How student loan forgiveness will be applied to your debt

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The U.S. Department of Education continues to release new information about how President Joe Biden’s historic student loan forgiveness plan worked.

Some of the final details include how the rebate will be applied to your balance: which federal student loans qualify for the relief and in what order.

It’s not unusual for someone to have multiple student loans, experts say. “I would estimate them at around 8 to 12 per borrower,” said higher education expert Mark Kantrowitz.

Here is the latest information you need to know.

Which of my loans will be canceled first?

Here is how eligible loans are prioritized, when a discount is applied:

  1. Overdue loans: Forgiveness will first be applied to any loans you may have defaulted on, Kantrowitz said.
  2. Highest interest rate: The relief will then be directed to your loans with the highest interest rate, he said.
  3. Type of loan: Unsubsidized loans will be canceled before subsidized loans.

“If everything is the same, which is unlikely, they will apply it to the most recent loan,” Kantrowitz said. “If it doesn’t make a difference, they’ll apply it to the loans with the lowest balances.”

How much debt can I get forgiven?

President Joe Biden announced in August that most federal student loan borrowers will be eligible for some forgiveness: up to $10,000 if they didn’t receive a Pell grant, which is a type of aid available to low-income undergraduate students, and up to $20,000 if they did. (Here is how to know if you have one.)

If the remaining balance of your student loan is less than the forgiveness amount to which you are entitled, only that amount will be compensated. You can, however, request reimbursement of payments made during the pandemic.

Borrowers earning more than $125,000 a year, or married couples or heads of households earning more than $250,000, are excluded from relief.

Are my loans eligible?

What if I still have a balance after forgiveness?

Since the average student loan balance is over $30,000, many people still having debts even after forgiveness.

But your monthly payment, once these resume in January, may be lower. Indeed, the Ministry of Education plans to “re-amortize” new borrower balances. It’s a wonky term which means it will recalculate your monthly payment based on your new balance and how many months you have left on your repayment schedule.

Kantrowitz provided an example: Let’s say you currently owe $30,000 in student loans with an interest rate of 5%. Before the pandemic, you were paying around $320 per month over a 10-year repayment term.

If you get $10,000 in student loan forgiveness, your total balance would be reduced by one-third, and your monthly payment would also be reduced by one-third, to about $210 per month. Your repayment schedule remains the same as before.

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