(Bloomberg) -- The Biden administration's announcement that qualifying borrowers can receive up to $20,000 in forgiveness on federally held student loans first elicited cheers from many of the 43 million Americans eligible to have their debt wiped. Then came a barrage of questions.
The Department of Education has offered some information on what borrowers can expect and will release more in the coming weeks.
For now, there are several key dates to know: Applications will open online in early October and take four to six weeks to process, the department has said. That means that borrowers should fill out forms by November 15, according to a graphic posted by Education Secretary Miguel Cardona, in order to receive forgiveness by the time a pandemic-era payment pause ends on December 31. Applications close next year on December 31, 2023. Separately, applications for limited expansion of the Public Service Loan Forgiveness program close on October 31.
Here are some steps you can take to be prepared when applications become available:
1. Check if you’re eligible.
If you made less than $125,000 in 2020 or 2021 — or if you’re married and you and your spouse made less than $250,000 — and you took out federal student loans prior to June 30, 2022, you’ll qualify for forgiveness. The number to check is your adjusted gross income, or AGI, on tax returns from either of the past two years.
Pell Grant recipients will receive up to $20,000 in debt forgiveness, and holders of other types of federal loans will receive as much as $10,000. All federally-held student loans – including undergraduate loans, graduate loans, spousal loans and Parent PLUS and Graduate PLUS loans — are eligible.
Borrowers should note that forgiveness is not per loan, but rather per borrower — meaning that if you took out multiple federal loans for your own education, or one loan for yourself and one Parent PLUS loan for a child, your forgiveness is still capped at $10,000 or $20,000, said financial-aid expert Mark Kantrowitz. Pell Grant recipients who took out one Pell Grant and other federal loans are still eligible for the full $20,000 in forgiveness, even if their grant was for less than that amount.
2. Check if you need to fill out an application.
The vast majority of borrowers will need to fill out an application to receive relief. However, around 8 million borrowers will be automatically enrolled in the program because the Department of Education already has access to their income information. That includes around 6 million current students who recently filled out the Free Application for Federal Student Aid and another 2 million borrowers who have income-driven repayment plans and have submitted income information for 2020 or 2021. The Department of Education will contact borrowers who are automatically eligible to notify them.
If you are not in that group, you’ll need to complete an application.
3. Sign up for Education Department updates, make sure your contact information is up-to-date with your loan servicer.
To make sure you’re notified when the forgiveness application goes live, sign up for updates at this Education Department webpage by selecting “NEW!! Federal Student Loan Borrower Updates” and entering your email address.
Then, confirm with your loan servicer that your contact information is up-to-date. If you aren’t sure who your loan servicer is, you can check on your personal dashboard at studentaid.gov.
4. Gather your 2020 and 2021 tax returns.
The purpose of the application is to gather income information to determine eligibility, so borrowers should have 2020 and 2021 tax returns on hand in order to find their adjusted gross income.
5. Decide if you want to consolidate eligible private loans — and if you do, start immediately.
Private loans, including Federal Family Education Loans (FFELs) that are backed by the government but were originally held by private companies, are not eligible for relief — but borrowers with FFEL loans can consolidate them into direct federal loans in order to become eligible. They can do so by going to the federal student aid website and filling out an application (available here), Kantrowitz said.
Applicants who wish to consolidate their loans into direct loans in order to be eligible for forgiveness should start that process immediately, Kantrowitz said, as it can take 30 to 45 days for consolidation to be processed and the department recommends that borrowers submit applications by November 15.
6. Check if you are eligible for a refund for any payments you made during the pandemic.
Payments made during the pandemic-era pause can be refunded and then forgiven. In some cases, the department said, refunds will be automatic: Borrowers who successfully apply for and receive student loan forgiveness will be automatically refunded the amount of their voluntary payments if those payments “brought your balance below the maximum debt relief amount you're eligible to receive but did not pay off your loan in full,” according to the department's FAQ.
Other borrowers with direct, FFEL or Perkins loans that are held by the Department of Education can still receive refunds and then forgiveness for voluntary payments made during the pandemic — they’ll just have to contact their loan servicers.
7. Weigh other forgiveness and repayment options.
The one-time loan forgiveness plan isn’t the only option available to debtors. Last October, the Department of Education announced a one-time expansion of eligibility for public service loan forgiveness. Applications for that program are due on October 31 and are available on the student aid website.
The department is also undergoing a one-time adjustment of income-driven repayment plans to address past inaccuracies in counting and eligibility. This adjustment is automatic, so you don’t need to worry about an application. But only borrowers with direct loans are eligible, meaning those with FFEL loans who want to qualify need to consolidate those loans into a direct loan. More information is available on the student aid website.
The Department of Education has proposed a new rule for income-driven repayment that would cap monthly bills at 5% of discretionary income, instead of 10% — cutting payments in half for many borrowers. Those rules likely will not be finalized until several months into 2023, student loan experts say, but borrowers should take note of the potential change for planning purposes.
Borrowers who are in default on direct loans, FFEL loans and Perkins loans held by the Department of Education are eligible for the Fresh Start program, which was announced in April and lasts one year after the payment pause ends on December 31. The department will reach out to eligible borrowers “in the coming months” with instructions on how to access the program, according to the aid website.
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