How Will Student Loan Forgiveness Be Applied?

Submitted by Law Offices of ... on Wed, 09/07/2022 - 9:02pm

How Will Student Loan Forgiveness Be Applied?

Under the Biden Administration the Department off Education has indicated that it will utilize a “waterfall” method when applying the $10,000 or $20,000 student loan forgiveness award for borrowers who have larger balances. The education department says it will prioritize the application of loan forgiveness in the following order:

  • Defaulted Department of Education-held loans;
  • Defaulted commercial FFEL Program loans;
  • Non-defaulted Direct Loan Program loans and FFEL Program loans held by the department;
  • Perkins Loans held by the department.

In the case of borrowers who have multiple loans in a specific type of loan program (such as multiple Direct student loans), the department will apply the relief in this order:

  • Loans with highest statutory interest rate will get first priority.
  • If interest rates are the same, student loan forgiveness will be applied to unsubsidized loans prior to subsidized loans.
  • If the interest rate and subsidy status are identical, the department will apply the loan forgiveness to the most recent loan.
  • If the interest rate, subsidy status, and disbursement date are all the same, the department will apply the loan forgiveness to the loan with the lowest combined principal and interest balance.

What happens to the remaining loan balances after the 10,000-20,000 student loan forgiveness program?

The Education Department has confirmed those a remaining balance following the student loan forgiveness award and are repaying their loans under a Standard, Extended, or Graduated repayment plan will have their balances re-amortized. That means that the department “will recalculate your monthly payment based on your new balance, potentially reducing your monthly payment. Your loan servicer will communicate your new payment amount to you.”

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