President Biden’s long-awaited student loan cancellation announcement last month raised as many questions as it answered, causing at least one major lender’s website to crash as borrowers scrambled to check their eligibility.
What’s clear: Individuals making less than $125,000 and couples filing jointly for less than $250,000 can receive up to $10,000 in student debt relief — and that maximum goes up to $20,000 if the borrower has ever received a Pell – subsidy.
What has been murky: Which loans will the termination apply to first? Does the payment amount on any remaining student debt change after cancellation? And what happens to FFELP loans?
Here’s the latest on how student loan cancellation will actually work.
1. When can I apply?
The student loan cancellation application will be available in early October, according to the Ministry of Education.
While about 8 million borrowers can see cancellation automatically, most must submit an application. The application will initially only be available online, but borrowers can expect access to a paper version at a later date.
Borrowers must apply for cancellation before the window closes on December 31, 2023. So if you have access to the online application, don’t wait for the paper to ensure your application is processed as timely as possible.
2. How do I get ready for cancellation?
There are two main steps you can take to prepare for cancellation:
- Verify that you meet the income criteria.
- Make sure your contact information is up-to-date on Studentaid.gov and with your service provider.
To be eligible, your annual federal income for 2020 or 2021 must be less than $125,000 if you filed as an individual. If you filed jointly, the limit is $250,000. If you have earned above the maximum in one of the two years, but have reached the threshold in the other, you may qualify with the lower annual income.
While it may seem safe to assume that adjusted gross income is what qualifies for federal annual income, the Department of Education has not spelled that out explicitly.
3. How much will I get?
Here’s the deal about Pell Grant eligibility: If you’ve ever received a Pell Grant of any amount and meet the income requirement, you get $20,000 in cancellation ($10,000 based on income requirement plus an additional $10,000 for being a Pell Grant recipient).
The Pell Grant award does not have to be related to the time, school or program for which you used your federal student loans. Let us e.g. say you received a Pell grant for your community college and didn’t use loans. Ten years later, you went back and completed your bachelor’s degree with loans. These loans may qualify for the $20,000 cancellation.
This is especially important for parent PLUS borrowers. A Parent PLUS loan is not necessarily eligible for the extra $10,000 in cancellation just because the child benefiting from the loan was a Pell Grant recipient. In order for a Parent PLUS loan to get the extra relief, the parent borrower must at some point have received a Pell Grant for their own education.
The extra $10,000 is not prorated based on the amount of your Pell Grant. A Pell Grant award of any amount qualifies for the additional $10,000 in its entirety.
4. Do FFELP loans count?
Some FFELP loans will be canceled. Here are all the loan types that are eligible:
- All loans under the direct loan program.
- Federally Owned FFELP Loans.
- Defaulted on FFELP loans with a guaranty agency.
- Federally Owned Perkins Loans.
- Other nonperforming loans, including commercially serviced Stafford loans.
Commercially owned FFELP loans can count if you consolidate them into a direct loan. Consider the pros and cons of consolidation to make sure it’s worth it.
Check Studentaid.gov to check what types of loans you have. How to find the information on the portal.
- Log in to Studentaid.gov.
- Select “My Aid” from the drop-down menu below your name.
- See your loans listed in the “Loan breakdown” section.
- Expand “View Loans” and select “View Loan Details” next to each loan to see more details.
5. Will a payment refund increase my cancellation amount?
You can request a refund of student loan payments made during the pandemic if payments were not required. However, Scott Buchanan, executive director of the Student Loan Servicing Alliance, recommends asking for a refund only if you’re experiencing a financial hardship.
The Education Department has not announced the official date it will use to determine your discharge loan balance, but Buchanan expects a clarification to be posted on the department’s website in the next few weeks.
“If you’re trying to get a repayment to maximize or optimize your loan forgiveness, my suggestion to borrowers is to wait,” says Buchanan.
6. Will my payment change after cancellation?
Borrowers will see their loans reamortized based on their post-cancellation balances. The monthly payments are likely to decrease as a result. However, the remaining payment period remains the same.
“Ideally, if everything is still in order, if you can afford the (initial) payment, then go ahead and make the larger payment,” says Damian Dunn, certified financial planner and vice president of corporate financial wellness platform Your Money Line . Borrowers “know how painful student loan debt can be,” he says. “If they can get under it sooner, even better.”
7. Can I choose which loans are canceled?
Borrowers with multiple loans cannot choose how they want their cancellation applied. Here is the order in which loans will receive relief:
- Defaulted federally owned loans.
- Defaulted on commercially owned FFELP loans.
- Direct Loans and Federally Owned FFELP Loans in good standing.
- Federally Owned Perkins Loans.
The Education Department will use the following order to cancel loans if you have several loans of the same type:
- Loan with the highest statutory interest rate.
- If the interest rate is the same, unsubsidized loans get relief before subsidized loans.
- If the interest rate and subsidy are the same, the most recent loans get relief.
- All other factors being equal, the loan with the lowest combined principal and interest balance gets relief.
How can I get updated information?
You can find the latest updates on the Education Department’s website. Once the application is active, borrowers should call 833-932-3439 for assistance.
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