Understanding the 2021 Student Loan Forgiveness Bill

Written by: The College Finance Team
Updated: 11/18/21

Student loan forgiveness in the United States has been a hot-button topic for many years. Because of this, the Public Service Loan Forgiveness (PSLF) program originally set in place in 2007 by President George W. Bush led many of the public debates surrounding the presidential candidacy of Joe Biden in 2020. Essentially, the program was aimed at erasing student debt for eligible borrowers who worked in public service fields for a minimum of 10 years and made a certain number of qualifying payments during that time. 

Trouble has arisen, however, with regard to various lenders, the U.S. Department of Education, and the federal government not setting up the most efficient of communication systems. Interested borrowers have also complained of spending a great deal of unnecessary time navigating a tricky system that can then prove unfruitful when borrowers find out after too many steps that they are ineligible. The Biden administration has worked with Education Secretary Miguel Cardona to take measurable steps toward improving the program in 2021 and beyond so student borrowers can make the most of their college investment.

This article will discuss what the new loan forgiveness bill proposes, where it stands currently, and what to expect with regard to loan forgiveness developments in 2021.

What Does Student Loan Forgiveness Really Mean?

Loan forgiveness means a borrower pays a specified portion of the original loan under preset terms over a period of time and then the federal government either pays off a portion or “forgives” whatever is left on the balance. Loan forgiveness is distinctly different from forbearance and discharge. 

Many borrowers have enjoyed the benefits of forbearance, essentially a formal payment pause where interest may continue to accrue, during the widespread economic hardships brought on by the pandemic. Loan discharge, by contrast, is directed at very specific sectors of student loan borrowers, such as those on permanent disability or serving active duty in the military.

The original Public Service Loan Forgiveness Program allowed certain federal student loan borrowers to enjoy full forgiveness, or debt cancellation, of whatever remained on their loan balances after making 10 years’ worth of monthly qualifying payments through enrollment in a certified repayment plan. Full-time employment in a public-sector job was also a prerequisite. 

In 2017, during the Trump administration, the first borrowers who would have made enough qualifying payments into the program became eligible for this type of loan forgiveness. However, many borrowers found out through time-consuming trial and error that certain loans, such as Federal Family Education Loan Program (FFELP) loans, did not qualify for this type of student loan cancellation.

What Does the Student Loan Forgiveness Bill Propose?

The 2021 student loan forgiveness bill is focused on the expansion of the targeted relief already set in motion by the Biden administration. Parties set to directly benefit from further loan forgiveness eligibility in the 2021 update include those under the Borrower Defense to Repayment Program, the Closed School Discharge Program, and the Total and Permanent Disability Discharge Program. 

The Public Service Loan Forgiveness Program will likewise now allow a wider array of federal student loans to qualify for debt cancellation. The U.S. Department of Education has speculated that the changes set in motion for 2021 will grant approximately 500,000 student loan borrowers in the PSLF category an average of two additional years on the collective 10 they require to access full loan forgiveness. Borrowers who owe private universities would still be excluded from debt relief under these new parameters.

As of the American Rescue Plan Act of March 6, 2021, the tax treatment of student loan debt forgiveness was changed to a tax-free status. This tax-exempt status will continue for all debt cancellation and student loan forgiveness that occurs through Dec. 31, 2025, regardless of whether future student debt forgiveness takes place via new legislation or executive action. Most impacting income-driven repayment (IDR) plans at or around the 20- to 25-year repayment mark, this doesn’t affect many forms of existing federal student loans since most already enjoy tax-free status.

As of Oct. 6, 2021, military service members and federal employees will be automatically data-matched by the U.S. Department of Education for credit toward PSLF without having to fill out an application. The U.S. Department of Education will likewise be reviewing formerly denied PSLF applications to check for errors and offer borrowers the chance to have their applications reconsidered. Additional steps in the form of expanded partnerships with employers that can streamline the PSLF process are currently being explored.

What Happened to Student Loan Forgiveness in 2021?

The Student Loan Forgiveness Program has been a trending topic in 2021 and may impact what incoming students feel comfortable borrowing in the first place. Thus far, the following changes have been implemented to student loan forgiveness since January 2021:

  • $7.1 billion in loan discharges have gone out to 364,000 qualified disabled borrowers, and Social Security/Veterans Affairs will automatically qualify such recipients in the future.
  • 47,000 active duty service members have received interest waivers, and these recipients will likewise be automatically qualified in the future.
  • $1.5 billion in loan relief has been distributed through the Borrower Defense Program, and eligibility has been expanded in this discharge category.
  • A limited waiver, good for roughly the next calendar year, has been implemented for the PSLF program and will allow more types of loans to qualify, including Perkins loans and past payments on FFEL loans.
  • Military members with federal student loans will have their active duty time counted toward their PSLF eligibility, whether payments were made during that period or not.

To take part in the limited waiver, though, borrowers must submit a PSLF form before Oct. 31, 2022, and have already undergone a consolidation of their collective federal debt into a Direct Loan. Despite some progress, current proposals still do not meet what Democrats in the Senate have called for President Joe Biden to do, which is to replace the current waiver system with near-total, across-the-board loan forgiveness. 

The White House is expected to be under further pressure by key players like Elizabeth Warren to continue debt cancellation expansions throughout the next calendar year.

How Likely Is It That Student Loan Debt Will Be Forgiven Soon?

Although President Biden has been public about his support for a more inclusive federal loan forgiveness program, no amounts have been specified yet nor formal proposals submitted. Having stated that he would cancel no more than $10,000 per borrower if he used an executive order to institute loan forgiveness, Biden has been under pressure from Congress to up that figure to $50,000 per borrower. 

At present, there are no provisions in the 2022 budget proposal issued by the Biden administration that lay out clear plans for broad-based student loan forgiveness. Keeping borrowing plans open is advisable for incoming students who should not, at this time, rely on the idea that federal student loans will be fully forgiven or that broader debt relief is measurably close by.

Learn More About Student Loan Forgiveness on CollegeFinance.com

Are you a student or parent wondering how you’re going to finance your college education? Get answers to your higher education funding questions at CollegeFinance.com. With our platform, students and their parents can find numerous resources to help them figure out how to plan for college, borrow funds, and repay their student loans.

Check out CollegeFinance.com to stay up to date on the continuous changes happening with the 2021 Student Loan Forgiveness bill.