Key things to know about Joe Biden’s student loan plan

US President Joe Biden announced on Wednesday that many Americans can have up to $10,000 in federal student loan debt forgiven.

That amount increases to $20,000 if they qualified for Pell grants, which are given to lower-income families in the United States.

Here is what we know so far about the Biden administration’s plan and what it means for people with outstanding student loans:

Who qualifies for student loan forgiveness?

You qualify to have up to $10,000 forgiven if your loan is held by the Department of Education and you make less than $125,000 individually or $250,000 for a family.

If you received Pell grants, which are reserved for undergraduates with the most significant financial need, you can have up to $20,000 forgiven. If you are a current borrower and a dependent student, you will be eligible for relief based on your parents’ income, rather than your own.

Will the student loan payment freeze be extended?

The payment freeze will be extended one last time, until December 31. The freeze started in 2020 as a way to help people struggling financially during the COVID-19 pandemic and it has been extended several times since. It was set to expire on August 31.

Interest rates will remain at zero until repayments start. Under an earlier extension announced in April, people who were behind on payments before the pandemic automatically will be put in good standing.

How do I apply for student loan forgiveness?

Details of that have not been announced but keep an eye on the federal student aid website for more details in the coming days.

What is a Pell grant and how do I know if I have one?

Roughly 27 million borrowers who qualified for Pell grants will be eligible to receive up to $20,000 in forgiveness under the Biden plan.

Pell grants are special government scholarships for lower-income Americans, who currently can receive up to $6,895 annually for roughly six years.

Nearly every Pell Grant recipient came from a family that made less than $60,000 a year, according to the Department of Education, which said Pell grant recipients typically experience more challenges repaying their debt than other borrowers.

Pell grants themselves do not generally have to be paid back but recipients typically take out additional student loans.

“This additional relief for Pell borrowers is also an important piece of racial equity in cancellation,” said Kat Welbeck, a civil rights counsel for the Student Borrower Protection Center. “Because student debt exacerbates existing inequities, the racial wealth gap means that students of colour, especially those that are Black and Latino, are more likely to come from low-wealth households, have student debt, and borrow in higher quantities.”

The burden of student loan debt is especially heavy for Black and Hispanic borrowers who on average have less family wealth to rely on to pay for college. And the pandemic only made things worse.

This relief helps to narrow the racial wealth gap and advance racial equity.

— President Biden (@POTUS) August 25, 2022

How many people will this help?

About 43 million Americans have federal student debt, with an average balance of $37,667, according to federal data. A third of those owe less than $10,000. Half owe less than $20,000. The total amount of federal student debt is more than $1.6 trillion.

What if I have already paid off my student loans – will I see relief?

The debt forgiveness is expected to apply only to those currently holding student debt. But if you have voluntarily made payments since March 2020, when payments were paused, you can request a refund for those payments, according to the Federal Office of Student Aid. Contact your loan servicer to request a refund.

Will student loan forgiveness definitely happen?

The White House is expected to face lawsuits over the plan, because the US Congress has never given the president the explicit authority to cancel debt. We do not know yet how that might affect the timetable for student loan forgiveness.

What repayment plan is the Department of Education proposing?

The Department of Education has proposed a repayment plan that would cap monthly payments at no more than 5 percent of a borrower’s discretionary income, down from 10 percent now. Borrowers will need to apply for the repayment plan if it is approved, which could take a year or more.

For example, under the proposal, a single borrower making $38,000 a year would pay $31 a month according a government press release.

The amount considered non-discretionary will also be increased, though the department has not said how much.

Discretionary income usually refers to what you have left after covering necessities such as food and rent, but for student loan repayment purposes it is calculated using a formula that takes into account the difference between a borrower’s annual income and the federal poverty line, along with the family’s size and geographic location.

“What’s tough about income-driven repayment is that it does not take into account your other liabilities, such as your rent payment,” said Kristen Ahlenius, a financial counsellor at Your Money Line, which provides financial literacy training. “If someone’s living paycheck to paycheck and their rent is taking up half of their paycheck and then their car payment takes the other, they have to choose. Unfortunately, income-driven repayment doesn’t take that into consideration, but it is an option.”

Student Debt Relief offers a calculator to help determine your discretionary income.

What if I cannot afford to pay even with loan forgiveness?

Once payments resume, borrowers who cannot pay risk delinquency and eventually default. That can hurt your credit rating and mean you will not be eligible for additional aid.

If you are struggling to pay, check if you qualify for an income-driven repayment plan.

The plan Biden announced on Wednesday also includes a proposal that would allow people with undergraduate loans to cap repayment at 5 percent of their monthly income. Proposals like this one can take a year or more to be implemented, and it is not clear what the fine print will be.