7 new details on how student loan cancellation will actually work

(NerdWallet) – President Biden’s highly anticipated federal student loan cancellation announcement last month created as many questions as it answered, prompting at least one major loan servicer’s website to crash as borrowers hustled to check their eligibility.

What is clear: Individuals making less than $125,000 and couples filing jointly making less than $250,000 may receive up to $10,000 in student debt cancellation — and that maximum goes up to $20,000 if the borrower ever received a Pell Grant.

What has been murky: Which loans will the cancellation apply to first? Will payment amounts on any remaining student debt change after cancellation? And what happens with FFELP loans?

Here’s the latest about how student loan cancellation will actually work.

1. When can I apply?

The application for student loan cancellation will be available by early October, according to the Education Department.

While about 8 million borrowers may see cancellation automatically, most will need to submit an application. The application will initially be available only online, but borrowers can expect access to a paper version at a later date.

Borrowers must apply for cancellation before the window closes on Dec. 31, 2023. So, if you have access to the online application, don’t wait around for the paper one, to ensure your application is handled in as timely a manner as possible.

2. How can I get ready for cancellation?

There are two main steps you can take to prepare for cancellation:

Verify you meet the income eligibility criteria.
Make sure your contact information is up to date on Studentaid.gov and with your servicer.

To be eligible, your annual federal income for 2020 or 2021 must be less than $125,000 if you filed as an individual. If you filed jointly, the cutoff is $250,000. If you earned above the maximum in one of the two years but met the threshold in the other, you can qualify with the lower annual income.

While it may seem safe to assume adjusted gross income is what qualifies for federal annual income, the Education Department has not clarified explicitly.

3. How much will I get?

Here’s the deal on the Pell Grant qualification: If you have ever received a Pell Grant of any amount and meet the income requirement, you get $20,000 in cancellation ($10,000 based on income requirements, plus an extra $10,000 for being a Pell Grant recipient).

The Pell Grant award does not have to correlate with the time, school or program for which you used your federal student loans. For example, let’s say you received a Pell Grant for your community college and didn’t use loans. Ten years later, you went back and finished your undergraduate degree with loans. Those loans can qualify for the $20,000 cancellation.

This is particularly critical for Parent PLUS borrowers. A Parent PLUS loan is not necessarily eligible for the extra $10,000 in cancellation just because the child who benefited from the loan was a Pell Grant recipient. In order for a Parent PLUS loan to get the extra relief, the parent borrower must have received a Pell Grant for their own education at some point.

The extra $10,000 is not prorated based on the amount of your Pell Grant. A Pell Grant award of any amount qualifies for the extra $10,000 in full.

4. Do FFELP loans count?

Some FFELP loans will receive cancellation. Here are all the loan types that are eligible:

All loans under the Direct Loan Program.
Federally-owned FFELP loans.
Defaulted FFELP loans held at a guaranty agency.
Federally-owned Perkins loans.
Other defaulted loans, including commercially-serviced Stafford loans.

Commercially-owned FFELP loans can count if you consolidate them into a direct loan. Consider the pros and cons of consolidation to make sure it’s worth it.

Check Studentaid.gov to verify which types of loans you have. Here’s how to find that information on the portal.

Log in to Studentaid.gov.
Select “My Aid” in the dropdown menu under your name.
See your loans listed in the “Loan Breakdown” section.
Expand “View Loans” and select “View Loan Details” next to each loan to see more details.

5. Will a payment refund increase my cancellation amount?

You can request a refund on student loan payments made during the pandemic forbearance if payments weren’t required. However, Scott Buchanan, executive director of the Student Loan Servicing Alliance, recommends only asking for a refund if you’re experiencing a financial hardship.

The Education Department hasn’t announced the official date it will use to determine your cancellation loan balance, but Buchanan expects a clarification will be posted on the department website in the next couple of weeks.

“If you are trying to get a refund to maximize or optimize your loan forgiveness, my suggestion to borrowers is to wait,” says Buchanan.

6. Will my payment change after cancellation?

Borrowers will see their loans reamortized based on their post-cancellation balances. Monthly payments will likely decrease as a result. However, the remaining payment term will stay the same.

“Ideally if everything is still in order, if you can afford that (original) payment, continue making that bigger payment,” says Damian Dunn, certified financial planner and vice president for corporate financial wellness platform Your Money Line. Borrowers “know how painful student loan debt can be,” he says. “If they can get from under that faster, even better.”

7. Can I pick which loans are canceled?

Borrowers with multiple loans cannot select how they want their cancellation applied. Here is the order in which loans will receive relief:

Defaulted federally-owned loans.
Defaulted commercially-owned FFELP loans.
Direct loans and federally-owned FFELP loans in good standing.
Federally-owned Perkins loans.

The Education Department will use the following order to cancel loans if you have several loans of the same type:

Loans with the highest statutory interest rate.
If interest rates are the same, unsubsidized loans get relief before subsidized loans.
If interest rate and subsidy are the same, newest loans get relief.
If all other factors are the same, the loan with the lowest combined principal and interest balance gets relief.