New guidance on latest student loan forgiveness plan released ahead of key August deadline

The Biden administration has revealed new details about its upcoming student loan forgiveness initiative that could benefit millions of borrowers.

The latest plan, expected to launch in the fall, is expected to be the second attempt at mass student debt relief after President Joe Biden’s first plan was rejected by the Supreme Court last year. After nearly a year of rulemaking negotiations (the administrative process for developing new regulations), the Education Department has indicated that the new program is in its final stages.

Following the millions of notices officials sent to borrowers last week about the important waiver deadline, the department has updated its official guidance on the plan. The new details provide additional clarity on four categories of borrowers who may qualify for loan forgiveness, even as the department continues to work to finalize the program rules. A fifth category based on hardship is not expected to launch until next year.

Here’s a detailed explanation.

Student Loan Forgiveness Due to Uncontrolled Interest Accrual

One of the main groups of borrowers potentially eligible for student loan forgiveness under Biden’s new plan are those whose loan balances have grown over time due to interest accruals and capitalization. This can happen in a variety of circumstances, such as using an income-driven repayment plan when the payments are lower than the monthly interest accrual amount. In such a scenario, a borrower could make large payments over a long period of time and still owe more than they originally borrowed.

Under the new guidance from the Department of Education, a borrower is eligible for partial student loan forgiveness in this category if “their current balance on an unconsolidated Direct Loan, a Federal Family Education Loan (FFEL) program loan held by ED, or a Perkins loan held by ED is greater than the balance on that loan at the time you begin repayment of it” or if “the current balance on the consolidation loan is greater than the balance on the loans included in the consolidation loan at the time you begin repayment of the original loans.”

“All borrowers will be eligible for forgiveness of this debt, either for the amount by which the borrower’s current balance exceeds the principal and interest balance at the time the loans begin repayment, or up to $20,000, whichever is less,” the department says. However, borrowers enrolled in an IDR plan and earning $120,000 or less per year individually or as a married couple filing separately, or $240,000 or less per year as a married couple filing jointly, could receive student loan forgiveness for “all principal and interest in excess of the principal and interest balance at the time the loans begin repayment.”

Student loan forgiveness for those who first entered the repayment phase many years ago

Borrowers can also apply for student loan forgiveness if they first started repaying at least 20 or 25 years ago.

“Borrowers with debt from undergraduate degrees only would be eligible for forgiveness if they began repayment before July 1, 2005, and borrowers with graduate or mixed undergraduate and graduate debt would be eligible for forgiveness if they began repayment before July 1, 2000,” the Education Department’s updated guidance reads. “For borrowers with consolidation loans, we would look at when the underlying loans were originally repaid (not when the consolidation loan was repaid). Loans that meet these criteria could be fully forgiven.”

The new guidance defines “entering into repayment” slightly differently depending on whether the loans had a grace period after graduation or withdrawal. “For subsidized and unsubsidized loans, borrowers are considered to be in repayment at the end of the loan’s grace period,” the department says. “For both PLUS Loans for parents and PLUS Loans for graduate or professional students, borrowers are considered to be in repayment when the loan is fully disbursed.”

Student Loan Forgiveness Based on School Issues

The third category of eligibility for student loan forgiveness under the new plan is for those who attended “low-volume” institutions. The Department of Education has specific definitions of that term for purposes of the new debt forgiveness plan.

To qualify, a school must “lose eligibility, or close when in danger of losing eligibility, to issue federal student loans.” There could be several possible reasons, including the school failing to meet federal standards based on student performance or failing to meet employment requirements.

“An institution does not meet our accountability standards for purposes of the proposed rule if it has a high rate of student loan defaults, its graduates have debt that is too high a share of their income or whose earnings are no better than those of a high school graduate; or if it has been subject to a final agency decision to terminate aid for failure to provide sufficient financial value,” the department states.

“Schools or programs that are in a similar situation but close before we make a final decision” also could fail to meet the department’s standards, the department continued. “Under the proposed rules, you would be eligible for this debt relief if you took out tuition loans at the institution or program during a period when it did not meet our settlement standards and became ineligible for federal student aid or was denied recertification.”

Eligible borrowers may receive complete forgiveness of their covered student loan.

Student Loan Forgiveness for Borrowers Qualifying Under Other Programs

Borrowers will also be able to get loan forgiveness under the new plan if they would have qualified for relief under other programs but never applied or enrolled.

Eligible borrowers “would otherwise be eligible for loan forgiveness under IDR plans but are not enrolled, or would be eligible for closed-school relief or other types of forgiveness opportunities but have not successfully applied for that relief,” the department says. This could include, for example, borrowers who received backlogged credit under the ongoing IDR Account Adjustment initiative but did not meet the threshold for immediate loan forgiveness and never enrolled in an IDR plan to continue progressing toward eventual debt relief.

The deadline to opt out of student loan cancellation is August 30

The Education Department has updated its guidance on the new student loan forgiveness plan, as officials sent mass emails to borrowers informing them about the program and giving them the option to opt out. Borrowers have until Aug. 30 to do so.

“If you do not want to receive debt relief for any reason, you must inform your loan servicer that you do not want to receive student loan debt relief,” the updated guidance reads. “Contact ALL servicers by August 30, 2024 to ensure that you opt out of potential debt relief on time. Servicers will not be able to tell you if you may be eligible. If you opt out, you will not be able to re-enroll.”

The department also warns that opting out of this debt relief initiative could also be interpreted as opting out of relief under other student loan forgiveness programs. “Please note that if you opt out, you will also be excluded from Income-Driven Repayment (IDR) forgiveness for the next several months and will not be eligible to re-enroll,” the guidance warns. “If you opt out, we will automatically reassess your eligibility for IDR forgiveness in the future; you will not need to take any action to have this happen.”

Importantly, receiving an email does not indicate automatic eligibility for student loan forgiveness. Similarly, NO Receiving an email does not mean that the borrower is ineligible for a loan.

“Because we have not yet identified eligible individuals, failure to receive an opt-out email does not mean you are potentially ineligible for student loan relief,” the guidance reads. “If you did not receive an email, you can still follow the instructions above to contact your loan servicer(s). You should also make sure your email address is up to date by logging into your StudentAid.gov account.”

When will borrowers find out if they qualify for student loan forgiveness?

Other than the ability to opt out if they want to, borrowers don’t have to take any specific actions to qualify for student loan forgiveness under the new plan. The Education Department is still finalizing the details.

“We are currently working to finalize new regulations to be introduced in the fall that will determine who is eligible to receive student loan debt relief,” the department said.

Relief under the new program will be automatic for eligible borrowers — meaning there will be no application required. “Once the regulations are finalized, we will identify borrowers who qualify for forgiveness and apply that forgiveness if the borrower does not opt ​​out,” the guidance reads. “There will be no application process for debt relief under the proposed regulations, which ED is working to finalize, and borrowers will not be required to take any action to receive relief.”

A fifth category of relief based on financial hardship will likely require borrowers to submit an application, though that element of the plan is not expected to be introduced until next year.

However, the new loan forgiveness plan will likely encounter legal challenges that could delay or block the relief.