What’s the Current State of Student Loan Forgiveness?

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Mark Kantrowitz

By Mark Kantrowitz

August 25, 2022

While campaigning for President, Joe Biden promised $10,000 in student loan forgiveness per borrower. Now President Biden has announced that the government will cancel as much as $20,000 in federal student loan debt per qualifying borrower. The announcement also included an extension of the federal student loans payment pause and more. Here’s a roundup of the latest announcements and other recent developments. This article will continue to be updated as more details become available.

Latest Student Loan Forgiveness Updates

President Biden announced on August 24th, 2022 that Americans earning less than $125,000 annually ($250,000 for households) would receive up to $10,000 in federal student loan forgiveness, while Pell Grant recipients would have $20,000 forgiven.

Additionally, the payment pause on federal loans will continue through the end of 2022, but payments will resume thereafter. The Education Department will soon lay out the plan in detail and provide information on an application that will be used to obtain the forgiveness.

Aside from the forgiveness component, Biden said that income-driven repayment plans would be capped at 5% of discretionary income, compared to the current 10% limit.

Prior to the latest announcement, the Biden Administration had focused on discharging student loans borrowed to attend for-profit colleges that were found to be defrauding student borrowers, such as Corinthian Colleges. The Education Department announced a $5.8 billion group discharge to cancel loans associated with those schools on June 1, 2022.

Also recently, an overhaul of the Public Service Loan Forgiveness program was announced to “restore the promise of PSLF,” according to the Education Department factsheet. A key aspect of the development is a one-time waiver that will allow payments from all federal student loan programs, including those not previously eligible, to be counted toward progress for Public Service Loan Forgiveness. These changes will expire on October 31, 2022.

The Department of Education announced on August 19, 2021 that over 300,000 borrowers who have a total or permanent disability will receive $5.8 billion in forgiveness. The Department of Education would begin identifying borrowers eligible for the automatic discharge by matching data from the Social Security Administration.

Other Recent Student Loan Forgiveness Developments

The U.S. Department of Education and the Justice Department are reviewing whether the President has the legal authority to cancel up to $50,000 in federal student loan debt through executive action. There is no timetable on when these reports will be issued. There may be delays because Congress has not yet confirmed key policy advisors in both departments.

The White House’s Domestic Policy Council will consider how student loan forgiveness should be targeted, regardless of whether it is implemented through executive action or legislation.

Borrowers should beware of student loan scams that promise debt forgiveness, in exchange for a fee. When student loan forgiveness is implemented, it will most likely be automatic and free. The U.S. Department of Education will publish an update on the StudentAid.gov web site.

The U.S. Department of Education has recently taken a few steps toward providing student debt relief for which they have clear legal authority:

Restoration of Total and Permanent Disability Discharges

Some disabled borrowers who qualified for a Total and Permanent Disability Discharge had their repayment obligation reinstated because they failed to submit the annual earnings paperwork during the pandemic. The U.S. Department of Education will reverse the reinstatements and provide other student loan debt relief for 230,000 borrowers with Total and Permanent Disability Discharges.

Expansion to the Payment Pause and Interest Waiver

Borrowers with a federally-held federal education loan are eligible for administrative forbearance and an interest waiver through January 31, 2022. Unfortunately, borrowers with defaulted loans in the Federal Family Education Loan Program (FFELP) were not eligible because those loans were held by guarantee agencies on behalf of the U.S. Department of Education. The U.S. Department of Education has decided to make these borrowers eligible for the federal student loan payment pause and interest waiver, affecting more than one million FFELP borrowers. FFELP borrowers who defaulted during the pandemic will also have their loans returned to good standing and the defaults removed from their credit histories.

Full Debt Forgiveness for Approved Borrower Defense to Repayment Discharge Claims

The Trump administration implemented a scheme in which defrauded borrowers received only partial forgiveness of their loans. The partial relief methodology was flawed. The U.S. Department of Education has decided that all borrowers whose borrower defense claims were approved will receive a full discharge of their loans. This will affect 72,000 borrowers who were subject to predatory student lending.

Tax-free Student Loan Forgiveness

Congress also took action concerning the tax treatment of student loan debt forgiveness. The American Rescue Plan Act of 2021 included tax-free status for all student loan forgiveness and debt cancellation through December 31, 2025. This primarily affects the forgiveness after 20 or 25 years in an income-driven repayment plan, since most other forms of student loan cancellation already had tax-free status. However, it sets the stage for future student debt forgiveness, whether implemented by executive action or new legislation.

Congress previously provided employer-paid student loan repayment assistance programs, or LRAPs, with tax-free status through December 31, 2025 in the Consolidated Appropriations Act, 2021.

The Biden administration and Congress have not yet taken any action concerning the bankruptcy discharge of student loans.

Likely Future Student Loan Forgiveness Developments

The next event will occur when the U.S. Department of Education and Justice Department issue reports concerning the executive branch’s legal authority to implement broad loan forgiveness without Congress.

These reports will likely conclude that the President does not have the legal authority to implement broad student loan forgiveness through executive action. This will force Congress to act. Congress might consider legislation to forgive student loans in the fall, as part of a budget reconciliation bill. The Biden Administration has repeatedly reiterated that the President would sign a bill offering $10,000 in federal student loan forgiveness to all borrowers.

The timing of loan forgiveness will also depend on which loans are eligible.

  • If student loan forgiveness is limited to federally-held loans, the process will be automatic and will happen within a month or two of the President signing the bill into law, assuming that there aren’t complicated eligibility restrictions. If there are limits based on income or other information not immediately available to the U.S. Department of Education, that may make the process more complicated and add months.
  • If commercially-held federal loans are eligible, it will take a little longer for those loans, since the U.S. Department of Education would have to make payments to the FFELP lenders to pay off the balances.
  • If private student loans are eligible, it will take even longer, because borrowers will have to submit an application that lists the loans, the loan id numbers, and the name and payment address of the lender. The U.S. Department of Education does not have any records of loans made through purely private student loan programs.

Consolidation

Borrowers with FFELP loans might consider consolidating them into a Federal Direct Consolidation Loan, in case the loan forgiveness is limited to student loans that are held by the federal government. Consolidating FFELP loans can also make them eligible for the payment pause and interest waiver, which runs through May 1, 2022.

The main risk associated with consolidation is that it resets the monthly payment clock for qualifying for 25-year forgiveness in an income-based repayment plan. Also, if a student borrower is receiving discounts from the FFELP lender, they will lose that benefit if they consolidate. Direct Loans offer a 0.25% interest rate reduction for borrowers who sign up for AutoPay, and no other discounts. Otherwise, there’s no significant downside to consolidation.

Refinance

Borrowers who are thinking about refinancing federal loans into a private loan to lock in current low interest rates may want to wait. Loans that are eligible for the payment pause and interest waiver effectively have a 0% interest rate through August 31, 2022. So, refinancing will increase the borrower’s costs in the short term. Borrowers with high interest rates may wish to start considering student loan refinancing options, especially as the Federal Reserve begins to hike its target Federal Funds rate. On the other hand, borrowers with private student loans do not risk losing forgiveness if they refinance their private student loans into a new private loan.

Borrowers who still have jobs and are able to continue making payments on their student loans should bank the money or pay down other debt, instead of making extra payments on their loans. It’s a good opportunity to build or bulk up your emergency fund. Generally, any borrower who expects to receive loan forgiveness should not make extra payments when they are not required to do so, as that just reduces the amount of forgiveness they will eventually receive. After the details of student loan forgiveness are announced, borrowers can use the banked money to pay down debt as appropriate.

Existing federal student loan forgiveness programs

If a borrower expects to receive loan forgiveness under President Biden, they can stop making federal student loan payments during the payment pause and interest waiver period, which was extended through December 31, 2022.

But, some borrowers may be eligible for an existing student loan forgiveness program. For example, Public Service Loan Forgiveness (PSLF) is available to borrowers who work full-time in a qualifying public service job. A borrower is eligible for loan forgiveness after making 120 qualifying payments.

During the payment pause, borrowers can still earn credit toward PSLF. As long as they continue to meet the eligibility requirements and submit the PSLF form, they will receive qualifying payment credit.

Borrowers who will not qualify for loan forgiveness when the relief period ends can also consider an income-driven repayment plan. With an income driven repayment plan, monthly payments are adjusted based on the borrower’s annual income. After a specified period of time (20 or 25 years) the debt is forgiven.

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