Student-loan forgiveness: Who qualifies for Biden’s plan and how to apply

“Millions and millions of people—working and middle class folks—can apply and get this relief. It’s simple and it’s now," said President Biden on Monday. The beta launch of the site received over eight million applications, according to the White House.

The launch of the application for debt relief is online. The form requires a borrower’s name, social security number, phone number and email address. It is available in English and Spanish. Borrowers must apply by Dec. 31, 2023.

The plan eliminates up to $10,000 in federal-loan debt for individual borrowers with annual incomes under $125,000 or couples who earn less than $250,000. Many borrowers will be eligible for total forgiveness up to $20,000 if they received Pell Grants, a form of federal financial aid awarded to students from low-income households.

“We’re in unprecedented territory," said Scott Buchanan, executive director of the Student Loan Servicing Alliance. “This has never been done before."

The plan is expected to benefit the majority of the more than 43 million people in the U.S. who hold a total of $1.6 trillion in student-loan debt.

In addition to the loan forgiveness, the president will be extending the pandemic-era student-loan pause on payments and interest through the end of the year. The measure began in March 2020 and has been repeatedly extended. The Federal Reserve Bank of New York estimates the pause spared borrowers nearly $200 billion in payments during this period.

President Biden’s announcement brings a host of questions for borrowers and servicers alike: Who qualifies for forgiveness and for how much? Here are answers to some of the key questions based on the announcement.

Who is eligible for student-loan forgiveness?

Borrowers with federal student-loan debt are eligible for up to $10,000 in relief if they earn less than $125,000 a year, or under $250,000 a year for couples. The income limit applies to gross adjusted income from 2021 or 2020.

People who received federal Pell Grants in college will also be eligible for up to $20,000 in forgiveness. Around 6 in 10 borrowers with any federal loans also received a Pell Grant, according to the White House, and Pell Grant recipient graduates hold about $4,500 more in debt than other graduates, according to a 2020 analysis of federal data by the Institute for College Access and Success, an advocacy group.

Most student-loan borrowers owe less than $25,000 on their loans as of May 2022, according to the Federal Reserve.

Do I need to take action to receive debt relief?

Yes. Borrowers must submit an application at the studentaid.gov website by Dec. 31, 2023.

The official application is now online. Borrowers who submitted during the beta period in October 2022 won’t need to reapply.

The Department of Education will determine your eligibility and contact you for more information. If requested, proof of income must be submitted by March 31, 2024. Your loan servicer will notify you when your relief has been processed.

What if I have private student loans?

Only federal debt is eligible.

What if the amount I owe is under $10,000?

If you owe less than $10,000 on your loan (or $20,000 for those who received Pell grants), then congratulations—you’ll now be student debt-free. President Biden’s plan will wipe out the debt of around 15 million borrowers.

Is the pause on student-loan payments extended?

Before today’s announcement, loan payments were expected to resume on Aug. 31. Now, borrowers will see the pause extended through the end of the year. Interest accrual and collections remain on pause as well.

Are Parent Plus loans eligible?

Yes. An individual student is limited in how much money they can take out in federal loans, but through the Parent Plus and Grad Plus Programs, families can borrow the total cost of attendance, including room and board and other expenses. This forgiveness applies to federal loans for both undergraduate and graduate programs, as well as to Parent Plus loans, White House officials said.

Is my debt forgiveness tax-exempt?

Debt forgiveness is often treated as income on taxes. But fortunately for borrowers, this canceled student debt is federally tax-exempt, as seen in other federal student debt forgiveness programs. Under existing state laws, in as many as 13 states, student-loan forgiveness could count as taxable income on state income tax returns, according to Jared Walczak, a state tax expert at the Tax Foundation, a tax policy think tank based in Washington, D.C.

That could mean a $500 tax bill in Massachusetts, which levies a 5% flat rate income tax, or an $1,100 tax bill in Hawaii, which has an 11% tax on its highest earners, wrote Mr. Walczak in a blog post.

What if I have already paid off my loans?

As of the end of last year, fewer than 1.2% of borrowers continued making payments on their student loans, Mr. Kantrowitz said. But some of the borrowers took advantage of the two-plus years of optional, interest-free payments to wipe out their debt entirely.

This measure won’t apply to balances that have already been paid off.

—Ashlea Ebeling contributed to this article.