Student loan relief, federal student debt forgiveness, student debt cancellation, student loan forgiveness plan… the media have been splashing around lots of labels for this hot topic — and lots of buzz with the splash. Even without the hype, this topic has certainly captured a lot of attention from the accounting staff at Baum CPA — because of SO MANY implications for personal financial and tax benefit.
We are certainly enthusiastic to share with our readers and our clients what to expect — and what to watch out for — as this new opportunity unfolds!
- Up to $20,000 in student loan debt will be canceled for millions of borrowers.
- The present pause on monthly student loan payments (permitted since March 2020 for the pandemic) will be automatically extended at 0% interest at least through the end of 2022.
- By 2023 there will be a new formula for a more affordable income-driven payment plan.
Am I Eligible for Benefit?
There are income limits that restrict who can qualify for the debt relief. Borrowers making less than $125,000 per year are eligible, as are married couples with a combined income of $250,000 or less. It doesn’t matter if you attended a public or private university, as long as the student loan is owned by the federal government. Even if you didn’t finish college but have federal student loan debt and meet the income limitation, you still qualify for debt relief.
The ‘forgiveness’ is about student loans borrowed that are not returning a payback to the student borrower.
Borrowers who qualify will receive up to $10,000 in relief if they did not receive a Pell Grant (a type of aid available to low-income undergraduate students), and up to $20,000 in relief if they did receive a Pell Grant.
Most federal student loans qualify for forgiveness, including Pell Grants, government-owned FFEL loans, and Direct Loans such as Parent PLUS and Grad PLUS loans.
Borrowers who are dependent students will be eligible for relief based on parental income, rather than on their own income.
How Do I Apply?
If you believe you are eligible, you will need to apply through the complicated federal loan servicing system before the end of the year. We recommend you keep a cynical, watchful eye on their balances for possible mistakes! The methods and system for application are still under development.
Check your income tax returns for 2020 and 2021 to confirm your income eligibility during these most-recent years. Then make sure your contact information is up-to-date with your loan servicer. Ask a live person or browse the appropriate website(s) for pointers on the application process and links to the loan forgiveness application form(s).
The U.S. Department of Education says that a simplified federal student loan forgiveness application will be online in early October. Borrowers must complete their application before November 15 to receive relief before the pandemic payment pause extension ends on December 31. The government says it will continue to process applications for federal student loan forgiveness in the order they are received, even after the payment pause expires Dec. 31.
If you miss the Nov. 15 deadline, you will still have more than a year to apply — all the way up till December 31, 2023. But your loan will enter repayment status in January 2013 before it can be forgiven.
The government estimates that about 8 million borrowers are “covered automatically” because their relevant income data is already available to the Department of Education, but you really ought to apply anyway. Would you really want to risk losing this benefit because of the possibility of automated failure? We experts at Baum CPA strongly urge you to confirm your own income eligibility and make a proactive outreach to the loan servicing company. Otherwise, you may find that you’ll be facing collection actions by the end of January 2023!
Exactly HOW Will I Benefit?
Depending on how much debt you have remaining, student loan forgiveness will most likely decrease your monthly payments or possibly get rid of them entirely.
Canceled debt is normally taxable, but student loans that are forgiven will be exempt from federal income tax because of a provision in the government’s 2021 American Rescue Plan. This debt relief will not be treated as taxable income for the federal income tax purposes, and the provision prevents taxation on student loans forgiven through 2025. No certainties yet about state income tax impacts.
Looking ahead to 2023, there is a plan to cut monthly payments in half for undergraduate loans, capping monthly payments for undergraduate loans at 5% of a borrower’s discretionary income (reduced from the previous 10% rate), lowering average annual student loan payments by $1,000 or more.
The debt relief plan also forecasts to forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less.
The plan intends to cover a borrower’s unpaid monthly interest, so that unlike existing income-driven repayment plans, no borrower’s loan balance will grow as long as they make monthly payments — even when that monthly payment is $0 because their income is low.
Defaulted borrowers are eligible for forgiveness. Borrowers with defaulted federal student loans will return to repayment without any past due balance when the pandemic pause ends at the end of this year, giving anyone with defaulted loans a fresh start at repayment.
You can get a refund for any payment (including auto-debit payments) you have made during the pandemic pause, since March 13, 2020.
A BIG Exception
Certain loans from the Federal Perkins Loan Program, such as ones held by colleges, may be excluded. All private student loans are also excluded. The government can’t erase loans that they don’t own.
If your federal student loan was borrowed before 2010 under what’s known as the Federal Family Education Loans (FFEL) program, you have already learned that the pandemic payment pause did not apply to help your situation — and now, even worse, you will NOT qualify for debt forgiveness. These older FFEL loans were guaranteed by the government but owned by private companies — and since the U.S. Department of Education does not own the loan, the pandemic payment pause and upcoming forgiveness policies do not apply.
A Possible Exception to the Exception
In some circumstances, the government has bought back FFEL loans, and other loans of non-governmental origin, meaning that the government DOES have ownership interests in those loans — hence the right to relieve the debt. In anticipation of this possibility, consolidating your loans through the government may help you qualify for forgiveness — but it’s a tricky process, requiring personalized research and assistance. If you think you are carrying non-government-owned student loans, you should call your loan servicer and ask for help to consolidate them into the Direct Loan Program. It takes between 30 and 45 days for a consolidation application to be processed, so start now.
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This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.