Student loans

How student loan forgiveness will be applied to your debt

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The U.S. Department of Education continues to release new information about how President Joe Biden’s historic student loan forgiveness plan worked.

Some of the final details include how the rebate will be applied to your balance: which federal student loans qualify for the relief and in what order.

It’s not unusual for someone to have multiple student loans, experts say. “I would estimate them at around 8 to 12 per borrower,” said higher education expert Mark Kantrowitz.

Here is the latest information you need to know.

Which of my loans will be canceled first?

Here is how eligible loans are prioritized, when a discount is applied:

  1. Overdue loans: Forgiveness will first be applied to any loans you may have defaulted on, Kantrowitz said.
  2. Highest interest rate: The relief will then be directed to your loans with the highest interest rate, he said.
  3. Type of loan: Unsubsidized loans will be canceled before subsidized loans.

“If everything is the same, which is unlikely, they will apply it to the most recent loan,” Kantrowitz said. “If it doesn’t make a difference, they’ll apply it to the loans with the lowest balances.”

How much debt can I get forgiven?

President Joe Biden announced in August that most federal student loan borrowers will be eligible for some remission: up to $10,000 if they don’t receive a Pell Grant, which is a type of assistance available to low-income undergraduate students, and up to $20,000 if they did. (Here’s how to tell if you have one.)

If the remaining balance of your student loan is less than the forgiveness amount to which you are entitled, only that amount will be compensated. You can, however, request reimbursement of payments made during the pandemic.

Borrowers earning more than $125,000 a year, or married couples or heads of households earning more than $250,000, are excluded from relief.

Are my loans eligible?

Overall, the vast majority – around 37 million borrowers – will be eligible for forgiveness depending on their loan type (and then as long as they also fall under the income cap), because their debt is under that. called the William D. Ford Federal Direct Lending Program.

This includes direct Stafford loans and all subsidized and unsubsidized direct federal student loans. Under the Direct program, Parent Plus and Grad loans are also eligible for relief. The roughly 5 million borrowers with a government-held Federal Family Education Loan (FFEL) may be eligible.

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The Department for Education recently said it was trying to find a way to provide relief to the other 5 million borrowers who have a commercially held FFEL loan, meaning the debt is held by a private company. Those who have these loans, meanwhile, can contact their service agent or Studentaid.gov to consolidate into the main federal direct program.

You can find out where your FFEL credits are held on studentaid.gov. Log in with your FSA ID, then go to the ‘My Help’ tab and find your loan details.

Private student loans cannot be canceled.

What if I still have a balance after forgiveness?

Since the average student loan balance is over $30,000, many people still having debts even after forgiveness.

But your monthly payment, once these resume in January, they could be lower. Indeed, the Ministry of Education plans to “re-amortize” new borrower balances. It’s a wonky term which means it will recalculate your monthly payment based on your new balance and how many months you have left on your repayment schedule.

Kantrowitz provided an example: Let’s say you currently owe $30,000 in student loans with an interest rate of 5%. Before the pandemic, you were paying around $320 per month over a 10-year repayment term.

If you get $10,000 in student loan forgiveness, your total balance would be reduced by one-third, and your monthly payment would also be reduced by one-third, to about $210 per month. Your repayment schedule remains the same as before.