Student borrowers hold a rally on August 25, 2022 outside the White House to celebrate President Joe Biden’s cancellation of federal student debt.
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As tens of millions of Americans process the news of federal student loan forgiveness, countless questions are emerging about how it will all work.
When will borrowers see relief? Who is eligible? Should I apply? The US Department of Education website was slow to load this week with so many people searching for these answers.
Here’s what we know so far.
Relief will be limited to borrowers earning less than $125,000 a year, or married couples or heads of households earning less than $250,000.
If your income was below these limits in 2020 or 2021, you should be eligible.
Overall, the vast majority – around 37 million borrowers – will be eligible for forgiveness depending on their loan type (and then as long as they also fall under the income cap), because their debt is under that. called the William D. Ford Federal Direct Lending Program. This includes direct Stafford loans and all subsidized and unsubsidized direct federal student loans. Under the Direct program, Parent Plus and Grad Loans are also eligible for relief.
Then it gets complicated.
As of now, the Ministry of Education declares that all loans it holds are eligible. This means that the roughly 5 million borrowers who have a commercially held Federal Family Education Loan (FFEL) can be excluded. (About the same number of borrowers have FFEL loans from the government and they need not worry.)
Borrowers wishing to find out whether their FFEL loans are commercially held can contact studentaid.gov and log in with their FSA ID. The information should be available in the “My Help” tab.
Even if your FFEL loan is with a private company, all hope may not be lost.
A Department of Education spokesperson said borrowers with these loans can call their manager and consolidate them into the Direct Loans program to become eligible for the forgiveness.
There is currently no deadline to do so, but there probably will be. Accordingly, experts recommend borrowers in this situation to act quickly.
Another type of loan may also be excluded from forgiveness because it is not in government hands. Kantrowitz said certain loans from the federal Perkins loan program. Some of these loans are given to the Department of Education, but most are held by colleges.
If you pay your monthly loan bill at one of the government loan services, you should be able to get the rebate, Kantrowitz said, but if your payments are sent to another private lender, you’re probably out of luck. .
All private student loans are also excluded.
Student loans taken out after June 30, 2022 will not be included in the relief.
The Ministry of Education said it will launch an app where borrowers can enter their income data and apply for loan forgiveness. The app will be available before the end of the year, the ministry said, and borrowers can register now on its website for updates on the process.
The ministry also said it already had income data for nearly 8 million borrowers because they were enrolled in income-driven repayment plans that already required the data. These people can get an automatic cancellation.
The student loan forgiveness will not trigger a federal tax bill.
However, you may still be liable for state levies, Kantrowitz said.
Some states automatically follow the federal rules, but others may consider the canceled balance as income, which means you may still have a state bill. The amount “could be the equivalent of a few student loan repayments,” Kantrowitz said.
If you are unsure, contact a local tax professional for an estimate before filing your tax return.
Experts recommend taking a photo or screenshot of your current student loan balance. This way you can ensure that it drops by the correct amount once the forgiveness has taken place.
In addition to Biden’s announcement on canceling student loans, he said he extend payment break on federal student loans through December 31. Payments will resume in January.
This is the seventh extension of the relief policy in the era of the pandemic started under the Trump administration and it will probably be the last.
– CNBC’s Sarah O’Brien and Kate Dore contributed reporting.
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