A closer look at how Biden’s student loan plan works

President Joe Biden said Wednesday that many Americans can get up to $10,000 in federal student debt forgiven. This amount increases to $20,000 if they qualify for the Pell Grants. Here’s what we know so far and what it means for people with outstanding student loans:

Who is eligible for student loan forgiveness?

You are eligible for a rebate of up to $10,000 if your loan is held by the Department of Education and you earn less than $125,000 individually or $250,000 for a family. If you have been awarded Pell grants, which are reserved for undergraduate students with the greatest financial need, you can be forgiven for up to $20,000. If you are a current borrower and a student dependent, you will be eligible for relief based on your parents’ income, rather than your own.

Will the student loan repayment freeze be extended?

The payment freeze will be extended one last time, until December 31. The freeze began in 2020 as a way to help people in financial difficulty during the COVID-19 pandemic and it has been extended several times since. It was due to expire on August 31.

Interest rates will remain at 0% until repayments begin. Under an earlier extension announced in April, people who were in arrears before the pandemic will be automatically brought into good standing.

How do I apply for student loan forgiveness?

Details on this have not been announced, but keep an eye on the federal student aid website for more details in the coming days.

What is a Pell Grant and how do I know if I have one?

About 27 million qualified Pell Grant borrowers will be eligible to receive up to $20,000 in rebate under the Biden plan.

Pell Grants are special government grants for low-income Americans, which can currently receive up to $6,895 per year for about six years.

According to the Department of Education, nearly all Pell Grant recipients came from a family that earned less than $60,000 a year, which said Pell Grant recipients typically have more difficulty paying off debt. than other borrowers.

Pell grants themselves usually don’t have to be repaid, but recipients usually take out additional student loans.

“This additional relief for Pell borrowers is also an important element of racial equity in the cancellation,” said Kat Welbeck, civil rights attorney for the Student Borrower Protection Center. “Because student debt exacerbates existing inequalities, the racial wealth gap means that students of color, especially those who are black and Latino, are more likely to come from low-income households, have student debt and borrow more.”

To find out if you have a Pell grant, check any emails you’ve received that describe your FAFSA award.

How many people will this help?

About 43 million Americans have federal student debt, with an average balance of $37,667, according to federal data. A third of them owe less than $10,000. Half owe less than $20,000. The total amount of federal student debt is over $1.6 trillion.

What if I’ve already paid off my student loans? Will I see relief?

Debt cancellation should only apply to people who currently have student debt. But if you have voluntarily made payments since March 2020, when payments were suspended, you can request a refund for those payments, according to the Federal Office for Student Aid. Contact your loan officer to request a refund.

Will loan forgiveness happen permanently?

The White House is expected to face legal action over the plan because Congress never gave the president explicit authority to cancel the debt. We don’t yet know what impact this might have on the student loan forgiveness timeline.

What repayment plan does the Ministry of Education offer?

The Ministry of Education has proposed a repayment plan that would cap monthly payments at a maximum of 5% of the borrower’s discretionary income, up from 10% currently. Borrowers will need to apply for the repayment plan if approved, which can take a year or more.

For example, under the proposal, a single borrower earning $38,000 a year would pay $31 a month, according to a government press release.

The amount considered non-discretionary will also be increased, although the department did not specify by how much.

Discretionary income generally refers to what you have left over after covering necessities like food and rent, but for student loan repayment purposes it is calculated using a formula that takes into account the difference between the borrower’s annual income and the federal poverty level, as well as family size and geographic location.

“The difficult thing about income-based repayment is that it doesn’t take into account your other debts, such as paying your rent,” said Kristen Ahlenius, financial adviser at Your Money Line, which offers training in financial literacy. “If someone is living paycheck to paycheck and their rent takes half their paycheck and their car payment takes the other half, they have to choose. Unfortunately, the income-contingent reimbursement does not take this into account, but it is an option.

Student Debt Relief offers a calculator to help you determine your Discretionary Income.

What if I can’t afford to pay even with loan forgiveness?

Once payments resume, borrowers who cannot pay risk becoming delinquent and possibly defaulting. This can hurt your credit rating and mean you don’t qualify for further help.

If you’re struggling to pay, check to see if you qualify for an income-driven repayment plan. You can find out more here.

The plan Biden announced on Wednesday also includes a proposal that would allow people with undergraduate loans to cap repayment at 5% of their monthly income. Proposals like this can take a year or more to implement, and it’s unclear what the fine print will be.

If you worked for a government agency or non-profit organization, you may also be eligible for the Civil Service Loan Forgiveness Program, which you can learn more about here.

Maria D. Ervin