Federal Student Debt Relief Plan Explained

Confused about everything going on with federal student loan relief? Let these notes from our experts be your guide!

Part 1: Repayment Pause.

• Due to the economic challenges created by the pandemic, the Biden-Harris Administration implemented a repayment pause on all federal student loans held by the U.S. Department of Education (also known as a Direct Loan), including interest accrual.
• Because of this, payments have not been required on eligible federal loans since President Biden took office in January, 2021.
• To ensure a smooth transition to repayment and prevent unnecessary defaults, the Biden-Harris Administration will extend the pause a final time through December 31, 2022, with payments resuming in January 2023.
• If you have an eligible loan, the extended pause will occur automatically. Borrowers with commercially held non-defaulted FFEL program and HEAL Loans, school held Perkins Loans, and private student loans are still ineligible.

Part 2: Targeted Debt Relief

• The U.S. Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education, and up to $10,000 in debt cancellation to non-Pell Grant recipients.
• They are working on ways to make Pell history clearer, but your Pell eligibility would have been based upon your expected family contribution calculated by the Department of Education when you filled out your FAFSA form.
• Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for households.
• Your relief is capped at the amount of your outstanding debt. For example, if you are eligible for $20,000 in debt relief, but have a balance of $15,000 remaining, you will only receive $15,000 in relief.
• If the U.S. Department of Education doesn't have your income data, the Administration will launch a simple application which will be available by early October.
• If you would like to be notified when the application is open, please sign up at the Department of Education subscription page.
• Nearly 8 million borrowers may be eligible to receive this relief automatically because of relevant income data that is already available to the U.S. Department of Education. If you are enrolled in an income based repayment program and have submitted your most recent tax return, your loan servicer already has your income information.
• Borrowers are advised to apply before November 15th in order to receive relief before the payment pause expires on December 31, 2022, but applications will continue to be processed after that date as well. Only loans disbursed before June 30, 2022 are eligible.
• Once a borrower completes the application, they can expect relief within 4-6 weeks.
• Only federal loans are eligible, this does not apply to private student loans. If you have Direct Loans, they are automatically considered. If you have FFEL program loans that are not in default, they are currently ineligible, but Federal Student Aid/the Department has indicated they are working on a solution. You can make your FFEL program loans eligible by consolidating into the Direct Loan program, but this may not be necessary. You can decide which action you’re most comfortable with, consolidating, or waiting to determine if the government will institute changes, and you will not have to take any action. Federal Parent, Grad PLUS, and Consolidation Loans are eligible.
• Unfortunately, if you paid your loans in full, you will not receive a reimbursement, and if you previously consolidated federal loans into a private loan, they are no longer eligible.
• Borrowers eager to know where their FFEL loans are held can go to studentaid.gov and sign in with their FSA ID. Then, go to the “My Aid” tab, and search for your loan details.
• The guidance provided indicates that the amount forgiven is not considered taxable income. However, it’s been reported that 13 states have laws that treat this forgiven debt as income in their tax code. This means, taxpayers may end up owing a few hundred dollars, or in Hawaii more than $1,000 – on their state tax return in April. The federal tax code generally treats forgiven debt as income, but Congress in 2021 included in the American Rescue Plan a measure that would temporarily exempt canceled debt from federal taxation. Some states may revise their rules prior when taxes are due next spring. It’s best to talk to a tax advisor.
• How will this impact your payments? When a large lump sum payment is made toward a loan, your payment may or may not be impacted depending upon how your servicer is instructed to manage your loan. Option one is that your payment will remain the same, and you’ll simply pay off your loan faster since you are paying a smaller balance over your loan term, or option two: your reduced balance will be calculated to pay your loan off at the end of your current loan term, resulting in smaller payment amounts each month.

• In addition to the targeted debt cancellation, borrowers who are employed by non-profits, the military, or federal, state, Tribal, or local government may be eligible to have their federal student loans forgiven through the Public Service Loan Forgiveness (PSLF) program.
• The general rules for the (PSLF) program forgives the remaining balance on your federal student loans after 120 payments while working full-time for an eligible employer.
• Temporary changes, ending on October 31, 2022, provide flexibility that makes it easier to receive forgiveness by allowing borrowers to receive credit for past periods of repayment that would otherwise not qualify for PSLF.
• You must have a Direct Loan, or consolidate into the Direct Loan program if you have FFEL, or Perkins Loan by October 31, 2022. No exceptions. Consolidation will not reset the PSLF count but only during this waiver period.
• Payments under all repayment plans count if they were made on or before 10/21/2021, while working for an eligible employer, and at least one PSLF form was approved as of October 31, 2022. This includes payments made for FFEL or Perkins Loans. Periods where payments were late, or for less than the amount due count. Proof of payment is not required -- what's important here is months in repayment status, not the actual payments.
• Enrollments on or after November 1, 2022 will not be eligible for this waiver.
• Keep making on-time, qualifying payment when you are required to do so in order to avoid delinquency and default. If you reach 120 payments under the limited PSLF waiver but continue to make payments after the pause ends, payments made beyond the required 120 will be refunded. If you have non-Direct Loans, your loans were already paid off, forgiven, or have a $0 balance, you will not be eligible for refund or reevaluation.
• The Department will be reviewing ALL denied applications in the coming months.

• Payments made during default and in-school deferment do not count.
• Voluntary discretionary forbearance, 12 consecutive months, or 36 cumulative months or greater will count.
• COVID-19 Emergency Relief forbearance periods do not count.
• Months spent in deferment prior to 2013 count.
• After 2013, months in administrative forbearance, other forbearance, grace, in-school or deferment status will not count.
• Economic hardship deferment after January 1, 2013 counts.
• For military members, your active duty counts for PSLF purposes, and any deferment or forbearance during that period counts. This is a permanent change.
• Sometime this fall, the Education Department will make adjustments to include these periods.

Part 3: New Income Driven Repayment Plan

• The Biden-Harris Administration is proposing a rule to create a new income-driven repayment plan that will substantially reduce future monthly payments for lower- and middle-income borrowers.
• This will require borrowers to pay no more than 5% of their discretionary income monthly on undergraduate loans. This is down from the 10% available under the most recent income-driven repayment plans.
• It will raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment.
• It will forgive loan balances after 10 years of payments for borrowers with original loan balances of $12,000 or less. If your loan balances are higher than $12,000, they will be forgiven after 20 years.
• The plan will cover the borrower's unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower's loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low.
• FFELP loan borrowers can only benefit from the adjustment by consolidating before ED implements the change, which is estimated to be no sooner than January 1, 2023.

Fresh Start Initiative

• The U.S. Department of Education is removing defaults that occurred before March 13, 2020 for borrowers, making them eligible for Title IV financial aid again, and offering credit reporting benefits. Prior to this initiative, students were ineligible for financial aid after default.
• This program will be available for one year after the payment pause ends in December. You will not have access to these benefits if you do not act before the Fresh Start period ends. The Department will reach out to you directly in the coming months with information and instructions, in the mean-time, ensure your contact information is up-to-date.
• Some Fresh Start benefits are available now, and some not until later in the year. Your aid eligibility is restored now, and later this year they will begin reporting your defaulted loans as current.
• Anecdotally, we understand the default status will be removed from the National Student Loan Data System – which is the system of record for colleges, universities and the Department of Ed, and from your credit report, but it’s unclear from the guidance provided if the repayment history will also be removed/cleared from the credit report. The default may be removed, but the late payments may remain. We will need to wait for further guidance on this. Regardless, it should result in an improvement to your credit.
• Loans will be transferred to a new servicer in the process.
• For students, the transfer process will happen once your new financial aid is disbursed. If you have Direct Loans, you will sign an acknowledgment that you are participating in the Fresh Start Initiative and that you agree to have your loans transferred. If you have FFEL loans, your loans should be reassigned to the Department of Education automatically, and your eligibility will be immediately restored. Keep an eye on correspondence and ensure your contact information is up to date with your servicer.
• This only applies to federal student loans, Direct, FFEL program, and Perkins held by the department of Education. There are some exceptions, including Perkins loans held by your school, and Direct or FFEL program loans that default after the payment pause are ineligible.
• The goal is to provide a pathway to additional education for defaulted borrowers, improving their chance of competing in the job market, and opening up the opportunity for borrowers to enroll in income-based repayment programs.
• Again, this program will remain in place for a one-year period, and borrowers will have one year to make arrangements before the program expires.

General Note: There will be a lot of scammers taking advantage of this narrative. Nobody will be calling you, and you will not have to pay a fee. Paying a fee will not get relief funds to you faster. If you get such call, report it to the Federal Trade Commission.

Articles & Resources:

Subscription Page for Updates: https://www.ed.gov/subscriptions

White House Fact Sheet: https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/

TISLA: Free Student Loan Advice

https://freestudentloanadvice.org/

https://freestudentloanadvice.org/loan-forgiveness/

Fresh Start: A Fresh Start for Federal Student Loan Borrowers in Default | Federal Student Aid

If you have a defaulted loan, and don’t know who your servicer is, or you are not sure if your loans qualify: Contact Us | Debt Resolution (ed.gov)

COVID 19 Emergency Relief: COVID-19 Emergency Relief and Federal Student Aid | Federal Student Aid

Loan Payment Pause: https://studentaid.gov/announcements-events/covid-19/payment-pause-zero-interest

Federal Trade Commission for scams: Federal Trade Commission | Protecting America's Consumers (ftc.gov)

ABC News: Americans can start applying for student loan relief in October, White House says - ABC News (ampproject.org)

Nerd Wallet: Student Loan Forgiveness: What’s Getting Fixed? - NerdWallet

Edvisors: Biden Student Loan Forgiveness and Repayment Relief: What We Know So Far | Edvisors

Limited PSLF Waiver: https://studentaid.gov/announcements-events/pslf-limited-waiver

New York Times: Biden’s Student Loan Forgiveness Plan: Your Questions, Answered (ampproject.org)