Sep 15, 2022 Student Loan Debt Relief Plan

The Biden administration announced its “student loan debt relief plan” at the end of August. The three-part plan aimed to relieve current student loan debt, make the student loan system and payments more manageable, and reduce college costs. We will take a deeper look at each part below.

They also announced that the pause on student loan payments will continue until December 31, 2022, but payments will resume on January 1, 2023. This is the final extension.

Part 1: Relieve Current Student Loan debt

The plan to relieve current student loan debt is to forgive $10,000 ($20,000 for borrowers who also received a Pell Grant). Income must also be under $125,000 for single borrowers or $250,000 for married or head of household to qualify for forgiveness. It will be based on 2020 and 2021 income. More specifics on exactly how that will work are still to be released. If the student is a dependent on their parent’s income tax return, the parent’s income will be used.

Federal loans made before June 30, 2022 are eligible for forgiveness. Private loans do not qualify at this time, although there is some talk about extending forgiveness to some types of loans held by private companies.

There is no retroactive repayment for borrowers who have already paid off their student loans. Although, borrowers who made payments during the payment pause starting in March 2020 could consider reaching out to their loan servicer to get a refund of their payments if their balance is under $10,000 or $20,000. You may be able to get them forgiven and keep the refunded payments.

Typically when debt is forgiven, it becomes taxable income, but due to the American Rescue Plan Act of 2021, the debt forgiveness will be tax-free at a federal level. However, debt forgiveness may be taxable for some states.

How to Apply for Forgiveness?

To receive forgiveness, borrowers must supply proof of income to the US Department of Education. The good news is that many borrowers already provide that information for their income-driven repayment plans. For those that don’t, the US Department of Education will have an application available by the end of the year.

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Part 2: Make the Student Loan System and Payments More Manageable

Another piece of the plan is to help make the student loan system more manageable for current and future borrowers by cutting payments. They are also trying to fix the broken Public Service Loan Forgiveness (PSLF) program by proposing a rule that borrowers who have worked at a nonprofit, in the military, or federal, state, tribal, or local government, receive appropriate credit toward loan forgiveness.

Income-driven repayment (IDR) plans require borrowers to pay 10%-20% of their discretionary income to their loans. Under the new proposal, this would be reduced to 5% for undergraduate loans and 10% for graduate loans. It also decreases the amount of income considered discretionary, reducing the payment even further.

Another proposed rule would provide an interest subsidy to borrowers on an Income-Driven Repayment plan so that their loan balance reduces with their monthly payment instead of continuing to grow. They expect to finalize the changes to the IDR plan by November 1, 2022 and go into effect by July 1, 2023.

The Public Service Loan Forgiveness (PSLF) program was intended to forgive the loans of borrowers that worked in nonprofit or government work for ten years while still making payments. However, this program has confusing requirements that caused many borrowers to be rejected from the program. They have temporarily expanded the PSLF program’s scope, but borrowers must apply for it. There is a waiver available here until October 31, 2022. Some of the provisions that are expanded in this temporary waiver are going to be made permanent by Biden’s proposal.

Part 3: Reduce College Costs

The plan’s final part plans to protect future students and taxpayers by reducing the cost of college and holding schools accountable when they hike prices. Some of the ideas discussed are making community college free and increasing the Pell Grant further. In addition, the President and the Department of Education are taking action to hold colleges accountable for costs. They are publishing watch lists that show each college’s debt levels and what college programs have poor outcomes.

If you have questions about strategies you should employ for your student loans or how these changes affect you or a family member, please contact your advisor.


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