On Wednesday, August 24, 2022, President Biden announced changes to student loan debt relief. The biggest item of note was up to $20,000 of student loan forgiveness on federal student loans to current borrowers. Also announced was the continued delayed payment and 0% interest rate of student loans for one “final” time from December 31, 2022, until January 2023. For the payment delay, there are no steps needed to take for this; it will automatically occur.
This article is not intended to debate the merits of this announcement, but rather to walk you through the program details and resources that have been outlined at this point.
What are the eligibility possibilities for student loan forgiveness?
A borrower is eligible for $10,000 of forgiveness if they had no Pell Grants. If they had Pell Grants, then they’re eligible for up to $20,000- limited to the amount of their outstanding debt. It is not clear whether there are any requirements around the number of Pell Grants you had to receive to be eligible for the forgiveness. If you are not sure whether you received a Pell Grant, you can log into the National Student Loan Data Systems website and your previous aid will be available.
All federal student loans including Direct, FFELP, Perkins, Grad Plus, and Parent Plus qualify for forgiveness. A parent with a Parent Plus would separately have to qualify and would be independent as to whether the student borrower would qualify for the forgiveness. Private loans are not eligible for forgiveness.
If you’ve made payments/paid-off your loans since March 2020 you should reach out to your loan servicer and request a refund for those payments.
Your debt relief is capped at your outstanding balance (i.e. if your outstanding balance is $8,523 and you received no Pell grant then your forgiven amount will be limited to that amount, not $10,000).
The loan had to be disbursed before 6/30/2022 to be eligible for forgiveness as opposed to when the loan originated. Active student borrowers who were dependent students in the 2021-2022 year will be eligible for relief based on their parent’s income, not their own.
How does income affect eligibility?
Anyone who makes over $125,000 filing single or $250,000 filing joint is not eligible. What has not been released yet is:
What’s considered income? For stimulus payments, the IRS used adjusted gross income or AGI, which can be found on line 11 of your Federal 1040 form
If there’s a phase-out income range or if there’s a cliff (e.g. if you made $125,001 filing single then you don’t qualify). It appears to be a cliff.
What tax year this income limit is on? It appears it will likely be 2020 or 2021’s income.
How taxes could affect the eligibility
If by chance it is based on 2022 income, a borrower could still potentially control their income through contributions to Traditional 401(k), Traditional IRA, HSA, FSA, or Dependent Care FSA, or filling status.
If it is based on 2020 or 2021, then there could be some potential planning opportunities: someone who has not yet filed their 2021 taxes and is a business owner that can lower their AGI.
It appears that this forgiven amount will not be taxable at the federal level per the American Rescue Plan, but could be at the state level depending on what state you live in. Some states have no tax already, others replicate federal rules or some could make an exception. These laws could also change to make it not taxable. This is something we will be monitoring as well.
Do I need to do anything if I am eligible?
The loans for most borrowers would be automatically removed from their balance as the Department of Education has income on file for the majority of borrowers. For those it doesn’t, there will be a “simple” application that the U.S. Department of Education will launch in the coming weeks. If you would like to be notified by the U.S. Department of Education when the application is open, please sign up on the Department of Education subscription page.
Lastly, included in the bill was the addition of another income-driven repayment (IDR) plan. The rule lowers the required percentage of discretionary income amount of borrowers from 10% to 5% for undergrad loans and 10% for grad loans from 10-20% program dependent. The amount of income that’s considered non-discretionary is protected from repayment guaranteeing no borrower earning under 225% of the federal poverty level will have to make a payment. Loans will be forgiven where balances are less than $12,000 and have been paid for 10 years (previously 20 years). Under the IDR plan, you would not accrue any interest above what you make on a payment (even if your IDR payment is $0) so your balance would not continue to grow as it did with the other existing income-driven repayment plans.
There still could be legal challenges to this forgiveness so borrowers should not assume this is a guarantee until the eligible balance has been officially removed from their account.
If you are eligible for the Public Student Loan Forgiveness (PSLF) plan, there’s a program that you can/must apply for by October 31, 2022, to count payments towards your student loans that may have not previously counted towards the PSLF program.
We will continue to monitor any updates on this topic. If you would like to talk to an advisor or CPA about this or any other financial question, please reach out to our Tax Endorsed Local Provider or your Financial Planner.
Author: Andrew Young