Federal Student Loan Forgiveness Update

As I reported to you a few weeks ago, the Supreme Court ruled that the Biden Administration can’t move forward with its plan to forgive up to $20,000 in federal student loans for qualified borrowers.

But the Biden administration is still moving forward with other ways to help federal loan borrowers. One plan is already going into effect and is not subject to legal challenges. Another plan may take up to a year to get approved, but if it does it could provide relief for millions of federal loan borrowers. Let’s get into some of the details.

Loan forgiveness for borrowers who have made 20 to 25 years of payments in an income-driven repayment (IDR) plan.

These plans have had a variety of names over the years, but with the same basic rules: If you qualified for an income-based repayment plan and made timely monthly payments for 20 or 25 years (it depends on the plan you enrolled in), any remaining balance was supposed to be forgiven. But the bookkeeping for these plans has been awful, and many borrowers’ accounts were not properly credited for timely payments.

The Biden Administration has announced a plan, effective immediately, that basically cleans up the mess. It says it will be forgiving $39 billion in federal student loans owed by more than 800,000 borrowers who have fulfilled the 20-25 year repayment requirement. Even better, the administration is notifying people starting this month if their remaining balance is being forgiven; there is no need to apply.

And some more good news if you are one of the 800,000, is that any forgiven amount will not be counted as income on your federal tax return. (In the states that tax forgiven loan balances, you may have a tax bill if states don’t step in and follow the federal government’s lead to not tax forgiven student loan balances.)

If you’re in an IDR plan but haven’t hit the 20- or 25-year payment requirement, there will be some good news coming your way next summer. The Department of Education is launching a new IDR plan that will ensure your balance can never grow (from added interest payments) if you make on-time payments. The Department of Education says anyone in the new SAVE Plan making at least $15 an hour will save more than $1,000 a year in student loan payments compared to current IDR plans. Some IDR borrowers will be automatically enrolled in this new plan. And all borrowers can apply for the SAVE Plan. You can learn more here.

Using an existing law to offer broader relief to more borrowers.

There’s also a proposal that could help a lot more student loan borrowers. The Department of Education is pursuing a different path to deliver widespread debt forgiveness similar to the proposal the Supreme Court nixed. The difference this time is that the administration is using existing legislation—The Higher Education Act—as the underpinning for the program. That puts it on more solid legal ground than the original plan, which was presented as a necessary emergency response to the economic fallout of the Covid pandemic. But we’re going to need to be patient. There is a set rulemaking process for this proposal tied to the Higher Education Act that must go through. And that could take up to a year. I will keep you posted.