The topic of student loan forgiveness has become a leading headline in recent years, with several Democrats advocating strongly for President Joe Biden to take far-reaching measures to forgive student loans. While a general loan forgiveness plan has not been passed, there have been several developments that borrowers should familiarize themselves with in 2021.
These new pieces of legislation, policy, and waivers have all resulted in new categories of students qualifying for student loan forgiveness or related forms of debt relief. We explore what this might mean for you and what you should know about qualifying.
How the Health Care and Education Reconciliation Act of 2010 Affected Student Loans
The first act we’ll explore is the Health Care and Education Reconciliation Act of 2010, which was passed under the Obama administration. The relevant portion of this act can be found in Title II: Education and Health. Part II applies specifically to student loan reform. The key features include:
- Terminated Federal Family Education Loans (FFEL), which were federally backed student loans made through private lenders. All federal student loans are now made through the William D. Ford Federal Direct Loan Program.
- Required that many loan servicers split into two companies because they weren’t allowed to service both federal and private loans. (This is the reason Sallie Mae launched its sister company Navient. Navient now services federal student loans.)
- Changed the Income-Based Repayment (IBR) Plan beginning July 1, 2014, so that instead of monthly student loan payments being 15% of discretionary income, they are now 10%, and instead of the remaining loan balance being forgiven after 25 years, it’s now forgiven after 20 years. (This change only applies to new borrowers, however.)
About PAYE and REPAYE
Additionally under the Obama administration, the U.S. Department of Education announced the Pay As You Earn (PAYE) program.
This program requires that you must be a new borrower on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011, to be used to repay Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, and Direct Consolidation Loans as long as they don’t include PLUS Loans made to parents.
Student loan repayment on this plan depends on your income and is done in the following way:
- Monthly payments are 10% of your discretionary income.
- Your discretionary income is counted as the difference between your adjusted gross income and 150% of the poverty wages for your family size.
- If you’re married and file jointly, your spouse’s income is included.
- You must update your income information each year.
- If 10% of your income ever becomes more than what you would have paid under the 10-year Standard Repayment Plan, you’ll pay no more than you would have on that plan.
- If any loan balance remains after 20 years, it’s forgiven.
- You might be required to pay income tax on the forgiven amount.
Four years after the PAYE program was announced, the Revised Pay As You Earn (REPAYE) plan was launched on Dec. 17, 2015, and came with fewer restrictions. All Direct Loan borrowers are eligible for REPAYE and can use this program to pay off Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, and Direct Consolidation Loans that don’t include Parent PLUS Loans.
The repayment under this program is almost the same as with the PAYE program with the following notable exceptions:
- Your monthly payment is 10% of your discretionary income regardless of whether that ends up being more than your 10-year Standard Repayment Plan payment.
- If any of your loans were taken out for graduate study, your remaining balance won’t be forgiven until after 25 years of payments have been made.
PAYE and REPAYE were an improvement on the Income-Based Repayment (IBR) plan for those who took out loans before July 1, 2014. If you took out loans after this date, IBR and PAYE are essentially identical.
What’s New for Student Loan Forgiveness in 2021 Under Biden?
Student loan forgiveness has been a priority for many in the federal government under the Biden administration, with several members of Congress looking for relief legislation to help the nation’s higher education student loan borrowers.
We’ve been watching the discussions surrounding student loan forgiveness in the White House. Currently, the U.S. Department of Education under Biden’s directive is reviewing the legal capabilities of the administration canceling student loan debt and providing loan relief. While we don’t yet know the results of this review, Biden’s proposal for federal student aid so far includes:
- Improving income-driven repayment plans
- Improving the Public Service Loan Forgiveness Program (PSLF)
- Increasing the availability of affordable college, such as two years of free community college
- Increasing Pell Grant awards
Senators have also put forth their own ideas for forgiveness. For example, Senator Warren has proposed $50,000 of forgiveness per borrower. Keep in mind that federal student loan forgiveness programs will not likely help with private student loans. Private student loans come from private institutions, and refinancing and making qualifying payments have to be managed with them separately.
As these discussions have emerged, there have also been several pieces of legislation passed that impact federal student loan borrowers in 2021. Here are some relevant developments that may impact student loan borrowers:
- Forbearance period: The Biden administration has extended the forbearance period until Jan. 31, 2022. This gives borrowers an extended grace period before they need to start or finish repaying their federal student loans. The U.S. Department of Education has said this will be the last extension of the forbearance period, but by the time it passes, borrowers will have had nearly two years of relief. The program began in March 2020 at the start of the pandemic.
- Service members: A waiver was also passed to provide relief to service members. Those who deploy to areas that include “imminent danger” or “hostile fire” will have any interest on their student loans waived retroactively, regardless of the interest rate. This will impact an estimated 47,000 service members and include both current active duty members and former members who served under these conditions. This benefit will also be done automatically through data servers, so qualifying members don’t have to worry about applying.
- Federal taxation: The American Rescue Plan, passed in March 2021, will free borrowers who receive student loan forgiveness from having to pay federal taxes on that forgiveness. This will be in effect from 2021 to 2025.
In addition, we’ve seen two large categories of borrowers receive forgiveness: those with disabilities and those defrauded by the colleges they attended. Below, we’ll explore each type of loan cancellation, including eligibility requirements.
Forgiveness for Borrowers With Disabilities
The U.S. Department of Education under the Biden administration has specifically targeted disabled borrowers with federal student loan debt. This portion of the student loan forgiveness plan will result in $5.8 billion in forgiveness and impacts 323,000 people with disabilities who have taken out federal student loans.
There are a few important points to note about this portion of the legislation:
- Borrowers who qualify as having a “total and permanent disability” are eligible for this loan forgiveness program.
- Those eligible won’t have to worry about applying. Instead, the qualifying student loan records will be matched according to the records held by the Social Security Administration.
- Those interested in securing forgiveness through this program won’t have to prove their income to qualify. This was originally paused as a measure to provide coronavirus relief, but the U.S. Department of Education now says the pause will be extended.
- Along with a pause on income eligibility, recipients won’t have to worry about a three-year period during which their income is monitored. This portion of the regulation goes into effect in October 2021.
Borrowers qualified under this measure can expect to receive notifications before the end of 2021. The process will begin in the fall of 2021.
Forgiveness for “Defrauded” Borrowers
A significant focus for those working on student loan forgiveness legislation has also been defrauded borrowers. These borrowers attended institutions that were deemed to have used misleading and illegal tactics to attract students.
There have been three rounds of loan forgiveness within this category. Each round targeted students of different institutions. Altogether, these programs will cover about 200,000 students.
Students who attended the following schools may qualify under this portion of the student loan forgiveness plan:
- ITT Technical Institute (including students who took out loans to attend classes but didn’t graduate)
- American Career Institute
- Corinthian Colleges
- Court Reporting Institute
- Marinello Schools of Beauty
- Westwood College
Before, those attempting to secure forgiveness after they were defrauded received minimal forgiveness and often had to wait for extensive periods while their cases underwent reviews. Many borrowers were also denied loan forgiveness. This legislation works to correct those problems.
Stay Up to Date on Student Loan Forgiveness Topics With CollegeFinance.com
Staying on top of the latest developments in student loan forgiveness can help you find opportunities that you qualify for and secure your chances to reduce your student loan bill.
If you want to know more about student loans, the most recent legislation impacting them, and ways to help manage them, CollegeFinance.com can help. We make it easier to understand the student loan repayment process.