What You Need to Know About Student Loan Forgiveness

College degrees don’t come with money-back guarantees. But as many as 40 million student loan borrowers across the country may soon be eligible for partial or complete student loan forgiveness.

Under the Student Debt Relief Plan, some student loan recipients will qualify for one-time relief of between $10,000 and $20,000. The plan, announced by the Biden-Harris Administration in August 2022, should discharge—that is, pay off completely—the remaining balance for nearly 20 million borrowers, according to the White House.

There are three main components to the relief plan:

• A final extension of the pandemic-related student loan repayment pause until Dec. 31, 2022
• Student loan debt cancellation of up to $10,000 or $20,000 for qualifying borrowers
• A new income-based repayment plan that reduces monthly payments for lower- and middle-income borrowers

The U.S. Department of Education will provide up to $10,000 in debt-relief for borrowers who did not receive a Pell Grant in college and up to $20,000 for recipients who received a Pell Grant, as long as they make less than $125,000 a year individually or $250,000 as a household.

This relief applies only to loans held by the U.S. Department of Education, including subsidized and unsubsidized loans, Parent PLUS loans, and Graduate PLUS loans. It even covers defaulted loans. But private loans are not eligible.

The plan caps forgiveness to outstanding balances. Even if you qualify for up to $20,000 in debt relief as a Pell Grant recipient who makes less than $125,000, if you only owe $10,000 in federal loans, you’ll only receive $10,000 in relief. The balance will not be distributed to you.

An estimated 8 million borrowers should receive relief automatically because their current income data is already available to the U.S. Department of Education.

That said, the Federal Student Aid office encourages everyone eligible to complete an application, which should be released on StudentAid.gov in early October. If you sign up for an account now, you’ll receive updates via email and text when applications are available.

The Department of Education is encouraging those who qualify to apply before the loan repayment pause expires at the end of the year, but people can wait as long as Dec. 31, 2023 to submit an application.

Some borrowers—including those employed by nonprofits, military, or federal, state, Tribal, or local governments may qualify to have their remaining student loan balance completely forgiven through the Public Service Loan Forgiveness (PSLF) program.

The PSLF forgives remaining balances after 120 payments for those working full-time for a qualifying entity. Temporary changes under the Student Debt Relief Plan add flexibility to those requirements, but they are short-lived. Those who qualify only have until Oct. 31 to apply.

Many student loans qualify for at least one income-based repayment plan. This simply means that your monthly payment is capped at a percentage of your monthly discretionary income—which is your household income after taxes and necessities are paid.

The debt relief plan would reduce repayments on undergraduate loans to 5% of discretionary monthly income for lower- and middle-income borrowers. Right now, most plans are generally 10% of discretionary income.

If the plan is approved, it would also raise the amount of income that is considered non-discretionary—essentially protecting a higher amount of income from repayment. According to the Federal Student Loan office, this change would guarantee that borrowers earning under 225% of the federal poverty level—around $15 an hour—would not make any monthly payments.

The rule would also forgive loan balances of less than $12,000 after 10 years instead of 20 years of repayments. Additionally, the borrower’s unpaid monthly interest would be covered so loan balances would not grow, as long as they are current on their monthly payments.

Forgiveness, cancellation, and discharge means basically the same thing: you’re no longer required to make payments. But they are used in different situations.

Forgiveness or cancellation is used if you no longer need to make payments because of your job—like if you qualify for the PSLF. In the case of total and permanent disability or the closure of the school where you received your loan, the term discharge is often used.

That depends on who you ask. The Biden-Harris Administration plan will cost around $24 billion per year, according to White House estimates. The non-partisan Congressional Budget Office estimates $400 billion. Private estimates put the figure much higher. One analysis from The Penn Wharton Budget Model at the University of Pennsylvania puts the total cost at an estimated $605 billion. Details on program funding have yet to be released.

Student loan debt can make it hard for people to start a business or purchase a home, because lenders factor in existing financial obligations. This is called a debt-to-income ratio, and like it sounds, it weighs how much of your monthly income goes to debt repayments.

With the expected cancellation of student loan debt, and one less monthly debt repayment—or at least a lowered amount for those with loans exceeding the relief amount—millions of borrowers could improve this ratio.

Borrowers could also see a boost to their credit score, but those changes may take three months or more to appear on credit reports after student loan balances are reduced or eliminated.