By Patrick Diamond, CFP® and Jeremy Lawton, MBA
On August 24, 2022, the Biden Administration announced a student loan debt relief plan. Jeremy and I have our own experience with student loans from undergraduate and graduate studies. We know firsthand how confusing the different (and moving) parts to the student loan repayment process can be to everyone. We’ve put together the following article to summarize the recent announcement and highlight where questions still exist.
Part 1: Payment Pause Extended
In March of 2020, the Department of Education put a pause on all federal student loan payments (also called “administrative forbearance”). This pause on payments has been extended through December 31st, 2022, with loan payments resuming in January 2023. This is being described as the final extension before payments begin in January.
Do I need to do anything to extend my student loan pause through the end of the year?
- The extended pause will occur automatically.
Will my payments automatically resume in January 2023?
- For borrowers that make automatic loan payments from a checking account, those payments may not restart automatically. Borrowers should check with their student loan servicer to see if they need to opt-in again for automatic payment enrollment.
Part 2: Debt Relief
The Department of Education also announced it will cancel $10,000 in federal student loan debt, and $20,000 for those who have received Pell grants. Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for households. In other words, if you did not receive a Pell Grant in college and meet the income threshold, you will be eligible for up to $10,000 in debt cancellation. These limits are likely based on adjusted gross income, or AGI, which may be different than your gross salary. To confirm your AGI for 2020 and 2021, look for line 11 on the front page of your tax return, known as Form 1040.
Your relief is capped at the amount of your outstanding debt. Here is a helpful example: If you are eligible for $20,000 in Pell Grant debt relief, but have a balance of $18,000 in federal student loans remaining, you will only receive $18,000 in relief. And the same for those without Pell Grants. If you have a balance of $8,000 remaining in federal student loans, you will only receive $8,000 in relief (not the full $10,000).
Do I need to do anything to get the student loan debt forgiveness?
- For many, debt forgiveness will be automatic because their income data is already available to the Department of Education. If you don’t know if the Department of Education has your income data, an application will be coming in the following weeks. You can sign up at the Department of Education subscription page (https://www.ed.gov/subscriptions) to be notified when the application is available.
Will the student loan forgiveness be taxable?
- Federal Taxes
Often when debt is forgiven it becomes a taxable event and considered income under IRS rules (with income taxes being owed). The student loan debt forgiveness will not be taxable under federal tax rules.
- State Taxes
Thirteen states currently have laws that would tax forgiven student loans, including Massachusetts and New York. It’s possible that some of these 13 states will revise their rules before the taxes are due next spring but we will have to wait and see.
Public Service Loan Forgiveness Program
Borrowers who are employed by nonprofits, the military, or federal, state, Tribal, or local government may be eligible to have all of their student loans forgiven through the Public Service Loan Forgiveness (PSLF) program. This is because of changes that waive certain eligibility criteria in the PSLF program. These PSLF program changes are temporary that expire on October 31, 2022. So don’t wait if you want to take advantage. For more information on eligibility and requirements, go to PSLF.gov.
Smart Steps to Take Now
- Get organized. If you don’t have a loan file for yourself, start one. This can be a spreadsheet or a google doc (just make sure you save a copy and back it up). You can go to studentaid.gov to find out information on your federal student loans. You should know:
- The number of loans you have outstanding
- Type of loans: know if they are federal/government loans or private loans
- Your loan characteristics: principal amount and interest rates
- The date of each loan (i.e., the date you borrowed money)
- The name of your lender and servicer (the name of the entity lending you the money and the name of the entity servicing your loan). These might be different companies. The loan “servicer” handles certain administrative tasks for the lender, like collecting payments and sending you account statements.
- Communicate with your loan servicer to make sure it has any information it needs.
- Get familiar with the different repayment plans offered by the federal government, including income-based repayment plans.
If you have any questions about your student loans or how to get organized, you can reach us at (401) 356-1400 or email@example.com.