Debt cancellation is not Biden’s only aid to borrowers

By Eden Iscil, Public Policy Associate

If you’ve got student loans like I do, you were probably waiting on President Biden’s student debt cancellation since January 6, 2021. And in late August, President Biden delivered on this promise and announced up to $20,000 in relief for borrowers. While the one-time debt relief has dominated headlines (and rightfully so), Biden’s Department of Education (ED) has implemented a few other noteworthy changes to the federal student loan system—reforms that could save thousands of dollars for millions of borrowers.

Here is a brief (and non-exhaustive) overview of recent modifications to US student loan infrastructure that consumers should keep in mind.

One-Time Debt Cancellation

The application for one-time debt relief is live and can be accessed at https://studentaid.gov/debt-relief/application. The process is 100% free and it takes less than five minutes to complete. This is the only website to which consumers should be providing information to receive debt cancellation. Filers do not need to go digging for old forms, IDs, or income receipts as the only information the application requires is name, date of birth, email, and Social Security number. The ED may contact select borrowers to verify eligibility or request further information, but unless you are contacted, you are good.

Borrowers who earn less than $125,000 a year are eligible for up to $10,000 in debt relief on federally held student loans. This amount increases to $20,000 in cancellation for Pell Grant recipients. Student loans eligible for cancellation must be held by the federal government and disbursed on or before June 30, 2022.

Student loans eligible for Biden’s debt cancellation include:

· Federal Direct Loans (including Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, Direct parent PLUS Loans, and Direct Consolidated Loans)

· Federal Family Education Loans (FFEL) held by ED

· Federal Perkins Loans held by ED

· FFEL and/or Perkins loans that were privately held but the borrower applied for these loans to be consolidated into a US ED consolidation loan before September 29, 2022

Student loans not eligible for the federal, one-time debt cancellation include:

· FFEL loans not held by ED

· Perkins Loans not held by ED

· Federal loans that were consolidated into a commercial loan

· Student loans held by a private lender

· Student loans held by a state government

Refunds for Loan Payments Made During the Pandemic

If you had paid off your federal loan balance after the pandemic began, you can request a refund for those payments to receive your debt relief. This should be done before applying for the debt cancellation. Also, this should only be done if you paid off your entire balance and would otherwise be unable to claim debt relief. If you still have an outstanding balance equal to or greater than the amount of debt cancellation you are eligible for, you likely do not want to request a refund for your payments.

To get your money back, call your loan servicer directly to ask for a refund on payments you made since March 13, 2020. You should figure out the specific amount of money you are requesting back before contacting your servicer. Additionally, you should have your payment confirmations and receipts nearby throughout this process to ensure that you get a refund for every payment that you want refunded. Then, you should apply for the one-time debt cancellation.

Will Debt Relief Be Taxed?

The one-time debt relief will not be taxed by the federal government, thanks to a provision within the 2021 American Rescue Plan. States, however, can tax debt cancellation as income. This is something that a small number of states have weirdly said they intend to do, while a handful of others may also end up taxing their residents on debt relief by failing to pass legislation in time to exempt the debt cancellation. Most states though will not tax the relief for borrowers.

Federal Payment Pause Ending

President Biden coupled the sweet with the sour by announcing the end of the federal payment pause on student loans alongside the debt cancellation. Since early 2020, student borrowers have not had to pay a cent toward their federal student loans. Now, that payment pause (AKA administrative forbearance) is set to expire on December 31, 2022, it is unclear what the impact will be of an added monthly expense to tens of millions of borrowers (especially as recession worries grow). The two-and-a-half-year pause made clear that these payments are not necessary—Biden, there’s still time to change your mind!

A New Income-Driven Repayment Plan

While receiving a significantly lesser share of the headlines, the new income-driven repayment (IDR) plan will have a significant impact. As opposed to standard repayment plans, which are calculated only from the principal loan balance, the interest rate, and the length of repayment, ED’s IDR plans put a cap on a borrower’s monthly payments proportional to the borrower’s income. Although a few IDR plans have been available for some time, President Biden’s newly announced IDR plan includes enhanced provisions to help prevent debt from becoming unmanageable.

The new IDR plan will place a payment cap at 5% of a borrower’s discretionary income (half of the previous 10%). Additionally, it will raise the threshold for non-discretionary income to 225% of the federal poverty level (the equivalent of $15/hr); borrowers earning less than this amount will not have to make a monthly payment. Furthermore, borrowers with original loan balances of $12,000 or less will have their debt wiped out in 10 years of enrollment in this IDR plan. Lastly, if monthly payments are made, the ED will cover the added interest, ensuring that borrowers’ outstanding balance does not grow, even if their monthly payment is $0 due to their income level.

To enroll in the new IDR plan when it becomes available, or to switch to any of the four existing ones, visit https://studentaid.gov/idr/.

Fresh Start for Borrowers in Default

When the federal payment pause ends on December 31, 2022, the federal government will open their Fresh Start program for one year, allowing borrowers who were previously in default to enter repayment in good standing. The program will not require anything like a lump sum payment or consolidation, but it will remove the many penalties associated with default, such as wage garnishment and the denial of further student aid.

More details on how to enroll when this program opens on January 1, 2023 can be found at https://studentaid.gov/freshstart.

National Consumers League applauds President Biden’s plan to cancel $10,000 in federal student loan debt to millions of Americans

August 24, 2022

Media contact: National Consumers League – Katie Brown, katie@nclnet.org, (202) 207-2832 

WASHINGTON, D.C. – The National Consumers League applauds President Biden’s decision to relieve student borrowers of billions of dollars in educational debt and to extend the federal loan repayment moratorium. By cancelling $10,000 in student debt for borrowers earning less than $125,000 and cancelling $20,000 for borrowers who received Pell Grants, this administration is providing direct aid to consumers suffering from the plight of educational debt.

The following statement is attributable to NCL Executive Director Sally Greenberg:

“President Biden is providing critical assistance to millions of borrowers across the country. Importantly, this executive order will work to negate the impact of student debt that disproportionately affects women and Black borrowers. As consumers face increased rents, grocery costs, fuel prices, and even student loan interest rates, educational debt cancellation will help provide relief on strained household budgets by reducing—and in many cases eliminating—student debt costs.”

###

About the National Consumers League (NCL) 

The National Consumers League, founded in 1899, is America’s pioneer consumer organization. Our mission is to protect and promote social and economic justice for consumers and workers in the United States and abroad. For more information, visit www.nclnet.org.

LifeSmarts announces partnership with Discover® Student Loans  

Media contact: National Consumers League – Katie Brown, katie@nclnet.org, (202) 207-2832

During Financial Literacy Month, LifeSmarts teen consumer literacy program has introduced a new lesson focused on financing a college education and understanding student loans.

March 31, 2022

Washington, DC– The 28th National LifeSmarts Championship is on the horizon for the National Consumers League’s (NCL) youth consumer education program. Through LifeSmarts students learn about real-life consumer issues and compete to win prizes and scholarships at the National LifeSmarts Championship in April each year. Tomorrow, April 1, is the start of Financial Literacy Month. To commemorate this month, NCL is proud to announce a new lesson about financing a college education, made possible through financial support from Discover Student Loans.

On April 21, 39 teams from across the country will meet in Washington, DC, to compete in the 2022 National LifeSmarts Championship.  The Championship competition takes place over four days in which students will showcase their knowledge of personal finance topics as well as consumer rights, technology and workforce preparation, health and safety, and the environment.

Thanks to Discover Student Loans, LifeSmarts has created a new lesson on financial aid, with questions that will be featured in the National Championship. In the fall, the lessons and new competition focus will be fully integrated into the program for the new school year. Students and educators will see a concentration on personal finance topics at both the 2022 and 2023 National LifeSmarts Championships.

“We are so pleased to work with Discover Student Loans to help our students learn more about the important subject of paying for post-secondary education,” said National Program Director Lisa Hertzberg. “We know LifeSmarts gives students the skills they need to succeed as adults, and we see students applying what they learn immediately at home and in their communities. We are thrilled to be able to give special focus to the most crucial lessons in personal finance, and we look forward to rolling out new resources for educators and opportunities for student participants.”

Last year, students answered more than 3.5 million consumer questions about credit reports, nutrition, social media, and everything in between. More than 100,000 students will participate this year.

LifeSmarts is active in all states and the District of Columbia, where NCL is headquartered. “We are excited to have the opportunity to focus on personal finance for consumers at this age, when they are beginning to make decisions for themselves and influencing decisions made by their parents,” said Sally Greenberg, executive director of NCL. “Too often, traditional high school curriculum fails to teach students vital information to become successful adults, and LifeSmarts helps to close that gap.”

“It’s important that students and their families plan and save for college expenses, pursue free financial aid such as grants and scholarships, and understand the options for federal and private student loans,” said PK Parekh, senior vice president of Discover Student Loans. “We are very happy to work with LifeSmarts to help students learn through real-world lessons about personal finance, financial aid, and responsible borrowing.”

###

About LifeSmarts

LifeSmarts is a comprehensive consumer education program that is free to middle school and high school students and educators. The goal of the LifeSmarts program is to create consumer savvy young people who will be better equipped for adult life in today’s complex, global marketplace. Visit LifeSmarts.org for more information. LifeSmarts: Learn it. Live it.

About the National Consumers League (NCL)

The National Consumers League, founded in 1899, is America’s pioneer consumer organization. Our mission is to protect and promote social and economic justice for consumers and workers in the United States and abroad. For more information, visit https://nclnet.org.