Q&A: Debt Relief & Eligible Loans

The U.S. Department of Education has published an FAQ with more details on student loan forgiveness, including the types of loans eligible for one-time student debt relief.

Here are a few highlights from the department’s new FAQ.

Q. What loans qualify for debt relief?
A. Most federal student loans held by the Department of Education qualify.

· Federal Direct Loans for undergraduates and graduates, including Subsidized, Unsubsidized, Parent PLUS, Graduate PLUS and Consolidation loans if underlying loans were first disbursed on or before June 30, 2022.

· Federal FFEL held by the department or in default at a guaranty agency.

· Federal Perkins Loans held by the department.

· Defaulted loans held by the department, or commercially serviced Subsidized Stafford, Unsubsidized Stafford, Parent PLUS, Graduate PLUS and Perkins loans held by the department.

Loans held by private lenders do not qualify; however, some loan consolidations will qualify if they were consolidated into federal loans.

Borrowers can log in to studentaid.gov and use My Aid in the dropdown box under their name to find out what type of loan or loans they have.

Q. How is forgiveness applied for borrowers with multiple loans?
A. According to the department’s website, relief will be applied in this order:

· Defaulted department-held loans.

· Defaulted commercial FFEL Program loans.

· Non-defaulted loans from the Direct Loan Program and FFEL Program loans held by the department.

· Perkins Loans held by the department.

For those with multiple loans in a program type – for example, multiple loans from the Direct Loan Program – relief will be applied in the following order:

· Loans with highest statutory interest rate.

· If interest rates are the same, relief is applied to unsubsidized loans before subsidized loans.

· If interest rate and subsidy status are the same, relief is applied to the most recent loan.

· If interest rate, subsidy status and disbursement date are the same, relief is applied to the loan with the lowest combined principal and interest balance.

Q. Is debt forgiveness taxable?
A. One-time student loan forgiveness will not be taxable federal income, but borrowers may have state and local tax implications.

Q. Are loan amounts forgiven under PSLF taxable?
A. Loan amounts forgiven under PSLF are not considered taxable income by the IRS, according to the department’s website.

Student loan borrowers qualify for relief if they have an eligible loan and meet income requirements. Borrowers with an annual income during the pandemic of less than $125,000, or $250,000 for married couples, who received a Pell Grant are eligible for up to $20,000 in debt relief. Borrowers who meet the income requirements and didn’t receive a Pell Grant are eligible for up to $10,000 in debt cancellation.

Loan forgiveness will happen automatically for 8 million borrowers whose income information is already available to the Department of Education, but most borrowers will need to apply for debt relief. The application will be available by early October and borrowers have until December 31, 2023, to apply. You can sign up here to receive notifications about the application.

The department’s FAQ page will be updated as more details become available, and information may change.

They’ve also noted that anyone applying for debt relief doesn’t have to pay for help with federal student aid questions or the process for debt relief, and they ask applicants to be aware of scams if contacted by someone or a company that offers help for a fee.