For Individual Investors in the US

What you need to know about Biden’s student loan forgiveness plan

Retirement Director Ben Rizzuto provides an overview of President Biden’s historic student loan forgiveness plan and outlines important dates borrowers should be aware of through the end of 2022.

Ben Rizzuto, CFP®, CRPS®

Ben Rizzuto, CFP®, CRPS®

Retirement Director

Sep 21, 2022
6 minute read

Key takeaways:

  • President Biden’s student loan forgiveness plan could fully cancel the remaining student loan balances for roughly 20 million borrowers in the U.S.
  • There are a number of key dates and action items borrowers should be aware of to help ensure the process goes smoothly.
  • Individuals should also consider how this significant debt relief could impact their long-term financial goals and plan accordingly.

President Biden recently came through on a campaign promise to forgive student loan debt. Under his plan, that debt forgiveness could amount to between $10,000 and $20,000, depending on a borrower’s debt and financial situation.

Following are the general details of the plan, as well as key dates and action items to be aware of through the end of 2022.

The Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education, and up to $10,000 in debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than $125,000 ($250,000 for married couples).1

A significant percentage of borrowers could benefit from these provisions, which would fully cancel the remaining student loan balances for roughly 20 million borrowers (there are roughly 43 million total borrowers in the U.S.).

The U.S. Department of Education estimates that, among borrowers who are eligible for relief, 21% are age 25 years and under, 44% are between the ages of 26-39 and more than a third are age 40 and older, including 5% of borrowers who are senior citizens.2 Thus the debt cancellation provisions will impact individuals of all ages, not just younger groups.

Biden’s student loan forgiveness plan will also help advance racial equality by helping borrowers with the highest economic need, since Black students are more likely to have to borrow for school and to take out larger loans. Other borrowers of color are also more likely than their peers to receive Pell Grants.3

Now that we’ve covered the headline-grabbing details, borrowers should make note of the important dates they’ll need to be aware of for the remainder of 2022.

Early October 2022

Roughly 8 million borrowers may receive their student loan relief automatically since the Department of Education already has their relevant financial data on file.4 Borrowers for whom this is not the case will need to apply to have their loans forgiven. The problem is, the application has yet to be released, which has caused confusion among borrowers since Biden first announced the plan.

The good news is, the Biden administration and the Department of Education have both indicated that the application will be released in early October. It is expected that an online form will be available first, with a paper version to follow. To be alerted to when the application goes live, borrowers can sign up for updates from the Department of Education via the Subscriptions section of their website.

November 15, 2022

Once released, it has been suggested that borrowers will have to submit their applications by November 15, 2022. The expectation is that we’ll see forgiveness applied to student loan accounts four to six weeks after applications are submitted. The deadlines are rather tight, but time is of the essence: By submitting your application by mid-November, you’ll help ensure that interest doesn’t start accruing on your loans in 2023 when the student loan payment pause ends.

December 31, 2022

Many borrowers have enjoyed the relief provided by the student loan payment pause initiated during the pandemic. The pause itself has been extended a few times over the past two years, but the White House and Department of Education have characterized the creation of the student loan forgiveness plan as the “final” extension of the payment pause. That means borrowers should make sure they are ready to start making repayments in January. This would include logging on to your student loan service provider’s website to make sure banking information is up to date and automatic payments are set up.

Things to consider going forward

Possible taxation

One aspect of loan forgiveness that many borrowers may not be aware of is potential taxation. Generally, loans that are forgiven are viewed as imputed income and taxed at 30%. Luckily, in this case, the Biden administration has confirmed that the student loan forgiveness won’t be a taxable event at the federal level for borrowers.

While that is the case, one cannot forget about potential taxation at the state level. Many states mirror federal law when it comes to the tax treatment of certain events, but at this point several states could treat forgiven student loans as taxable income. While this is an evolving issue, those states currently include: Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.5

Remaining balances

There will be millions of borrowers – including those repaying loans under a standard, extended, or graduated repayment plan – who will have balances remaining even if they are able to take advantage of the forgiveness program. For those borrowers, the Department of Education will recalculate – and possibly lower – their monthly payment based on their new balance. This highlights how important it will be for borrowers to stay educated on updates from the Department of Education and/or log on to the Federal Student Aid website to make sure they understand how a change in payment amount will affect their budgets.

Retirement savings

The possibility of having a smaller payment will be welcome news to many. However, it’s important to make sure those newly available dollars are put to good use. Many times we see investors put off saving for retirement to pay down student loan debt. The timing of this change – the beginning of 2023 – may provide a wonderful opportunity to start or increase the amount you’re putting into your 401(k) or retirement plan account. When doing so, be sure to consider how the traditional or Roth 401(k) options that may be available in your plan will fit into your long-term savings and tax goals.

Having $10,000 to $20,000 in student loan debt instantly vanish will provide both financial and emotional relief for many Americans. But it’s important to be aware that there are a number of actions that must be taken to make sure the process goes smoothly. Understanding these steps and making note of the key dates outlined above – as well as thinking about how debt relief could impact your future goals – can help you take advantage of this historic student loan forgiveness program and start 2023 off on the right foot.

1 “FACT SHEET: President Biden Announces Student Loan Relief for Borrowers Who Need It Most.”, August 24, 2022.

2 Ibid.

3  Ibid.

4 “The Biden-Harris Administration’s Student Debt Relief Plan Explained.” Federal Student Aid Department, August 2022.

“States That Might Tax Student Loan Debt Cancellation.” Tax Foundation, August 25, 2022.