As part of President Joe Biden’s historic student loan forgiveness plan, up to 8 million people could get automatic debt relief, according to the White House.
Across the board, most people with federal student debt will be eligible for some forgiveness: up to $10,000 if they didn’t receive a Pell Grant, which is a type of aid available to low-income undergraduate students, and up to $20,000 if they did. The aid is limited to those who make less than $125,000 per year, or married couples or heads of households earning less than $250,000.
Those who will get automatic loan cancellation are those for whom the U.S. Department of Education already has income data on file and can therefore verify eligibility without waiting for an application.
Here’s what you need to know.
Who qualifies for the automatic loan cancellation?
To automatically verify certain borrowers’ income data for tax years 2021 or 2020 (whichever is lower), the Education Department plans to use data obtained through the Free Application for Federal Student Aid, or FAFSA, as well as via income-driven repayment plans.
The FAFSA is how families apply for financial aid for college each year, while income-driven repayment plans allow borrowers to repay their loans in a more affordable way by capping their monthly bills at a share of their earnings. Both require proof of income; however, because the government only cares about the earnings for 2020 or 2021, the timing here will matter.
If you recertified your earnings on an income-driven repayment plan in 2021 or 2022, you may qualify for the automatic cancellation, said higher education expert Mark Kantrowitz. For the FAFSA, meanwhile, you’ll need to have filed it for the 2022-2023 academic year, he said.
Should I still apply for relief if the government has my income data?
Yes. Experts say that even if you believe the government already has your income information, you should still go through the formal request process when the application goes live, which the Education Department says will happen by “early October.”
“With any new government program, there is a risk of glitches, so it is best to apply just in case,” Kantrowitz said.
How quickly will forgiveness occur?
Borrowers could see the loan cancellation reflected on their accounts within six weeks, Kantrowitz said.
“They should also receive a notice from the loan servicer when they receive the forgiveness, showing how it was applied to their loans,” Kantrowitz said.
Was my income below the limits?
The relief will be limited to borrowers who make less than $125,000 per year, or married couples or heads of households earning less than $250,000.
Review your recent tax returns to confirm your income fell below those thresholds in 2020 or 2021 (either will work). The Education Department will be considering people’s so-called adjusted gross income, or AGI, which may be different than your gross salary.
To confirm your AGI for 2020 and 2021, look for Line 11 on the front page of your tax return, known as Form 1040.
What’s next after cancellation?
A smaller monthly student loan payment “is an opportunity to re-examine fundamentals like cash flow,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.
“Money that was once used each month to pay down debt can now be used to increase savings or investment,” he said.