What you need to Know about the Student Debt Relief Plan Announced 8/24
August 29, 2022

On 8/24/22 the Department of Education released details about the three part plan offering borrowers student debt relief. Read on to understand how the Student Debt Relief Plan announcement impacts your specific loan situation.

 

 

Part 1: Payments will resume in January 2023.

My federal student loan payments aren’t paused, what relief is available to me?

The payment pause only applies to Department of Education held loans. All Direct Loans but generally not FFEL/Perkins loans are held by the Dept of Ed. But, if you have FFEL or Perkins loans, you can  consolidate to a Direct Consolidation Loan to get some relief.

      • If you’re pursuing Public Service Loan Forgiveness (PSLF) avoid consolidating qualifying Direct Loans after the 10/31/22 deadline so you don’t reset the qualifying payment count to zero.
      • You can consolidate your ineligible loans by themselves after the 10/31/2022 limited waiver expiration to avoid resetting the payment count on qualifying loans.

How does this impact other loan forgiveness like PSLF?

Paused payments still count as progress toward PSLF, Income Driven Loan Forgiveness (IDLF), and Teacher Loan Forgiveness (TLF).

How can I plan for payments in January?

This is the final payment pause extension, so make a plan to resume payments in January. This post is a good place to start Preparing for Federal Student Loan Payments to Resume.

 

Part 2: Up to $10,000 or $20,000 of cancellation is part of the student debt relief for at need borrowers.

Who is this cancellation relief available to?

Borrowers with an annual income below $125,000 (for individuals) or $250,000 (for married couples or heads of households) could qualify for $10,000 or $20,000 of cancellation.

Current students with loans from 6/30/22 and prior are eligible for this cancellation.

  • Dependent borrowers’ eligibility is based on parental income.

Parent PLUS loans & graduate loans are eligible for this cancellation.

 

How do I know if I qualify for $10,000 or $20,000 of cancellation as part of the student debt relief?

  • You can receive up to $10,000 of student debt cancellation if you aren’t a Pell Grant recipient.
  • You can receive up to $20,000 of cancellation if you are a Pell Grant recipient.

 

How do I make sure I get the student debt cancellation?

Step 1: Apply for a Direct Consolidation Loan if you don’t have Direct Loans. This cancellation is only for loans held by Department of Education. That means borrowers with FFEL/Perkins Loans will likely need to apply for a Direct Consolidation Loan or expect to wait longer for cancellation.

Step 2: Complete the application to verify your income before 12/31/2023. There is currently no application to verify income. But you can expect to see an application in early October. Borrowers who are already on IDR plans may have their income information used to determine eligibility. However, currently the Department of Education recommends that all borrowers submit their applications.

    • The Department of Education suggests submitting the application no later than 11/15/22 to receive cancellation prior to payments resuming in January.

 

When can I expect to see the student debt cancellation?

After you apply, can expect cancellation within 4-6 weeks.

 

Is the cancellation amount taxable?

You won’t have to pay federal income taxes on your cancellation. However, 13 states are considering taxing the cancellation. 

 

Part 3: Changes to Income-driven repayment mean lower payments for everyone.

 

How will my income driven payments be more affordable under the new rules?

Changes to discretionary income calculations mean your payments will be lower.

    • The new discretionary income calculation will be: adjusted gross income (AGI) – 225% of the federal poverty level
      • Used to be 150% of federal poverty level

 

Balances will no longer grow under income driven repayment plans.

The Dept of Ed will cover the unpaid interest for borrowers whose required minimum monthly payment does not satisfy the total interest accumulated. Borrowers will still need to make monthly payment and balances will stay flat for those who aren’t able to keep up with interest.

 

What is the new income-driven repayment plan that’s only 5% of discretionary income?

This new plan is for undergraduate loans only and has the lowest possible monthly payment of all the income driven plans. The monthly payments under this new plan will be 5% of discretionary income. Now even more borrowers might be able to access loan forgiveness programs like PSLF or income-driven loan forgiveness.

 

Some borrowers can get their loans forgiven after 10 years of income-driven payments.

Any borrowers who have an original loan balance of $12,000 or less will have their loans cancelled after 10 years of income-driven payments. Borrowers with original loan balances >$12,000 will still have to pay for 20-25 years before getting their balance cancelled.

 

Additional Resources

Federal Student Aid Student Debt Relief Plan Explained

What You Need to Know About the PSLF Limited Waiver Opportunity

Three Features of the PSLF Waiver You Might Not Know

List of states which may tax cancellation