below the mentioned income thresholds, can receive up to $20,000 in forgiveness.
If your current loan balances are below the applicable $10,000 or $20,000 thresholds, the Department of Education will automatically refund any payments you made during the payment moratorium period which started on March 13, 2020 (see “End of Loan Payment Moratorium” below) so that your balance reaches the threshold allowing you to take full advantage of forgiveness.
End of Loan Payment Moratorium
Action Step Deadline: December 31, 2022 (Evaluate cash flow to account for resumption of student loan payments in January 2023).
If you have existing federal student loans, you’ve likely benefited from a halt in required payments since March 13, 2020. From that point forward, you weren’t required to make any payments, and your interest rate was set to 0%. Any payments you have made since that date were credited to any accrued interest first, and then the loan principal.
If you made payments during the moratorium and would like a refund of some or all of these payments, you can request this refund until December 31, 2023 by contacting your loan servicer. Any amounts refunded will increase your loan balance.
However, if you qualify for loan forgiveness and your balance is currently below the applicable $10,000 or $25,000 threshold, the Department of Education recently announced that they will refund the amount you paid in excess of those thresholds so you can take full advantage of the cancellation.
When the pause ends on December 31, 2022, you’ll be required to resume your loan payments. Reevaluate your budget to account for these new fixed payments so that you’ll have the cash available each month. Also, read below to see if you can qualify for the new Income Driven Repayment Plan.
New Income Driven Repayment Plan
Many borrowers have taken advantage of the income driven repayment plan. While it offers the ability to lower monthly loan payments based on income, it is not without its problems. If a borrower’s required payments were too low, it’s possible they wouldn’t even cover the interest accruing on the loans, thus resulting in negative amortization. As a result, loan balances could actually grow over time. The new income-driven repayment plan makes the following changes to the program:
1. It limits the required payments to 5% of discretionary income for undergraduate loans (10% for graduate loans).
2. It decreases the amount of income considered discretionary. Old IDR plans considered discretionary income your adjusted gross income less 150% of the poverty line. The new plan increases the threshold to 225% of the poverty line. So, the maximum 5% payment will be calculated on a smaller number than in the past.
3. Remaining balances on loans with balances of $12,000 or less, and timely payments for 10 years, will be forgiven. All others will have their loans forgiven after 20 years of timely payments.
4. To prevent negative amortization, the government will cover any unpaid interest if your required payments are not enough to cover the interest owed. This means that, under the new income driven repayment plan, loan balances cannot grow over time.
We’re still waiting on clarity about eligibility and implementation.
Check out these relevant resources for more information and guidance:
- Nerd’s Eye View: Biden’s Debt Relief Program
- Federal Student Aid: Biden-Harris Administration Debt Relief Plan Explained
The Biden-Harris Student Debt Relief Plan offers much needed debt relief to many, but because the plan was put into place through executive order, it will likely be challenged in the courts. If you’d like to take advantage of the benefits, be sure to consult with your loan servicer and work with them to apply for the various components.