What Student Loan Forgiveness Means for You

To make the U.S. student loan system more manageable and to ease financial burdens, the Biden Administration announced in August a one-time student loan debt relief plan for borrowers of federal student loans targeted to low- and middle-income families. While not all ACOFP members may be eligible for such relief, there are important requirements to be aware of.

Student Loan Forgiveness Plan

The three-part loan forgiveness plan is intended to:

1. Provide targeted debt relief by canceling up to $20,000 in federal student loan debt for Pell Grant recipients and $10,000 for non-Pell Grant recipients—if borrowers earn below $125,000 annually as an individual or $250,000 annually as a couple (of note is that any borrower of federal loans, including medical students and PLUS borrowers, are eligible for the forgiveness if they meet the income thresholds);
2. Make the student loan system more manageable by reducing monthly payments for undergraduate loans under income-driven repayment plans from 10 percent to 5 percent of a borrower’s discretionary income and by expanding eligibility for the Public Service Loan Forgiveness program to ensure borrowers who have worked at a nonprofit, in the military or in government receive comprehensive credit toward loan forgiveness; and
3. Protect individuals from steep increases in the cost of college by reinstating the enforcement unit in the Office of Federal Student Aid and by publicly reporting programs with the worst debt rates, thereby holding institutions accountable for rising costs.

Types of Eligible Loans

Most federal student loans are eligible. Specifically, eligible loans include:

• Undergraduate and Graduate Direct Loans,
• Parent PLUS and Grad PLUS Loans,
• Consolidation loans (for loans disbursed on or before June 30, 2022),
• Federal Family Education Loans,
• Perkins Loans, and
• Defaulted loans.

If a borrower made voluntary payments during the COVID-19 pandemic, the payments they made will be refunded if they submit an application and if the payments made brought their balance below the maximum debt relief amount they are eligible to receive but they did not pay off their loan in full.

Tax Implications of the Forgiveness Plan

While the one-time student loan debt relief will not be subject to federal income taxes, student loan forgiveness may be subject to state taxes.

Application Requirements

Borrowers must submit an application to receive debt relief. The beta online application to apply for student loan debt forgiveness launched on October 14. During the beta launch, the application was available on and off, but the U.S. Department of Education (DoE) reassured borrowers there was no advantage to applying before the full launch. The official application launched on October 17, but borrowers who submitted a beta application need not resubmit.

The application is due by December 31. The Biden Administration recommends applying before November 15 to ensure the debt relief is received before the student loan payment pause expires on January 1, 2023.

On October 21, a federal appeals court issued an administrative stay while it considers a motion to block the student loan forgiveness plan filed by six Republican-led states. This administrative stay orders the Biden Administration to not act on the plan while the motion is being considered. However, it is important to note this stay does not prevent borrowers from applying for student debt relief. All borrowers are still encouraged to submit an application.

Key Action Steps and Resources

ACOFP members should first determine whether they are eligible for student loan forgiveness, remembering that these requirements apply only to federal student loans. In addition, physicians should be prepared to submit their applications by the abovementioned deadlines and monitor their email and accounts for changes. Loan balances remaining after relief will be re-amortized, meaning the DoE will recalculate monthly payment based on the borrower’s new balance.

Additional resources, including eligibility information, frequently asked questions, and the application for claiming this relief are available on the Federal Student Aid website.