Student debt forgiveness curveball means some borrowers won't be eligible
Student loan forgiveness was thrown a bit of a curve after one group of borrowers discovered that a limited backdoor strategy suddenly closed.
About 770,000 borrowers would lose student loan forgiveness, according to a Biden administration official.
But an outside expert estimated that the number could be significantly bigger. The borrowers who are not going to be eligible for forgiveness are those who hold older Federal Family Education Loans and Perkins loans that are not held by or on behalf of the U.S. Department of Education.
Mark Kantrowitz, a student loan expert and author of “How to Appeal for More Financial Aid,” said the number impacted could be up to 4 million, depending on how many have consolidated already.
Kantrowitz said he's using that figure based on data published earlier by the U.S. Department of Education in the FSA Data Center.
Kantrowitz acknowledged that it is possible that a significant number of borrowers applied for consolidation after the Aug. 24 announcement and before the change was made Sept. 29. But he doubts the group of applications would be so large that the figure would drop to 770,000.
The lower figure is based on the fact that some borrowers would not have qualified based on the income limits for the forgiveness program, some did consolidate already and will qualify and others would not have been eligible to consolidate, according to an administration official. The Education Department did not give a specific number.
We are talking about some fairly old loans here, including loans for those who graduated from college or left school 10 years ago or more.
The FFEL program ended June 30, 2010. Due to the maturity of the student loan portfolio, many of those loans are likely to be in an extended or income-based repayment plan, Kantrowitz said.
Some loans could still be in a standard 10-year repayment plan, Kantrowitz said, but it’s likely those borrowers entered repayment more recently than 12 years ago or took advantage of deferments or forbearances.
As part of earlier discussions involving the new forgiveness program, it was expected that these borrowers would have been able to consolidate those loans into a Federal Direct Consolidation Loan to qualify for the one-time forgiveness program, Kantrowitz said.
“They are out of luck,” he said.
Six GOP-led states brought a lawsuit against the Biden administration to try to halt the sweeping forgiveness plan, charging that the administration overstepped its executive powers. The states are Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina.
The Biden administration quickly dropped the eligibility for this limited group in response to that lawsuit as a way to keep the program going forward for tens of millions of other borrowers. The borrowers who don't qualify now have loans backed by the federal government but owned by private lenders.
More: How parents get helpStudent debt forgiveness applies to PLUS loans
The Education Department put out a notice this week saying that as of Sept. 29, “borrowers with federal student loans not held by Education Department cannot obtain one-time debt relief by consolidating those loans into Direct Loans.”
To confuse matters further, the Education Department noted that borrowers who had applied to consolidate into the direct loan program before Sept. 29 are eligible.
The news will no doubt spark more uncertainty about what kind of debt relief borrowers can expect. The Education Department also said it is “assessing whether there are alternative pathways to provide relief” to these borrowers and is discussing options with the private lenders.
Here are five questions you might want to know about debt relief:
When is the application available?
We're looking at sometime in October. See StudentAid.gov. The online application will be short, the Education Department said, and borrowers won’t need to upload any supporting documents or use their FSA ID to apply.
You should aim to try to meet a Nov. 15 deadline. Borrowers should file an application for student debt forgiveness fairly quickly for adjustments to be reflected in student loan monthly payments, which will resume in January after a pandemic-related moratorium of almost three years on payments.
You'd have until Dec. 31, 2023, to apply, but you'd want to apply as soon as possible.
Who needs to apply?
Tens of millions of borrowers who have federal student loans will need to apply. Only 8 million borrowers or so are expected to see automatic relief.
You’d get an email and text message — if you’re signed up for text alerts — if the Education Department determines that you qualify for relief without applying.
More: Questions answeredStudent debt forgiveness ahead
It all depends what kind of data is available about your financial situation. When it comes to automatic relief, the department will look at information for tax years 2020 or 2021 as supplied on the Free Application for Federal Student Aid and income-driven repayment applications on file.
“If we have borrower data for both years, we'll use the year with the lower income,” the Education Department stated in its online fact sheet.
Will all my debt be forgiven?
Don’t you wish. Some will see up to $10,000 in federal loans forgiven. Others would see up to $20,000 in debt relief if they had a federal Pell Grant while in college.
Borrowers with loans held by Education Department are eligible for this relief if their individual income is less than $125,000 or $250,000 for households.
Will Michigan tax this forgiven debt?
No. The State of Michigan will not treat student loan relief as taxable income. The federal government won’t treat debt forgiven in this program as taxable income. It’s estimated that The 1.4 million borrowers in Michigan could save thousands of additional dollars if they qualify for federal student loan forgiveness.
Can I decide what loans will be forgiven?
No. The highest-cost debt will be forgiven first. Relief will apply to loans in the following order, according to the Education Department:
Defaulted loans held by the Education Department.
Defaulted loans under the commercial Family Federal Education Loan program.
Loans in the Direct Loan Program and Family Federal Education Loan program held by the Education Department.
Perkins loans held by the Education Department.
If you have multiple loans in the same program, forgiveness first applies to the loans with the highest rate. If rates are the same, unsubsidized loans would be forgiven before subsidized loans.
Contact Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.
This article originally appeared on Detroit Free Press: Some Federal Family Education, Perkins student loans won't be forgiven
