7 new details on how student loan cancellation will actually work

September 8, 2022

Cecilia Clark, 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.

Getty Images

Shot of a young man going over his finances at home

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.

How can I get updated information?

You can find the latest updates on the Education Department’s website. Once the application is live, borrowers should call 833-932-3439 for help.

The other big student loan news: Changes to repayment

Canva
Some of the most common types of debt—a mortgage, an auto loan, and a credit card balance—are often necessary forms of debt people take on for everyday life, from covering household purchases and building good credit to attaining the American Dream of home ownership.

In the U.S., pursuing higher education has also often meant adding on another type of debt burden. Since The Great Recession, rising tuition at U.S. universities has contributed to student loans growing at rates unseen with other forms of personal debt. As of June 2022, the average student loan debt among consumers in the U.S. totaled $39,381, according to Experian. In 2012, U.S. consumers' overall student loan debt surpassed the $1 trillion mark for the first time, and it's continued its climb since.

To better understand how student loan debt has grown over time, Experian compiled data collected from student loan holders from across the country and government data dating back to 2009. The average loan balance used in the analysis represents the average debt among all student loan borrowers.

Historical data shows how average student loan debt balances have increased faster than inflation. In fact, student debt has also grown to equal more than credit card and auto loan balances combined.

Canva
Some of the most common types of debt—a mortgage, an auto loan, and a credit card balance—are often necessary forms of debt people take on for everyday life, from covering household purchases and building good credit to attaining the American Dream of home ownership.

In the U.S., pursuing higher education has also often meant adding on another type of debt burden. Since The Great Recession, rising tuition at U.S. universities has contributed to student loans growing at rates unseen with other forms of personal debt. As of June 2022, the average student loan debt among consumers in the U.S. totaled $39,381, according to Experian. In 2012, U.S. consumers' overall student loan debt surpassed the $1 trillion mark for the first time, and it's continued its climb since.

To better understand how student loan debt has grown over time, Experian compiled data collected from student loan holders from across the country and government data dating back to 2009. The average loan balance used in the analysis represents the average debt among all student loan borrowers.

Historical data shows how average student loan debt balances have increased faster than inflation. In fact, student debt has also grown to equal more than credit card and auto loan balances combined.

Show Caption Hide Caption
The other big student loan news: Changes to repayment

Experian
As of Q2 2021, the average student loan debt balance has grown by nearly 92% since 2009, according to Experian data. Student loan debt averages saw the biggest year-over-year increase from summer 2012 to summer 2013 when they jumped nearly 10%. For Americans who carry student loan debt, it averages nearly $40,000—second only to home mortgages when it comes to consumers' average debt balance.

Experian
As of Q2 2021, the average student loan debt balance has grown by nearly 92% since 2009, according to Experian data. Student loan debt averages saw the biggest year-over-year increase from summer 2012 to summer 2013 when they jumped nearly 10%. For Americans who carry student loan debt, it averages nearly $40,000—second only to home mortgages when it comes to consumers' average debt balance.

Show Caption Hide Caption
The other big student loan news: Changes to repayment

Experian
According to the U.S. Bureau of Labor Statistics (BLS), the annual nationwide inflation rate in the U.S. hovered around 2%—and often fell below 2%—over the decade leading up to the COVID-19 pandemic. In 2021, the first full pandemic-era calendar year, the inflation rate spiked to 7%.

Since the summer of 2012, the average student loan balance has grown much more rapidly. Over the three-year period preceding 2012, the average student loan balance grew by just under $2,000. Since 2012, student debt rose steadily at a much faster rate than income.

Experian
According to the U.S. Bureau of Labor Statistics (BLS), the annual nationwide inflation rate in the U.S. hovered around 2%—and often fell below 2%—over the decade leading up to the COVID-19 pandemic. In 2021, the first full pandemic-era calendar year, the inflation rate spiked to 7%.

Since the summer of 2012, the average student loan balance has grown much more rapidly. Over the three-year period preceding 2012, the average student loan balance grew by just under $2,000. Since 2012, student debt rose steadily at a much faster rate than income.

Show Caption Hide Caption
The other big student loan news: Changes to repayment

Experian
The median household income in the U.S. fell in the years following the financial crisis of 2008, and then saw modest year-over-year growth from 2015 to 2020, according to the U.S. Census Bureau.

Comparatively, the average student loan debt balance has increased at more than twice the rate of the median household income since 2009. By 2020, the median household income had grown from $49,777 to $67,521, or about 36%, not adjusting for inflation. Between 2009 and June 2022, the average student loan balance held by U.S. consumers grew about 92%, from $20,560 to $39,381.

Experian
The median household income in the U.S. fell in the years following the financial crisis of 2008, and then saw modest year-over-year growth from 2015 to 2020, according to the U.S. Census Bureau.

Comparatively, the average student loan debt balance has increased at more than twice the rate of the median household income since 2009. By 2020, the median household income had grown from $49,777 to $67,521, or about 36%, not adjusting for inflation. Between 2009 and June 2022, the average student loan balance held by U.S. consumers grew about 92%, from $20,560 to $39,381.

Show Caption Hide Caption
The other big student loan news: Changes to repayment

Experian
For at least a decade, college tuition has become increasingly expensive, according to data from BLS and the U.S. Department of Education.

The rate at which the average student loan debt balance in the U.S. has increased actually slowed from 2020 to 2021, according to Experian data. This is largely due to a nationwide drop in college enrollment during the COVID-19 pandemic, which reduced the number of people who took out new loans.

The CARES Act, passed in March 2020, also affected loan balances when it set an emergency relief interest rate for federal student loans at 0%. The law also allows employers to make up to $5,250 in tax-free annual payments toward their employees' student loans, which could have had an effect.

On August 24, 2022, the Biden administration announced a student debt relief plan to cancel $10,000 in student debt for individuals making less than $125,000 a year, or $250,000 for married couples. Pell Grant recipients will receive $20,000 in loan forgiveness. For all borrowers, the pause on federal loan repayment has been extended for more than two years now, with a final deadline of December 31, 2022.

This story originally appeared on Experian and was produced and distributed in partnership with Stacker Studio.

Experian
For at least a decade, college tuition has become increasingly expensive, according to data from BLS and the U.S. Department of Education.

The rate at which the average student loan debt balance in the U.S. has increased actually slowed from 2020 to 2021, according to Experian data. This is largely due to a nationwide drop in college enrollment during the COVID-19 pandemic, which reduced the number of people who took out new loans.

The CARES Act, passed in March 2020, also affected loan balances when it set an emergency relief interest rate for federal student loans at 0%. The law also allows employers to make up to $5,250 in tax-free annual payments toward their employees' student loans, which could have had an effect.

On August 24, 2022, the Biden administration announced a student debt relief plan to cancel $10,000 in student debt for individuals making less than $125,000 a year, or $250,000 for married couples. Pell Grant recipients will receive $20,000 in loan forgiveness. For all borrowers, the pause on federal loan repayment has been extended for more than two years now, with a final deadline of December 31, 2022.

This story originally appeared on Experian and was produced and distributed in partnership with Stacker Studio.

Show Caption Hide Caption

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