Which student loans will be forgiven first?
Who qualifies for student loan forgiveness? Which student loans will be forgiven first?
These are some of the many questions borrowers have about student loan forgiveness. This is not surprising. Understanding how a waiver works is not easy, as there are many basic conditions, requirements and limitations. However, in order to plan your finances, it is important to take the time to understand how they work and which student loans will be forgiven first.
Who qualifies for student loan forgiveness?
The first thing you need to know is if you qualify for student loan forgiveness.
As an individual borrower, you are eligible for up to $10,000 in your federal student loans if your annual income is less than $125,000.
Married borrowers are entitled to receive up to $10,000 of their federal student loans if their annual income is less than $250,000.
Borrowers who receive a Federal Pell Grant in college are eligible to receive up to $20,000 of their student loans. Provided they meet the income requirements - less than $125,000 for single borrowers and less than $250,000 for married borrowers. The $20,000 waiver applies even if you receive a partial Pell grant or have held a Pell grant for only one year.
What types of student loans will be forgiven?
This is the second most important thing you need to know in order to be able to determine your debts that are eligible for forgiveness.
Almost all types of federal student loans are eligible for forgiveness. This includes all subsidized and unsubsidized Direct Loans, Direct Stafford Loans and Parent Plus and Alumni Loans. Excluded from this list are most Federal Family Education Loans (FFEL) and Perkins Loans that are not owned by the federal government.
Private student loans are not eligible for forgiveness. This is because loan forgiveness is a federal government initiative and the federal government does not offer private student loans.
Which student loans will be forgiven first?
Next on your list of needs that you should know are which student loans will be forgiven first. Like most borrowers, you have multiple student loans with different terms and interest rates. You can't decide to pardon. The federal government has already finalized an order whereby the loans will be forfeited. The good news is that the warrant is designed to provide the maximum benefit to the borrowers.
1- Overdue loans.
If you have multiple federal student loans, forgiveness will be applied first to the defaulted loans. A loan is considered to be in default if the scheduled payment is at least 270 days late.
Defaulting on a loan has a heavy price tag. You pay high interest on the amount owed plus a hefty penalty for late fees until they are settled. Additionally, defaulting on a loan can hurt your credit score. Paying off your late loans early will help you reduce your total student debt significantly.
2- The loan with the highest interest rate
If you have multiple student loans with different interest rates, the ones with the highest interest rates will be paid off first.
Even if you have several loans of the same type, each one will have a different interest rate. This is because the federal government sets a fixed interest rate for each academic year. All loans taken out during the year will have the same interest rate. However, this rate changes every year depending on market conditions.
If you take out federal student loans each year of college, you will notice that each loan has a different interest rate. In this case, the forgiveness will be applied to your loans with the highest interest rate first. Log in to your FSA account to find the interest rates on all of your federal student loans.
3 - The most recent loan or loan with the lowest balance
It is very unlikely that you will get two or more loans at the same interest rate. But it can happen. Different criteria are used to determine which student loans will be disbursed first if multiple loans have the same rate. In this case, several scenarios may apply.
If the interest rates are the same, the relief is applied to unsubsidized loans first and then to subsidized loans.
Support status and interest rate are the same, your existing loan will be forgiven first. The forgiveness will then be applied to your second most recent loan.
It is extremely rare that all three criteria - support status, interest rate and exchange history - are the same. But if that happens, the loan with the lowest balance (principal and interest combined) will be forgiven first.
5 important things to know about student loan forgiveness
All student loan borrowers have different situations. This gives rise to a variety of scenarios that may apply to different borrowers. Here are a few things you should know in addition to knowing which student loans will be forgiven first.
1- What if the first loan that was forgiven was less than the forgiveness limit?
All federal student loan borrowers who qualify for forgiveness are eligible for a certain amount of which they are forgiven. The limit is $10,000 for single borrowers and $20,000 for married borrowers. This forgiveness applies to student loans in a specific order.
For example, let's say you're an individual borrower and your first qualifying loan balance is only $6,000. In this case, the remaining $4,000 (of the $10,000 total) will be applied to the next qualifying loan. The same applies to married borrowers. Only forgiveness is the most extreme.
2 - What happens if you have more than that missed loan?
The federal government will only forgive as much as it has promised. He will not forgive more than that. This is regardless of how much student loan debt you have. Not all of your federal student loans will be forgiven.
If your student loan balance exceeds the forgiveness limit, your payments will resume in June 2023. The good news is that you'll start with a lower balance because the forgiven amount will be subtracted from the total. In most cases, this means that the monthly payment amount will also decrease because the repayment schedule remains the same.
You should receive a notification from your loan servicer detailing your adjusted monthly payments. If you do not receive a notification, be sure to reach out and ask.
3 - If your student loan balance is less than the amount for which you qualify.
If you are nearing the end of your loan term, you may have already paid off a significant portion of your loan. Your balance may be less than the tolerance limit. In this case, you will only get the outstanding loan amount.
Assume you qualify for $10,000 in loan forgiveness but your student loan balance is just $7,000. You will only receive $7,000 in compensation.When your balance is below the limit, the balance is considered the tolerance limit.
4- The tax implications of student loan forgiveness
All student loans that have been forgiven by the federal government are exempt from federal income tax. However, you may have to pay state income tax depending on which state you live in. Be sure to check with your state's department of revenue to determine the tax implications in your state.
5- Student loan forgiveness is considered automatic, but you do not bear anything.
In principle, the forgiveness will be applied automatically to all eligible federal student loans. But this is a huge undertaking with many variables and many things can go wrong behind the scenes. If you qualify for forgiveness, you must be proactive and ensure that forgiveness is applied to your eligible debts. Your loan provider is the best person to talk to if you have any questions or need clarification.