The White House says President Joe Biden’s plan to forgive student loans, which has never been done before, could give automatic debt relief to up to 8 million Americans.
Most people who owe money on federal student loans can get some or all of it forgiven. If they got a Pell Grant, a type of financial aid for low-income undergraduate students, they could get up to $20,000. You can only get help if you make less than $125,000 a year, are married, or are the head of a household and make less than $200,000.
People whose income information is already on file with the U.S. Department of Education and can be verified as eligible without waiting for an application will have their loans automatically canceled.
Here is what you need to know.
Who is Eligible for Automatic Loan Cancellation?
The Education Department plans to use data from the Free Application for Federal Student Aid, or FAFSA, and from income-driven repayment plans to automatically validate specific borrowers’ income data for tax years 2021 or 2020. (whichever is lower).
Families use the FAFSA every year to get help paying for college. Income-driven repayment plans make it easier for borrowers to repay their loans by limiting their monthly payments to a certain percentage of their income.
Both need proof of income, but time is the most critical factor because the government is only interested in revenue from 2020 or 2021.
Mark Kantrowitz, an expert on higher education, says that if you recertify your wages on an income-driven repayment plan in 2021 or 2022, you might be eligible for the automatic cancellation. He also said that you must have filled out the 2022–2023 school year FAFSA.
Should I Still Seek Assistance if the Government Knows My Income Information?
Yes. When the application goes live, which the Education Department says will be in “early October,” experts say to make a formal request even if you think the government already knows about your income.
Kantrowitz says, “There is a chance that any new government program will have problems, so it is smart to apply just in case.”
How Quickly Be Will Forgiveness Granted?
Kantrowitz says the debt could be taken off the borrower’s account in as little as six weeks.
When they get the loan forgiveness, “they should also get a letter from the loan servicer explaining how it was applied to their loans,” Kantrowitz said.
Was My Income Less Than the Threshold?
Borrowers who make less than $125,000 a year, married couples, or heads of households will be the only ones who can get help.
It would help if you looked at your most recent tax return to ensure your income was within those limits in 2020 or 2021. (either one will do) The Education Department will look at your “adjusted gross income,” or AGI, which may differ from your actual salary.
Find your AGI for 2020 and 2021 on Line 11 of the first page of your tax return, which is often called Form 1040.
What Happens After the Cancellation?
According to certified financial planner Douglas Boneparth, owner of Bone Fide Wealth in New York, a lower monthly payment on a student loan “is an opportunity to reexamine fundamentals like cash flow.”
“Money that was earlier used each month to pay down debt can now be utilized to enhance savings or investment,” he added. “This is a significant change from the situation just a few years ago.”