Student Loan ‘Financial Hardship’ Forgiveness: New Details Revealed

Eight million borrowers facing “persistent financial burdens,” such as those brought on by unexpected medical bills, natural disasters or high child care or family caregiving costs, could qualify for federal student loan forgiveness — but it’s not a done deal yet.

The Education Department revealed new details of the financial hardship proposal on Friday, Oct. 25, including eligibility criteria and how borrowers could apply for the relief.

“For far too long, our broken student loan system has made it too hard for borrowers experiencing heartbreaking and financially devastating hardships to access relief, and it’s not right,” U.S. Secretary of Education Miguel Cardona said in a statement.

The hardship proposal is part of President Joe Biden’s student loan forgiveness ‘plan B,’ which currently faces legal challenges. The president introduced ‘plan B’ in June 2023, after the Supreme Court blocked his original up-to-$20,000 student loan forgiveness plan. The Education Department kicked off the rulemaking process in October 2023.

The Education Department aims to finalize the plan in 2025, but lawsuits could impact that rollout. The department will formally publish the proposed regulations in the coming weeks. Once published, the public will have 30 days to comment on regulations.gov.

“While this is yet another lawful avenue to cancel student debt, pushback is anticipated, so it is crucial that we move forward quickly to deliver this much-needed relief,” said Kristin McGuire, executive director of Young Invincibles, a policy organization focused on issues affecting young people, in a statement.

If the hardship proposal goes into effect, borrowers would have two main pathways to this student loan forgiveness:

• Automatic forgiveness. If the Education Department determines that you have at least an 80% chance of defaulting on your student debt within two years, it may automatically forgive your loans on a one-time basis. Determining hardship factors may include your income, assets, type and amount of student debt and whether you received a need-based Pell Grant to pay for school. 

• Application-based forgiveness. If you don’t qualify for the automatic one-time forgiveness, you may submit an application that holistically assesses how likely you are to default or experience severe, persistent financial hardship.

“I have so little faith in that actual forgiveness program coming to fruition,” says Stanley Tate, a lawyer who specializes in student loans. “Even if you have what you would believe to be a pro-forgiveness president in office, they still would be up against challenges from groups who have the right to challenge these things.”

On Oct. 3, a federal judge in Missouri temporarily blocked Biden’s ‘plan B’ for student loan forgiveness, which includes this hardship proposal. A group of Republican-led states including Missouri, Georgia and Alabama filed the lawsuit in September.

“Our latest lawsuit challenges [the Biden-Harris administration’s] third and weakest attempt to mass-cancel student loans in the dark of night without letting Congress — or the public — know about it,” Missouri Attorney General Andrew Bailey said in a September statement.

If you’re struggling with student debt right now, consider these existing relief and forgiveness options instead:

• Income-driven repayment (IDR) plans. IDR plans cap your monthly federal student loan bills based on your income and family size, to as low as $0. After 20 or 25 years, your remaining debt will be forgiven. 

• SAVE lawsuit forbearance. The newest federal IDR plan, SAVE, currently has legal challenges. As a result, borrowers enrolled in SAVE have an interest-free payment pause until at least April. If you’re not on SAVE, you can still get this interest-free forbearance if you apply for the plan now. You always have the option to change plans down the line. 

• Deferment or forbearance. You can temporarily postpone your federal student loan bills by asking your servicer for a deferment or forbearance. Deferments are generally the better option, because interest does not generally accrue — but you must meet specific eligibility criteria. If you have private student loans, ask your lender about ways to temporarily lower or suspend your payments. 

• Refinancing if you have private student loans. If you have private student loans, your relief options are limited and you don’t have access to federal student loan forgiveness. Refinancing your private student loans to get a lower interest rate can reduce your monthly payments and the amount you pay overall. However, you can only qualify for the lowest advertised rates if you have a strong credit score and finances.