The Biden administration has released new details on an upcoming student loan forgiveness initiative that could benefit millions of borrowers.
The latest plan, expected to launch this fall, is intended as a second attempt at mass student debt relief after President Joe Biden’s first plan was struck down by the Supreme Court last year. Following nearly a year of negotiated rulemaking (an administrative process to develop new regulations), the Education Department has indicated that the new program is in its final stages.
In conjunction with millions of notices that officials sent out to borrowers last week with an important opt-out deadline, the department has updated its official guidance on the plan. The new details provide additional clarity on the four categories of borrowers that may be eligible for loan forgiveness, even while the department continues to work on finalizing the rules for the program. A fifth category based on hardship is not expected to launch until sometime next year.
Here’s a breakdown.
Student Loan Forgiveness For Runaway Interest Accrual
One of the primary groups of borrowers potentially eligible for student loan forgiveness under Biden’s new plan are those who have experienced an increase in their loan balance over time due to interest accrual and capitalization. This can occur under a variety of circumstances, such as being in an income-driven repayment plan when the payments are less than the monthly amount of interest accrual. In that scenario, a borrower could make substantial payments over a long period of time, and still wind up owing more than what they originally borrowed.
According to the new Education Department guidance, a borrower is eligible for partial student loan forgiveness under this category if their “current balance on an unconsolidated Direct Loan, ED-held Federal Family Education Loan (FFEL) Program loan, or ED-held Perkins loan is greater than the balance of that loan when it entered repayment,” or if the “current balance on a consolidation loan is greater than the balance of the loans included in your consolidation loan when the original loans entered repayment.”
“All borrowers would be eligible for this debt cancellation, either up to the amount by which the borrower’s current balance exceeds the principal and interest balance when the loans entered repayment or $20,000, whichever is less,” says the department. But borrowers who are enrolled in an IDR plan and earn $120,000 or less per year individually or as married filing separately, or $240,000 or less per year as married filing jointly, could receive student loan forgiveness for “all principal and interest above the principal and interest balance at the time their federal student loans entered repayment.”
Student Loan Forgiveness For Those Who First Entered Repayment Many Years Ago
Borrowers can also be eligible for student loan forgiveness if they first entered repayment at least 20 or 25 years ago.
“Borrowers with only undergraduate debt would qualify for forgiveness if they entered repayment on or before July 1, 2005, and borrowers with graduate school debt or a mix undergraduate and graduate debt would qualify for forgiveness if they entered repayment on or before July 1, 2000,” says the updated Education Department guidance. “For borrowers with consolidation loans, we would check when the underlying loans initially entered repayment (not when the consolidation loan entered repayment). Loans that meet these criteria could be fully forgiven.”
The new guidance defines “entering repayment” somewhat differently depending on whether the loans had a grace period after graduation or withdrawal. “For subsidized and unsubsidized loans, borrowers are considered to have entered repayment at the end of the loan grace period,” says the department. “For both PLUS loans for parents and PLUS loans for graduate or professional students, borrowers are considered to have entered repayment when the loan is fully disbursed.”
Student Loan Forgiveness Based On Issues With School
A third student loan forgiveness eligibility category under the new plan is for those who attended “low-value” institutions. The Education Department has a specific definitions of this term for purposes of the new debt relief plan.
To qualify, the school must have “lost eligibility, or closed while at risk of losing eligibility, to give out federal student loans.” There could be several possible reasons for this, including the school’s failure to meet federal standards based on student outcomes, or failure to meet gainful employment requirements.
“An institution fails our accountability standards for the purposes of the proposed rules if it has high student loan default rates, producing graduates whose debt represents too large a share of their income or whose earnings are no better than those of a high school graduate; or was subject to a final agency action to terminate aid for failing to provide sufficient financial value,” says the department.
“Schools or programs that face similar situations but close before we make a final determination” could also fail the department’s standards, continues the department. “Under the proposed rules, you would be eligible for this debt relief if you took out loans to attend an institution or program during a period when it failed our accountability standards and lost its eligibility to participate in the federal student aid program, or was denied recertification.”
Eligible borrowers could receive complete student loan forgiveness for covered loans.
Student Loan Forgiveness For Borrowers Who Qualify Under Other Programs
Borrowers could also receive loan forgiveness under the new plan if they would qualify for relief under other programs, but never applied or enrolled.
Qualifying borrowers “would otherwise be eligible for loan forgiveness under IDR plans but are not enrolled, or who would be eligible for closed school discharge or other types of forgiveness opportunities but haven’t successfully applied for that relief,” says the department. This could, for instance, include borrowers who received retroactive credit under the ongoing IDR Account Adjustment initiative, but were short of the threshold for immediate loan forgiveness and never enrolled in an IDR plan to continue progressing toward eventual debt relief.
Opt-Out Deadline For Student Loan Forgiveness Is August 30
The Education Department updated its guidance on the new student loan forgiveness plan as officials sent out mass emails to borrowers notifying them of the program, and giving them an opportunity to opt out. Borrowers have until August 30 to do so.
“If you don’t want to receive debt relief for any reason, you need to tell your loan servicer that you don’t want to receive student loan debt relief,” says the updated guidance. “Contact ALL of your servicers by Aug. 30, 2024, to make sure you opt out of potential debt relief in time. Your servicers won’t be able to tell you if you may be eligible. If you opt out, you won’t be able to opt back in.”
The department also warns that opting out of this debt relief initiative could also be construed as opting out of relief under other student loan forgiveness programs. “Note that if you opt out, you will also be opted out of forgiveness under income-driven repayment (IDR) for the next several months and won’t have the option to opt back in,” warns the guidance. “If you opt out, we will automatically reevaluate your eligibility for forgiveness under IDR in the future; you won’t need to take any action for that to occur.”
Importantly, receiving the email is not an indication of automatic eligibility for student loan forgiveness. Likewise, not receiving an email does not mean that a borrower is ineligible.
“Because we have not identified who is eligible yet, not receiving an opt-out email doesn’t mean you’re not potentially eligible for student debt relief,” says the guidance. “If you did not receive an email, you can still follow the instructions above to contact your loan servicer(s). You should also make sure your email is up to date by logging in to your StudentAid.gov account.”
When Borrowers Will Know If They Qualify For Student Loan Forgiveness
Other than opting out if they choose, borrowers do not have to take any specific action right now to qualify for student loan forgiveness under the new plan. The Education Department is still finalizing the details.
“We’re currently working to finalize new regulations this fall that include who may receive student debt relief,” says the department.
Relief under the new program will be automatic for qualifying borrowers — meaning no application will be required. “Once the regulations are finalized, we will identify borrowers who are eligible for forgiveness and will apply that forgiveness if the borrower has not opted out,” says the guidance. “There will be no application process for debt relief under the proposed regulations that ED is working to finalize, and borrowers will not need to take action to receive relief.”
A fifth category for relief based on hardship will likely require borrowers to submit an application, although this component of the plan won’t go live until sometime next year.
The new loan forgiveness plan will likely face legal challenges, however, which could delay or block relief.
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