5 things you need to know about student loan forgiveness

President Joe Biden detailed plans Wednesday to forgive up to $20,000 in student loan debt. Here's what borrowers need to know about what Biden announced, and what comes next.

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1. What authority is Biden using?

The president, who has previously called on Congress to enact student loan forgiveness, has decided he has the authority to do so. He's relying on an interpretation of federal law that gives the U.S. education secretary broad authority during an emergency, such as the COVID-19 pandemic.

That interpretation is certain to face legal challenges. Under President Donald Trump's administration, the U.S. Department of Education concluded it did not have such authority.
 

2. How much relief?

Most borrowers will get $10,000 of their student loans forgiven. Pell Grant recipients, those in the greatest financial need, will get a total of $20,000 in debt forgiven.

The Biden administration says this will wipe out the debts for 20 million people. More than 43 million people have student loan debt, with an average balance of $37,000.

The relief won't be taxable federally, but it will be subject to Minnesota income tax unless state lawmakers act before next tax season. That's because Minnesota does not automatically conform to federal changes. The forgiveness would increase a person's tax liability and potentially reduce tax credits or deductions a person would otherwise be eligible to receive, state revenue officials said.

3. What are the income limits?

Borrowers qualify as long as they made less than $125,000 in income last year. The cap is $250,000 for married couples.

The education department plans to notify people about next steps in the coming weeks. Most borrowers will need to fill out a form about their income.

Relief will be automatic for about 8 million borrowers who are enrolled in income-based repayment plans, said Mark Kantrowitz, a student financial aid expert.

"For those borrowers, the U.S. Department of Education has the info it needs to implement loan forgiveness automatically," he said. "For all remaining borrowers, they will need income information."

4. What about future college students?

The forgiveness applies to loans awarded before July 1, 2022, meaning current college students may qualify for some relief if they took out loans before that cutoff date. Future borrowers will not receive relief, and neither will people who already paid off their loans.

For future borrowers, Biden's plan would cap the size of payments at 5% of a person's discretionary income -- after taxes and necessary expenses -- to prevent payments from ballooning.

5. When do payments restart?

Biden is also extending the pause on interest accrual through Dec. 31. President Donald Trump's administration hit pause on payments in 2020, and Biden has extended the freeze multiple times.

Biden says this will be the final extension and borrowers will owe money again in January.

Loan servicing companies will be contacting borrowers in the coming weeks about the restart, and people need to be aware that they have to start paying again, Kantrowitz said.

In the meantime, "there are potentially better uses for that money such as building or bulking up your emergency fund," he said. "You should have at least half a year’s salary saved for unintended emergencies. You should use the money to pay down higher interest debt, like credit card debt. That will save you more money (than paying back student loans before the Jan. 1 restart)."