Currently, 43 million people across the country owe around $1.6 trillion in federal student debt. After speaking about this for months, on August 24, 2022, President Biden announced a plan to forgive some student loan debt. For Pell Grant recipients, the goal is to forgive up to $20,000 of debt. For non-Pell Grant recipients, the plan is to forgive $10,000 of debt. However, this only applies to those earning less than $125,000 a year or $250,000 if you are a married couple. The average balance for borrowers is about $37,000.
I recently spoke with Denise Valdez and Brian Loftus on KLAS 8 News Now on this topic and shared my insights. For many borrowers who have been holding on to student debt for years, this will be a windfall of $10,000 or $20,000, depending on the type of loan you have. There’s seemingly no tax consequence either. The debt forgiveness will not be taxable income to those students at a federal level.1 There’s also the repayment extension, where you’re granted more time to work on repayment. So essentially, there were three major takeaways from this announcement.
3 Major Takeaways
Student Loan Debt Forgiveness
The first major takeaway is, of course, debt forgiveness. It’s $10,000 for federal loans for non-Pell Grant recipients. And for Pell Grant recipients, it’s $20,000 in forgiveness. However, an individual’s income needs to be below $125,000 per year to qualify. On the other hand, if you’re married and filing taxes jointly, the threshold is below $250,000.
To address the financial harms of the pandemic for low- and middle-income borrowers and avoid defaults as loan repayment restarts next year, the Department of Education will provide this loan relief to borrowers. Nearly every Pell Grant recipient came from a family that made less than $60,000 a year, and Pell Grant recipients typically experience more challenges repaying their debt than other borrowers. Borrowers who meet those income standards but did not receive a Pell Grant in college can receive up to $10,000 in loan relief2.
Student Loan Forgiveness Taxability
The second major takeaway is that debt forgiveness is non-taxable income at the federal level. Generally, a discharge of indebtedness counts as income and is taxable. However, under the American Rescue Plan Act (ARPA) introduced by President Biden, the forgiveness of student loan debt between 2021 and 2025 will not be considered taxable income. Therefore, states that follow the federal treatment here will likewise exclude debt forgiveness from their state income tax bases. However, for various reasons, not every state follows these standards1.
As of now, it appears that 13 states have the potential to tax the discharged student loan debt. These states include Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin. Again, though, the final count could be significantly smaller if states make legislative changes or administratively determine that the debt forgiveness can be excluded or if conformity dates are updated retroactively1.
Student Loan Repayment Pause Extended
The third major takeaway is the repayment pause extension. Previously, all student loan repayments and interest were paused until September. To help ensure a smooth transition back to repayment, the Department of Education is extending the student loan pause a final time through December 31, 20223.
Federal loan repayment and interest have been paused since the pandemic began two years ago. Therefore, starting January 1, 2023, students will have to pick up payments where they left off. This extended pause will also occur automatically, so nothing has to be done to apply or qualify for the extension.
3 Major Questions
“What do I need to do right now?”
Many people may ask, “Is there anything borrowers need to do with their accounts right now?” Specifically, for many, it’s been two years of no activity, and since 2020 they have not had any repayments or interest accumulated on their student loans.
A significant thing to note is that although repayment has been extended again until December 31, 2022, starting January 1, 2023, they will have to pick up the payments. So, at this point, for the next several months, borrowers should begin planning and ensuring they have the appropriate budget and cash flow to start making those payments in January.
“What happens to student loans in the future?”
This program only applies to loans taken out before June 2021. For future student loans received by students trying to afford college, it is not sure what will apply to them yet. We don’t know if this could also be forgiven for students in the future. We only see how the bill is written today. We don’t know what future action Congress will take to forgive other loans or reduce the cost of college.
Since the New Student Loan Forgiveness Plan has been announced, the Department of Education is also proposing a new rule for future borrowers to address these concerns and follow through on Congress’ original vision for a new income-driven repayment program. This rule may include introducing a new income-driven program where the payments are reduced from 10% to 5% of discretionary income. In addition, the Department of Education is also considering raising the amount considered non-discretionary income, forgiving loan balances after ten years (instead of 20 years) of payments, and covering the borrower’s unpaid monthly interest as long as they make their monthly payments2. However, which parts of the rule will be enacted is yet to be seen.
“Who is paying for the loan forgiveness?”
Whether you support this forgiveness or not, it brings up one central question in the minds of many. Where does all this money come from to pay off such an enormous debt in student loans? The taxpayers will ultimately be responsible for paying for it. It is estimated that the cost of forgiveness will be around $300 billion. So someone will eventually be left holding the bag, and that person will be the taxpayers.
If you want to figure out how much of your loan will be forgiven, you can log into your federal student aid account. Your dashboard should show you a breakdown with a chart. It will likely differentiate the amount in your loans and grants so you may understand how this new plan may affect you.
Nearly 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available to the U.S. Department of Education. However, if the U.S. Department of Education doesn’t have your income data – or if you don’t know if the U.S. Department of Education has your income data, the Administration will launch a simple application in the coming weeks. The application will be available before the federal student loan repayments pause ends on December 31st2.
In addition, borrowers employed by non-profits, the military, or federal, state, tribal, or local government may be eligible to have all their student loans forgiven through the Public Service Loan Forgiveness (PSLF) program. However, these borrowers have a limited time to apply for the changes that waive specific eligibility criteria in the PSLF program. These temporary changes expire on October 31, 2022. For more information on eligibility and requirements, go to PSLF.gov2.
Student Loan Forgiveness for Dentists and Physicians
Most of our dentists or doctor clients are contacting us wondering how the new student loan forgiveness plan affects them. As the education costs for professions such as these are extraordinarily high, Dentists and Physicians usually have a more considerable than usual amount of student loan debt. Unfortunately, most of them will not qualify for forgiveness. However, dental students, medical students, and medical residents may be eligible for some forgiveness.
Financial Advisor Specializing in Student Loans
Understanding the new student loan forgiveness plan can take a lot of effort. If you need help navigating your student loan repayment plan, please book a complimentary consultation with one of our financial planners or me so we can help guide you in the best way possible. In addition, you can visit our website to learn more about our Student Loan Advice and Consulting Services.