Direct student loans, FFEL loans, private loans, the "rising balance phenomenon." President Biden’s plan to erase $10,000-$20,000 in student loan debt for millions of Americans has borrowers racing to find out what kind of student loans they have — and how much, if any, relief they can expect.
On the surface, it sounds simple: Biden is eliminating $10,000 in federal student loan debt for those with incomes below $125,000 a year, or households that earn less than $250,000. He’s canceling an additional $10,000 for those who received federal Pell Grants to attend college.
But parsing the jargon of student loans? It’s complicated. Amy Lins, vice president of enterprise learning at Money Management International, sat down with FOX TV Stations to break down the four categories of student loans and how Biden’s plan will impact repayment.
Direct student loan forgiveness
Direct student loans are issued directly by the federal government. The direct loan program has been in place since 2010. Anyone with a new student loan since then has a direct loan.
All direct student loans qualify for one-time debt relief under Biden’s plan, Lins said.
Family Federal Education Loan (FFEL) forgiveness
Before 2010, most student borrowers received Family Federal Education Loans (FFEL), also known as the Guaranteed Student Loan program or Stafford loans. Those loans were made by private lenders but backed by the federal government. Lins said there are plenty of people who still have these loans even though they’re no longer issued.
Do they qualify for student loan relief under Biden’s plan? It depends.
When the FFEL program ended, some of the private lenders got out of the student loan business and returned their loan portfolios to the Department of Education. Others did not.
The older FFEL loans transferred to the federal government qualify for student loan relief under Biden’s plan. The others still held by private lenders do not, but they can *if the borrower takes action*.
Here’s what they have to do: Anyone with an older FFEL loan still held by a private lender can do a direct consolidation loan through the Department of Education, which would bring their loans under federal control and then make them eligible for forgiveness if they meet income requirements.
Borrowers who are considering direct consolidation loans should research the terms, Lins said. These types of loans can impact interest rates, and they can also negatively affect borrowers in the Public Service Loan Forgiveness program (more on this below).
Perkins loan forgiveness
Perkins loans were issued by universities with seed money from the federal government. They’re also government-subsidized loans, but the loans are repaid to the school. The Perkins loan program ended in 2017.
Like FFEL loans, some Perkins loans moved to the Department of Education after the program ended, but others did not. If the Perkins loan is not held by the federal government, the borrower cannot get forgiveness under Biden’s plan. But they, too, can move their Perkins loan to the federal government through a direct consolidation loan, which would then qualify for forgiveness.
Borrowers with older FFEL and Perkins loans still held by private lenders weren’t included in the student loan payment pause that’s set to expire Dec. 31.
Private student loan forgiveness
These are student loans made 100% by private lenders with no government backing. They do not qualify for forgiveness under the new plan, and there’s no way to transfer private loans to the Department of Education. Private loan borrowers must deal directly with their lenders to discuss payment and refinancing options.
Parent PLUS loan forgiveness
Parent PLUS loans are loans that parents of dependent undergraduate students can take out to help pay for college. They are also eligible for one-time forgiveness under Biden’s plan.
"So a student or graduate with their own loans — and their parent who took out a PLUS loan on their behalf — could each receive forgiveness, if they meet income requirements," Lins said.
The one-time forgiveness also applies to students who are still in school. If they’re still considered dependents, eligibility will be based on their parents’ income.
PELL Grant forgiveness
Federal PELL Grants are given to undergraduate students based on financial need. According to the White House, the majority of families who qualify for PELL grants make less than $60,000 a year.
Under Biden’s plan, PELL grant recipients will have up to $20,000 in student loan debt erased.
What kind of loan do I have?
If you’re still not sure what kind of loan you have, here’s how you find out:
- Log on to your Federal Student Aid (FSA) account at studentaid.gov.
- Find the "My Loan Servicers" section.
- If a servicer name starts with "DEPT OF ED," the loan is held by the federal government and qualifies for one-time debt relief.
Direct consolidation loans and the Public Service Loan Forgiveness Program
If you’re a borrower with an older FFEL loan and you’re currently in the public service loan forgiveness program, there are some important things to know if you want to move your loans to the Department of Education and get your debt reduced.
If you’ve already made payments toward public service loan forgiveness — say you’ve made 50 of your 120 payments — any payments you made will be wiped out through a direct consolidation loan because you’re essentially paying off one loan and starting the process again. But there’s a way to prevent that from happening.
FFEL borrowers in the PSLF program have until October 31 to fill out a waiver to transfer all PSLF payments made from your old FFEL loan to your new consolidated loan.
The waiver also allows teachers who are in the teacher loan forgiveness program to join the public service loan forgiveness program simultaneously, but they have to fill out the form by Oct. 31.
Perkins loans do not qualify for public service loan forgiveness, but they have their own Perkins Cancellation program, which is similar, Lins said.
Student loan forgiveness and income-driven repayment
The administration’s plan could cut some monthly income-based payments in half.
There are several different plans for income-driven repayment, and although they’re all based on your ability to pay, they’re all different in how they calculate your payments.
Under some income-driven plans, borrowers pay up to 15% of their discretionary income each month, while other borrowers pay 10%. Discretionary income is based on adjusted gross income, family size and where you live.
Biden’s new plan will create a new income-driven repayment option, one that reduces the monthly payment to 5% of your discretionary income.
"This one will reduce payments significantly," Lins said.
Borrowers can leave one repayment plan and enter another at any time, but only if their loans qualify for the plan they want to switch to. Certain types of loans aren’t eligible for certain types of repayment plans.
The administration is also looking to forgive loan balances after 10 years of income-based payments instead of 20 years for balances of $12,000 or less. The White House said the plan "will allow nearly all community college borrowers to be debt-free within 10 years."
The ‘rising balance phenomenon’
One of the other major issues Biden’s plan seeks to address is the "rising balance phenomenon," Lins said. Under income-driven repayment plans, some payments are so low they’re not covering all the interest being accrued. When that happens, it’s called negative amortization — meaning your balance is growing despite making payments.
"That’s how you get stories of people who didn’t start out with hundreds of thousands in debt, but somehow ended up with it," Lins said.
Some of the income-driven repayment plans have tried to address it, but the "interest subsidies" under those plans didn’t cover 100% of the growing interest, so balances are still getting bigger.
The new income-driven repayment plan will cover 100% of unpaid interest, Lins said, to eliminate rising balances.
When will student loan debt be erased?
If Biden’s plan survives near-certain legal challenges, applications for student loan relief will be available in early October, White House officials said during a press briefing. It will take four-six weeks for the forgiveness to be applied.
Borrowers who want debt relief applied to their balances before the student loan payment pause expires Dec. 31 should apply by Nov. 15. Applications will still be accepted after the moratorium ends.
Not everyone who is eligible for loan forgiveness under Biden’s plan will have to fill out an application.
The Education Department already has income data for about eight million people, or roughly 20% of borrowers, officials said. If those people qualify based on the income on file, they’ll get relief automatically.
It’s unclear right now how a borrower can determine if the Department of Education has that information.
"They’ve made it clear this is the last pause, and the reason is they want time to make sure they’ve got everything in place with relief, so people know what they need to do to restart payment," Lins said.
Republicans have denounced the plan as an insult to Americans who have repaid their debt and to those who didn’t attend college. Some Democrats have said the plan doesn’t go far enough, but Lins said she believes "it’s going to help the people it was meant to help."
"Lower wage earners, people who aren’t in jobs where they’re getting raises or high levels of pay increases over time, people in public service fields that traditionally don’t have high level pay, and it’s going to help their families," she said. "Pell grant recipient families make less than $60,000 a year. That’s going to be a big help all around."
The Associated Press and FOX's Megan Ziegler contributed to this report.