Student loan debt forgiveness is approved, up to $20,000 per borrower — here's who qualifies

Those with student loans are breathing a huge sigh of relief today as the Biden administration announced that it will cancel up to $20,000 worth of federal student loan debt per borrower. The federal loan repayment pause will also be extended until Dec. 31, 2022 and those on income based repayment plans will have lower monthly payments.

Here's what you need to know about the Biden administration's latest move, and how it affects you.

President Biden announced today that borrowers will have up to $20,000 worth of student loans forgiven, along with one final extension on student loan forbearance through the end of the year.

This move will alleviate all student loan debt for roughly 20 million borrowers, according to the White House. Of the roughly 45 million total federal student loan borrowers, 43 million would be eligible for some type of forgiveness. The decision comes after both the Trump and Biden administrations extended the federal student loan payment pause multiple times since it was instituted in March 2020.

As long as you're under the yearly income thresholds, which are $125,000 for individuals and $250,000 for families, you will qualify for the following student loan forgiveness:

• Up to $20,000 of debt cancellation for Pell grant recipients
• Up to $10,000 for most other non-Pell borrowers

The payment pause for federal loans will continue until Dec. 31, with repayment starting Jan. 1, 2023. According to the White House, this will be the last extension of the payment pause.

On top of this, the Department of Education is beginning to develop a new income-driven repayment plan system for undergraduate loans. For those who qualify for income-driven repayment, your monthly payments will be capped at 5% of your monthly income — reduced from 10%.

However, it's likely that some of today's actions will be challenged in court by Republicans as the party has staunchly been against many forms of forgiveness.

For more details on student loan forgiveness, the payment pause and the new income driven repayment plans visit the Student Aid website.

For millions of borrowers, this news comes as a sigh of relief. But there is one important step to ensure you get the forgiveness you qualify for.

• Be sure to certify your income. Though some borrowers already have their income data on file with the Department of Education, millions of borrowers have not certified their yearly income. If you haven't done so, there will be an application in the coming weeks from the Department made available. To get alerted when the application is live, sign up here.

It's unclear when borrowers will see their loan balances reflect the applicable forgiveness. Additionally, this student loan forgiveness is not considered taxable income due to the American Rescue Plan.

If you're unsure whether or not you had Pell Grants (which qualify borrowers for up to $20,000 in loan forgiveness), you can log in to your Federal Student Aid account and click "view details" under the "Grants" section to see if any of your grants are Pell Grants. Pell Grants are typically awarded to low-income undergraduate students who have demonstrated a serious financial need.

Note that this announcement doesn't affect anyone with private student loans. If you currently have private student loans, consider refinancing them for a lower interest rate and better terms with a lender like SoFi or Laurel Road.

Forgiving $10,000 per borrower could cost the federal government around $330 billion, a recent estimate from the University of Pennsylvania's Wharton Budget Model. Mark Kantrowitz, higher education expert and author of 'How to Appeal for More College Financial Aid', estimates an even higher cost — more than $350 billion when including $20,000 forgiveness for Pell Grant recipients. This leaves the estimated cost per taxpayer at $2,000, according to the National Taxpayers Union Foundation.

Advocates of student loan forgiveness have argued that this is an important process to help close the racial wealth gap. On average, Black college graduates owe $23,400 versus the $16,000 owed by their white peers, according to Brookings, a progressive think tank. An analysis conducted by the Roosevelt Institute, a left-leaning think tank, found that forgiving $50,000 worth of student loan debt would increase Black household wealth by 40%.

Detractors of student loan forgiveness assert that benefits would accrue primarily for high-income earners and that it doesn't address the core issue: college affordability. Those against student loan forgiveness also believe it would create a moral hazard issue where borrowers would take out more in loans with the hope that the federal government would forgive debt in the future.

Additionally, critics of the move say that student loan forgiveness only helps those in financially secure positions. The Committee for a Responsible Federal Budget, a nonpartisan and nonprofit organization, found that forgiving $10,000 would deliver 71 percent of the benefit to the top half of the income distribution.

And with record-high inflation squeezing the wallets of Americans, there are fears that forgiveness could make matters worse.

This is the first time that the federal government has ever implemented student loan forgiveness. So if your student loan debt has been completely wiped out, Lauren Anastasio, director of financial advice and certified financial planner at investing-app Stash recommends reevaluating your financial goals.

"This can help offset the impact of inflation on your budget, help you pay off the debt sooner than you would have otherwise, or simply give you a little extra money to put towards other goals each month," she says.

So whether it's bolstering your emergency fund, beginning to invest for retirement or simply paying down other debt, this announcement can help you get closer to accomplishing your financial goals.

Catch up on Select's in-depth coverage of personal finance, tech and tools, wellness and more, and follow us on Facebook, Instagram and Twitter to stay up to date.