What You Must Know About Student Loan Cancellation

Student Loan Cancellation Planning

The Biden-Harris administration announced that student loan borrowers would receive forgiveness of $20,000 for Pell Grant recipients or $10,000 for all other borrowers. The forgiveness applies exclusively to federal loans, not private student debt. 

You must have had an adjusted gross income (AGI) of less than $125,000 for individuals or $250,000 for married couples in either the 2020 OR 2021 tax year. This requirement is a big deal because many borrowers can qualify based on one year but may not be eligible based on another year. 

For many, the student loan debt cancellation is automatic for borrowers who have filled out the FAFSA since 2020. However, many borrowers will have to stay on top of the news and potentially take action soon. 

If you’ve already paid off your federal student debt, have FFEL debt, or live in a state where cancellation is taxable, you might consider taking action. 

What If You Paid Off Your Student Loan Debt?

If you’ve already paid off your federal student loan debt, you may think that cancellation isn’t for you. Thanks to the CARES Act, you can request a refund for your federal student loan payments made since March 13, 2020. You can reinstate your $0 balance loan by contacting your loan servicer and then request forgiveness later. 

You’ll want to request up to $20,000 if you’re a Pell Grant recipient or $10,000 for everyone else. Once your loan is reinstated, you can apply for the Biden-Harris forgiveness if income and other requirements are met. There’s no downside, but it will require time, patience, and potentially state income tax (more on that later). 

Are You Pursuing IDR or PSLF?

If you’re on track for public service loan forgiveness (PSLF) or forgiveness through income-driven repayment, you should request a refund for all payments made since March 13, 2020. There isn’t a benefit to making extra payments to your loans. 

If you’re curious if these strategies are right for you, you can book a customized repayment plan. 

Federal Family Education Loans (FFEL)

If you have federal student loans issued through the FFEL program, your loans will not automatically receive forgiveness. They are assessing the possibility of including FFEL loans without consolidation, but recent FAQs suggest consolidation. To qualify for the Biden-Harris forgiveness, you must consolidate FFEL loans to direct loans. 

Make sure that you’re consolidating your loans, not private refinancing them. Consolidating your loans still keeps them as federal loans. However, private refinancing of your loans is an irrevocable decision that may not make sense for you to make. 

Direct consolidation of FFEL loans does not make sense for everyone. There are speculations that the Department of Education is working on expanding forgiveness to FFEL borrowers to eliminate the need for direct consolidation.  

Parent Plus Loans

If a parent of a student took out parent PLUS loans for their child, they might qualify for cancellation when satisfying other criteria. Cancellation eligibility includes parent PLUS loans and graduate PLUS loans. Typically, they’re eligible for $10,000 per parent borrower. 

To qualify for PLUS loan cancellation, the parents must meet income requirements. If the student received a Pell Grant, the parent doesn’t extend to the parents. The parent must have had a Pell Grant issued for their studies to qualify for $20,000 forgiveness.

State Taxation & Student Loan Cancellation 

The one potential downside to cancellation is when you’re on track for forgiveness, such as PSLF, and receiving forgiveness now. While many states do not tax loan cancellation, there are several that do. The states potentially taxing loan cancellation are CA, NC, MS, IN, WI, AR, WV, and MN. 

For a resident, fellow, or attending physician on track for PSLF, forgiveness may cause an unnecessary tax in the states listed above. Once you’ve completed all requirements for PSLF, you receive complete forgiveness. Therefore, you may not even want to apply forgiveness in this situation. 

How To Request a Refund

• If you’ve paid off your entire loan balance and want to reinstate your loan, identify payments for the refunded amount. 
• Review your bank statements to determine when you made payments towards your loans. Save the statements as you may need to submit them to your loan servicer. Many of the loan servicers have consolidated and given out insufficient information. 
• After you’ve completed these steps, you need to contact your loan servicer. You’ll instruct them that your student loans should be reinstated or refunded due to the CARES Act legislation.
•  Be sure to ask your loan servicer where the refund will be deposited and approximately how many business days it takes to process. 

How To Apply For Biden-Harris Forgiveness

You must apply for forgiveness if you haven’t completed the FAFSA since 2020. You’ll achieve this through the Department of Education’s studentaid.gov website. The Department of Education recommends applying for forgiveness by November 15, 2022, to receive forgiveness before the repayment pause expires on December 31, 2022. 

You can request email updates when the application is available by subscribing to their email updates: Get Updates From Department of Ed

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