How to Prepare for Student Loan Forgiveness

Grace Lemire
Grace Lemire

Grace Lemire is a freelance writer and editor with over five years of experience in the personal finance industry. She has been featured on a variety of publications, including NPR, CNN, FinanceBuzz, Dollar Geek, Pangea, and True Finance. Her work focuses on the intersection of personal finance and technology. In 2023, Grace was nominated for the Best Personal Finance Advice award in’s FinTok Awards.

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Daniel Kahn
Daniel Kahn
Daniel is the co-founder and COO at Sparrow. Daniel is responsible for the day-to-day operations of a company, working closely with other members of the executive team to develop and implement strategies to support the growth and success of the company.
Daniel was a 2023 Forbes 30 Under 30 lister in the Education category.  Daniel was born and raised in Raleigh, North Carolina and graduated from Duke University in 2020.
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Camden Ford
Camden Ford

Camden leads Sparrow’s business operations – everything from product management to business analytics. After graduating Cum Laude from Duke University where he studied Civil Engineering, Camden worked as a Consultant for A.T. Kearney where he worked in their Strategic Operations practice. With a strong background in analytics, Camden strives to deliver data-driven conclusions and insights.

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November 10, 2023

On August 24th, President Joe Biden announced his comprehensive student loan relief plan, complete with up to $20,000 in student loan forgiveness per eligible borrower.

Now, as the application is nearing its release, it’s time to prepare. Here’s what you should do before the application comes out to make sure you’re ready.

Stay Updated on Any Changes

Details regarding student loan forgiveness are changing frequently. To ensure you’re up-to-date with the latest information, subscribe to the Department of Education’s email updates.

If and when information changes, you’ll receive an automated email complete with everything you need to know. (Don’t worry. You can pick exactly which newsletters you want to subscribe to, so your inbox won’t wind up packed with emails you don’t care about.)

Prepare Necessary Documentation

When the student loan forgiveness application is released, thousands of borrowers will flock to the site. While the Department of Education has been preparing for this exact moment, there’s a good chance the massive uptick in traffic will cause the site to get overloaded and even crash.

If you’re halfway through your application and the site goes down, you’ll likely lose your progress and need to restart when it comes back up. So, instead of memorizing certain details then having to recall them later, compile the documents you’ll need and have them at-the-ready, right in front of you.

You may need certain information, such as:

  1. Your tax returns from 2020 and 2021
  2. Proof of your address
  3. Proof you received Pell Grants while in school

It’s best to also have scanned copies of these documents in case you need to upload them.

Start Saving for a Potential Tax

While the amount forgiven isn’t taxable at the federal level, it may be taxed at the state level depending on where you live. Based on current information, Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin are expected to apply a state income tax to student loan forgiveness.

That said, several states have made an alteration to their tax rules, making discharged debt temporarily exempt from state income tax. So, there is a chance the above states follow suit.

While it’s unclear just how much you could be taxed, experts have estimated anywhere from a couple hundred to a couple thousand dollars. Due to how wide that range is, it’s important to start preparing for a potential tax as soon as you can.

Commit to sending a chunk of money to savings each time you’re paid. That way, covering the payment come tax time won’t be as much of a burden.

States Expected to Tax Student Loan ForgivenessStates Expected to Not Tax Student Loan ForgivenessStates Without Income Tax (thus, no tax on student loan forgiveness)
North Carolina
New Jersey
New Mexico
New York
North Dakota
Rhode Island
South Carolina
West Virginia
South Dakota

New Hampshire does not tax earned wages, so student loan debt forgiveness likely won’t be taxed.

Remember Other Aspects of Biden’s Relief Plan

The focus of President Biden’s student loan relief plan has been on forgiveness, but there are other parts to be aware of, such as the end of the forbearance period.

Forbearance Ending

If forgiveness won’t be wiping out your entire balance, you’ll need to prepare for payments to restart on January 1st, 2023 when the forbearance ends. 

To estimate your monthly payment amount, log into your loan servicer’s account. In some accounts, there is an option to view your projected monthly payment for each individual loan. While the number will likely drop due to a portion of your balance being forgiven, it’ll give you a solid estimate for what to expect once the forbearance ends.

This is a good time to look at your budget and make adjustments to your spending to accommodate a loan payment.

Sign Up for AutoPay

It’s been quite a while since borrowers have been required to make payments on their federal student loans. If you’re worried that the change of pace may cause you to miss a payment once the forbearance ends, now is a good time to opt in to autopay. This will automatically withdraw your payments from your account each month, so you never miss a payment.

Make Sure Your Contact Information is Updated

If you’ve recently moved or changed email addresses, log into your account and ensure the contact information is updated. Important information regarding your loans, the forgiveness application, and changes to the program will be sent to the information on file. If the information isn’t current, you could miss out on key details.

Look at Other Forgiveness Opportunities

If you don’t qualify for President Biden’s student loan relief, don’t fret. There are other programs you may be eligible for:

Public Service Loan Forgiveness

Also known as PSLF, this program eases the burden of federal student loan debt for eligible public service workers. If you work in a qualifying role, such as a teacher or law enforcement officer, you may qualify to have your entire loan balance forgiven.

Teacher Loan Forgiveness

If you are a highly-qualified teacher with federal student loan debt, this program is for you. To qualify, you must have taught at a low-income school or educational service agency for at least five consecutive school years.

Nurse Corps Loan Repayment

If you’re a nurse working in a critical shortage facility, you may be eligible to have up to 85% of your nursing school debt forgiven.

Income-Driven Repayment Forgiveness

After making qualifying payments on an IDR plan for 20-25 years, your entire remaining balance can be forgiven. While this option requires a lengthy commitment to receive relief, it is a great option for those committed to remaining on an IDR plan for that length of time.

Beware of Student Loan Forgiveness Scams

While student loan scams aren’t new, they’re increasing in number since the Biden Administration’s plan was announced. To prevent falling prey to a scam, here are a few red flags to look out for:

  1. Language that suggests urgency. You will never be asked to decide quickly when it comes to student loan forgiveness. Plus, most student loan forgiveness programs will require you to have made a certain number of payments. That requires preparation and, therefore, can’t be a decision made in a moment’s notice.
  2. Saying the program ends soon. Federal student loan forgiveness programs have been running, and will continue to run, for many years to come.
  3. Promising immediate loan forgiveness. Loan forgiveness programs all have a variety of criteria you need to meet. Plus, you’ll usually need to apply to even be considered. So, in any case, your loans won’t automatically be forgiven.
  4. Asking for your FSA ID or password. Neither the Department of Education nor a Federal Student Aid representative will ask for your personal information over the phone.
  5. Requesting a fee to discharge your debt. Legitimate student loan forgiveness programs do not require a fee to participate.

Remember, scammers are smart. Some may even utilize telemarketing services that place their location at Washington, DC to make the call look more reputable. Be wary of any call you receive in relation to student loan forgiveness. Always contact your loan servicer directly if you’re unsure whether something is real or a scam.

Final Thoughts from the Nest

As the application release date approaches, it’s important to start preparing. Make sure to gather all necessary documentation, ensure your contact information is up-to-date, and prepare for the potential loan forgiveness tax.

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