Student Loan Forgiveness – Who, What, When?



It’s been big news, so we’re pretty sure you already have an inkling that loan forgiveness is coming (for some). Here are the deets…

The Biden-Harris administration has announced a one-time plan to:

    1. Forgive up to $20,000 of student loans for certain borrowers
    2. Extend the Student Loan Repayment Pause (for a final time)
    3. Update the Income-Based Repayment Plans

Part of our responsibility, why you trust us to provide a balanced perspective on money-related news, is to interpret what may be happening in the news and how it may affect your personal finances.

Whether you agree with the Biden Administration’s decision or not, today we’re focused on helping you know whether you qualify for student loan forgiveness, and if you do, how to apply for it.

In short, the student loan forgiveness program is designed to bring a graceful conclusion to the student loan repayment pause.

As we navigated the pandemic, the administration put this pause in place to help low-income students survive significant economic challenges.

Now, the White House is electing to extend the pause one final time through December 31, 2022.

Translation: repayments of student loans will resume in January 2023.

This is designed to create a smooth transition back to repayment and prevent defaults to the extent possible.

That brings us to the idea of student loan forgiveness.

The maximum debt forgiveness for the average borrower is limited to $10,000 per person.

However, if you as the borrower also received a Pell Grant, the maximum forgiveness jumps to $20,000.

Pell Grants often don’t need repayment because they are grants, not loans, so the $20,000 would be subtracted from other federal student loans.

So, the $10,000+ question remains…

Who Qualifies for Student Loan Relief?

For starters, only federal loans that were funded by June 30, 2022 are eligible for repayment relief and privately held loans are ineligible.

Most taxpayers with federal loans, including Parent PLUS Loans, will be eligible for relief, but as borrower income exceeds certain levels, the forgiveness is eliminated.

If your 2020 or 2021 income was below the following threshold, you likely qualify for student loan forgiveness:

  • Joint and/or Head of Household tax filing income threshold: $250,000
  • Single/Individual tax filing income threshold: $125,000

Ironically, the bill doesn’t actually define what “income” is, but it’s likely to be AGI.

Are income thresholds a ‘cliff’ for student loan forgiveness?

It appears so, which poses some strange conundrums.

In retrospect, you would likely be far better off earning $124,000 in 2020 and 2021 and getting $10,000 of forgiveness than if you’d earned $125,000.

Can we expect another loan forgiveness for students in 2022 or 2023?

It’s unlikely we will see additional student loan forgiveness initiatives in the near future.

The Biden administration is using the pandemic emergency as justification to legally forgive student loan debt.

How much benefit am I eligible to receive?

Your relief is capped at the amount of your outstanding debt, no more.

If you have $8,000 in outstanding student debt, that is the most relief you may receive.

Can we do some planning now to be eligible for forgiveness?

Unfortunately, the answer is likely no at this point.

For most borrowers, whatever your income was in 2020 and 2021 determines your eligibility for student loan forgiveness.

However, in some cases, if you’re a business owner who hasn’t yet filed your 2021 tax returns, you may consider maxing out retirement plan contributions – earmarked for yourself and/or employees – to lower your AGI to qualify for forgiveness.

How do I request my loan forgiveness?

For some borrowers whose income is on file with the Department of Education, it will be automatically forgiven from your account.

For others, they’ll need to complete an application.

The application will be available before the pause on federal student loan repayments ends on December 31st.

The Biden administration says details will be released in the coming weeks.

When the process officially opens, we recommend signing up at the Department of Education webpage.

What about the Income-Driven Repayment (IDR) Plan?

For borrowers who won’t have all of their federal student loan debt forgiven, the White House also announced plans to create a new Income-Driven Repayment (IDR) Plan.

Under this plan, your payments would be limited to no more than 5% (currently 10%) of your discretionary income for undergraduate loans and no more than 10% (currently 20%) for graduate loans.

Borrowers with loans for both will have weighted average income caps.

For current IDRs, “discretionary income” is usually an individual income above 150% of federal poverty level income.

This new program will increase the amount of discretionary income to be equal to 225% of federal poverty level income.

Similar to several current IDRs, the Biden IDR is built to forgive any student debt still remaining after 20 years of payments.

However, if the original loan balance was $12,000 or less, any balance remaining at the end of 10 years will be forgiven.

Finally, the new program will ensure that if you, as the borrower, make your required monthly payment, the loan balance will not grow.

It’s important to mention that it’s still not clear what requirements may be necessary to opt into the new repayment plan.

Reminder About the Public Service Loan Forgiveness (PSLF) Program Waivers

The announcement also includes an important reminder that the current Limited PSLF Waiver program is scheduled to end on Oct. 31, 2022.

The waiver currently allows borrowers to receive credit for past payments that would otherwise not normally count toward the PSLF program.

If you currently or previously worked in the nonprofit, in the military, or in federal, state, tribal, or local governments, we strongly encourage you to explore whether you might benefit from the program.

What does this mean for my financial planning, especially for my child’s college planning?

As with any significant legislation announcement, there is often more confusion than clarity in the first days, if not weeks.

Our ongoing commitment to you is to provide the most relevant, accurate, up-to-date information (and fiduciary-guided interpretation) of changes from this announcement.

For now though, we continue staying on track with our clients’ written, detailed, and personalized financial plans.

These past few years are truly unprecedented, but timeless principles remain unchanged…

Preparing for a better future is one of our greatest responsibilities, not just in financial matters.

That we, as fiduciaries, will do our best as possible to continue guiding your financial future.

And there is a tremendous opportunity to make the most of your money to help you thrive.

To your prosperity,
Your HWM Money Mavens


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