When President Joe Biden ran for office, he promised that he would address student loan debt. In fact, he pledged that his administration would forgive at least $10,000 worth of debt per person. The Biden loan forgiveness was a hefty commitment, especially considering no other president has ever done something similar.
Over a year into his presidency, Joe Biden is finally making good on his campaign promise. This debt forgiveness could mean huge financial advancements for people struggling to pay their debt. However, there are some intricacies to student debt forgiveness that you need to understand to determine how it will affect you. Here’s what you need to know.
Who Qualifies for Biden Loan Forgiveness?
The Biden loan forgiveness plan is set to offer debt relief for about 43 million Americans and erase student loan debt for about 20 million people completely. Student loan forgiveness will only apply to federal student loans – the government does not have the power to erase private student loans.
To qualify, you’ll need to earn less than $125,000 per year if you’re single. If you’re married, you and your spouse cannot earn more than $250,000.
The Biden loan forgiveness plan applies to both current students and those out of school. Current students whose parents claim them as dependents will receive relief based on the income of their parents. Parent PLUS loans (federal student loans for parents of undergrad students) are eligible for debt forgiveness, as well. However, any loans taken out after June 30th, 2022 do not qualify.
How Much Student Debt Forgiveness Is Available?
Most people can qualify for up to $10,000 in student loan forgiveness. The exact amount you can get depends on whether or not you received a Pell grant to help you pay for college.
Federal Pell grants are provided to students who have an “exceptional financial need”. These students have not yet attained a bachelor’s, graduate, or professional degree. Pell grants typically don’t have to be repaid, except under certain circumstances. However, Pell grants are only enough to cover about a third of the price of a four-year degree, so people still need to borrow and are often still in debt.
People who did not receive a Pell grant and who meet the income requirements are eligible to have up to $10,000 of federal student loan debt forgiven. Those who did get a Pell grant can have up to $20,000 in student loan forgiveness.
Do You Have to Apply for Student Debt Forgiveness?
So – how do you actually get the student debt forgiveness? For some, it will be applied automatically, and for others, there’s an application system.
The Department of Education has the income information of about eight million borrowers on file. For these folks, there’s no need to verify that they meet the income qualifications, so the student loan forgiveness will be automatically applied.
For about 35 million other borrowers, however, there’s an application that must be submitted. The Biden administration is set to launch the application within the coming months. You can sign up for updates on the status of the application process via the Department of Education’s subscription page.
If you’re in the group of borrowers who’ve already provided income information to the department, you may still want to check your status. You can do so via the same application process, once it’s launched.
Even after you submit an application, there’s no guaranteed timeline for when you’ll see that student debt forgiveness applied to your federal loans. However, we should get more information from the Department of Education as they work on the program. You can check for updates on the Federal Student Aid website.
Will There Be Another Student Loan Extension?
In early 2020, the government paused payments on federal student loans to provide temporary relief to borrowers as we went through a pandemic. Yet even as things began to return to normal, the government continued to extend the student loans pause.
The most recent student loans extension was set to August 31st – now, the Biden administration is extending it again. The new student loan pause extension goes through December 31st, 2022, with the administration noting that this will be the final time.
The student loan extension is set to occur automatically, just like the others, so you don’t need to take any action. Once the student loan repayment extension expires, payments will resume in January 2023.
What Happens to the Remaining Debt?
As we discussed above, the Biden student loan forgiveness plan is set to completely clear out federal debt for about 20 million people. For the remaining 23 million Americans, however, there will still be remaining debt to pay. Since it appears we won’t get another student loan pause extension, people will need to begin thinking about how they’ll make payments.
There is an unexpected aspect of the Biden student loan forgiveness plan. As part of the recent announcement, the administration said they were updating income-driven repayment (IDR). As the name implies, income-driven repayment allows a person to lower their monthly payments based on their monthly earnings. The program is available to those who cannot afford large monthly payments.
Biden’s New IDR Plan
Under Biden’s new IDR plan, borrowers are required to pay even less than before. Income-driven repayment previously required that you pay 10% of your discretionary income toward student loan debt – now that number is just 5%.
Plus, the new IDR plan is set to raise the amount of income that can be considered non-discretionary. Borrowers who earn below 225% of the federal poverty line will not be required to make a payment each month. The plan also shortens the forgiveness period. If you have $12,000 or less in debt, you may qualify for student loan forgiveness after 10 years of payments rather than the current 20-year standard.
Finally, under the new income-driven repayment plan, the Biden administration is proposing that unpaid monthly interest be covered by the government. That holds true even if the monthly payment is set at $0 because of your income level. This would help you avoid a growing loan balance that makes it even harder to pay off the debt.
Improving Financial Future for Millions of Americans
Ultimately, the student loan forgiveness plan could mean a sizable step toward a better financial future for millions of Americans. If you have federal student loan debt and earn less than $125,000 – or $250,000 as a couple – you’ll likely see a student debt forgiveness of $10,000. If you received a Pell grant, you could be eligible for even more. Be sure to stay updated by the Department of Education so that you can apply once the program goes live. With the final student loans pause in place, the updates to the IDR plan may also be a lifesaver for millions of Americans.
The Biden loan forgiveness plan also means you’ll have more money to invest. Be sure to consider your options. Whether you want to put the extra money toward your retirement or make a big purchase, it’s important to be informed. If you really want to make that money work for you, you might try your hand at real estate investment. Crushing REI has tons of educational content to help you along the way. Check out our guide on the BRRR method or house hacking to get started!
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