How to Get Your Student Debt Canceled

Last month, the Biden administration announced its long-awaited student loan debt plan, a first attempt to counter the fact that the average student graduates with around $25,000 in debt. The plan will cancel $10,000 in federal loans for borrowers earning less than $125,000 and up to $20,000 for low- and middle-income borrowers who previously received Pell Grants. The Department of Education has announced that the debt relief application will go online in early October, but many logistical aspects of the rollout remain unclear. How do you know if you qualify? What if you’ve already paid off your debt? Is the relief taxed? Could the Republicans still ruin everything?

The Cut spoke to financial aid expert Mark Kantrowitz about what you need to know to cancel your college debt.

According to the U.S. Department of Education, only federal loans — including subsidized and unsubsidized, Parent Plus, and Grad loans — taken before June 30, 2022 are eligible. Personal loans are not eligible. If you earn less than $125,000 — or $250,000 for jointly filed married couples — you’re eligible for $10,000 in debt relief, regardless of whether you graduated from college. Pell Grant recipients are eligible for up to $20,000 in relief. (Confirm your Pell Grant status by logging on to studentaid.gov and going to the My Help section, or contact your school’s financial aid office and ask.) To determine if you meet the income requirements, check your adjusted gross income on your 2021 or 2020 tax returns; per CNBC either will work.

Although the Biden administration previously suggested that those with FFEL and Perkins loans — federal loans held by private lenders — could consolidate their debt into a federal direct loan and be eligible for relief, the Department of Education has met opposition from Republicans responded with a retreat. If you did not consolidate your FFEL and Perkins loans before September 29th, you will not be able to do so or receive debt relief now.

While the official deadline for submitting your debt relief request is December 31, 2023, Kantrowitz recommends submitting it by November 15, 2022. It will take four to six weeks for your debt to actually be forgiven, and you ideally want to reduce your overall balance before the pandemic-related payment pause expires at the end of the year. “If you apply closer to the deadline, your loans will be forgiven later, but you’ll also pay interest on the amount that would have been forgiven,” Kantrowitz says. The White House has said 8 million borrowers already enrolled in income-based repayment plans could get automatic termination, but even if you’re one of those borrowers, Kantrowitz urges you to file an application to foolproof the process make.

You may be able to request a refund, but only for payments made during the pandemic break. While borrowers have had no payments to make and no interest accrued since March 2020, some have still made payments and in certain cases their outstanding balance is now below the lapse threshold. If this is you, call your credit servicer and ask for a refund. For example, if you owed $10,000 before the pandemic and paid it back to $5,000 during the hiatus, you would only get $5,000 in debt relief. But if you ask for a refund, you can get $5,000 back and then have your $10,000 balance reversed. “If you paid off your loans in February 2020, you were out of luck. Prepayments don’t count,” says Kantrowitz.

If you refinanced your federal loans into private loans during this hiatus, that’s another opportunity for a possible refund. “Your federal loans will resume, but you’ll get your loan forgiveness,” says Kantrowitz, who recommends all borrowers who made additional payments or paid off their debt during the pandemic to apply for refunds. “This is a new process,” says Kantrowitz. “Who knows what bureaucratic difficulties you may encounter, so it’s best to ask anyway.”

Yes, federal parental loans are eligible based on the income of the borrowing parent. If you are dependent at school, your eligibility to cancel is determined by your borrowing parent’s income. For self-employed students or graduates who left school elsewhere, cancellation is based on personal income. Pell Grant status also depends on who borrowed the loan: If a parent was a college Pell Grant recipient but borrowed on behalf of a student, the parent is eligible for a US$20,000 relief -Dollar.

The debt plan is exempt from federal income tax, but depending on where you live, Kantrowitz says it may still be subject to state income tax. It’s on a case-by-case basis, but even if your state taxes the relief, Kantrowitz still recommends applying for it. “Even though it’s taxable, the amount of the tax is much, much less than the amount that’s waived,” Kantrowitz explains. “There’s no point in not applying.”

Earlier this month, The Washington post reported that Republican prosecutors and other leading conservatives are reviewing lawsuits to potentially block the debt plan, and appear to be already trickling in: On Tuesday, a conservative attorney in Indiana filed a lawsuit against the Biden administration to reverse policy; As of Thursday, prosecutors in Missouri, Arkansas, Kansas, Nebraska, South Carolina and Iowa were suing the government over a program they called “imprudent and inherently unfair.” While the Biden administration has emphasized that loan cancellations are legal, there is reason for caution. “There’s a chance a court case could delay the annulment,” Kantrowitz says, but he notes that even if it’s blocked, anyone who has already received relief can keep it. Even more lawsuits could come once the first credit line is actually forgiven. Another reason to apply as soon as possible.

This post has been updated.