Wondering what Biden loan forgiveness plan is? Biden Officials reiterated on January 8, that the president was supporting Congress “immediately” in the form of the COVID-19 relief to cancel $10,000 of federal students loan debts per person. According to federal information, this will fully remove debt from nearly 15 million borrowers who owe $10,000 or less. The majority (around 67 percent) of student creditors have debts of more than $10,000.
More opportunities to cancel debt
In addition, Biden has recommended canceling federal student debt in the following instances:
Attendees of private historically Black colleges and universities and additional minority-serving institutions would also be eligible.
Graduate student debt would not be canceled under Biden’s proposal.
Biden’s plan references a phase-out of this benefit but does not offer further details.
Any broad student debt cancellation plan is likely to face extensive negotiation and headwinds in Congress.
Additional forgiveness for public service
Biden would introduce a new student loan forgiveness program for borrowers who provide public service.
Under Biden’s plan, $10,000 of your debt would be automatically canceled for each year you perform eligible service, for up to five years total.
Public Service Loan Forgiveness. That program, which is available to government workers, teachers and other nonprofit employees, requires borrowers to make 120 eligible payments to have their remaining balance forgiven.
Biden proposes qualifying additional federal loans and repayment options for PSLF. Half your balance would also be forgiven after five years. Roughly 98% of PSLF applications have been rejected to date, according to Department of Education data.
Free college tuition
Biden has proposed making college tuition-free at some schools:
Tuition would be free for four years if your family has an income below $125,000.
Grants would cover up to two years’ tuition at private historically Black colleges and universities, tribal colleges and universities, and additional MSIs.
Tuition would be free for two years if you hadn’t previously pursued a postsecondary degree. You could also use these funds for a career-training program if it meets to-be-determined graduation and job placement rates.
As with existing free college options, you’d still need to pay non-tuition costs such as room and board and books. Those expenses averaged more than $14,600 and $16,000 in 2019-20 at two-year and four-year schools, respectively, according to the College Board.
How Much Could This Save Borrowers?
Borrowers in income-driven repayment plans will be affected most by the change. Of 45 million student loan borrowers in the U.S., a third is enrolled in income-driven repayment plans.
These types of repayment plans cap borrowers’ monthly bills at a percentage of their discretionary income, and cancel any of their remaining debt after 20 or 25 years. If a borrower is on an income-driven repayment plan, it’s likely because they cannot afford to pay more toward their student loans, says Taylor.
Under current law, if a borrower falls into the 22% tax bracket and has $100,000 in student loan forgiven, they may owe $22,000 to the IRS. The new provision would mean that they do not have to pay that tax.
“We call it the tax bomb,” says Taylor. “It’s not unusual for borrowers to have $100,000, $250,000, $50,000 forgiven at the end of an income-driven repayment plan,” she says. “I’m hopeful that the semi-permanent legislation will lead to permanent legislation.”
But this new provision is temporary. It would last through the beginning of 2026, but could be extended or become permanent, says Taylor. That means borrowers on income-driven repayment plans who finish their loan term between now and Jan. 1, 2026 won’t have to pay taxes on any outstanding amount that’s forgiven.
There are other student debt forgiveness plans that are already nontaxable, including one for borrowers who work in public service — such as nurses and teachers— and another that cancels the debt for those with serious disabilities.
Student loan forbearance
The current federal student loan forbearance began in March and was extended a second time on Dec. 4, 2020. It was set to end on Jan. 31, but Biden immediately upon inauguration extended the pause through Sept. 30, 2021.
The administrative forbearance automatically pauses payments on most federal student loans and waives new interest on the loan balance. It also halts all collection activities on loans in default.
Graduate student loans — for which the average student debt is $71,000, according to the National Center for Education Statistics — would be ineligible.
Current income-driven options set payments between 10% and 20% of your discretionary income, depending on the plan.
You can currently qualify for $0 payments based on your income, the federal poverty line, and your family size.
Biden’s income-based plan would forgive any remaining undergraduate balance tax-free after 20 years. Existing options offer forgiveness after 20 or 25 years, depending on the plan, but tax that amount.
All new and existing borrowers would be automatically enrolled in this new plan with the option to opt-out.
Bigger Pell Grants
These grants, which are available to students who demonstrate financial need, are currently worth up to $6,345. That covers less than 60% of tuition and fees at public four-year colleges, according to a NerdWallet analysis — and that doesn’t even account for room and board or other expenses included in the cost of attendance. Biden would also expand eligibility to cover more of the middle class.