Biden Cancels Another $1.3 Billion of Federal Student Loans, Provides Debt Relief for Other Borrowers

President Biden canceled over a billion dollars in federal student loans for the second time this month and provided debt relief to borrowers with defaulted FFELs.

Earlier this month, the U.S. Department of Education announced that about 41,000 borrowers whose federal student loans were forgiven due to total and permanent disability and then reinstated will get a discharge. On March 30, 2021, the Department also announced that borrowers with defaulted Federal Family Education Loans (FFELs) would receive a 0% interest rate and that the Department would pause collection actions on these loans during the coronavirus (COVID-19) emergency.

Relief for Student Loan Borrowers with Total and Permanent Disabilities

Borrowers receiving a total and permanent disability discharge are subject to a three-year monitoring period (unless the discharge is completed in conjunction with the Department of Veterans Affairs). During this time, borrowers have to provide the Department of Education information about their employment earnings.

Under the Education Department's recent announcement, around 41,000 borrowers whose loans were reinstated after failing to provide earnings information will get their discharges back, have any payments made during the COVID-19 crisis refunded, and won't have to submit earnings documentation. Another 190,000 borrowers who are currently in the monitoring period won't have to submit earnings documentation during the COVID-19 emergency.

This action will cancel approximately $1.3 billion in federal student loans, which is in addition to the $1 billion that Biden canceled earlier in the month for students who previously got partial relief on their federal student loans under a "borrower defense to repayment" claim.

Relief for Student Loan Borrowers with Defaulted FFELs

Under the FFEL program, private lenders made federal student loans to students, and guaranty agencies insured those funds. The federal government reinsured the loans. When an FFEL goes into default, the lender transfers the loan to the guaranty agency. While the Department of Education holds (owns) some FFELs because the federal government purchased them during the last financial crisis, private entities hold others.

On March 30, 2021, the Department of Education announced that the pause on interest and halt to collections for Federal Direct Loans and FFELs that the Department of Education owns is expanded to cover all defaulted FFELs loans, including FFELs held by guaranty agencies. So for defaulted FFELs, borrowers' interest rates will be 0%, and collection activities, including wage garnishments and tax refund seizures, will stop through at least September 30, 2021. Also, loans that went into default on or after March 13, 2020, will be returned to good standing. The guaranty agencies holding the loans must assign them to the Department of Education and ask the credit reporting bureaus to remove the default from borrowers' credit files.

This action will provide relief to more than one million additional borrowers during the COVID-19 emergency and is retroactive to March 13, 2020, when the coronavirus pandemic began. The Education Department plans to return any already seized tax refunds or garnished wages. Borrowers who made voluntary payments on these loans over the past year can request a refund of those amounts.

Borrowers with Perkins Loans and private student loans aren't covered, though. And the relief also doesn't cover FFELs in good standing.

Student Loan Forgiveness is Tax-Free Under the American Rescue Plan Act

The American Rescue Plan Act exempts student debt forgiveness from federal taxation until January 1, 2026, and covers Direct Loans, FFELs, and private student loans. The Biden administration has indicated that it will encourage Congress to pass separate student loan forgiveness legislation that includes $10,000 in loan forgiveness in the coming months.

Effective date: March 30, 2021