Coming Soon – Student Loan Forgiveness

Sep 14, 2022 | College Planning and Finances

On August 24, 2022, the Biden administration unveiled their long-anticipated plan to help solve the student loan crisis that grips many Americans. While the plan focuses on target dollar amount relief, the administration also announced a flurry of updates and changes to the student loan program. Below we answer several questions in relation to this news.

Do I Qualify for Student Loan Forgiveness?

The main headline of this announcement revolves around the cancelation of $10,000 of student loan debt for eligible federal borrowers, and up to $20,000 for Pell Grant recipients.

1. To qualify, you must have an individual income of less than $125,000 or income less than $250,000 for married couples.

a. While it is not currently clear what type of income will be included, it has been confirmed that qualification can be based upon either 2020 or 2021 income.

b. The language from the Biden administration and White House fact sheet point toward a cliff threshold rather than a phase out. This means that if your income was just $1 over the above thresholds you would not qualify for relief.

2. While not yet finalized, according to the executive order, borrowers who received any Pell Grant funding would qualify for the full $20,000 loan forgiveness.

3. Current students with debt may be eligible for relief as well. However, if they are a dependent claimed on a parent’s tax return, the income threshold will include their parent’s income

4. Privately held loans are not eligible for the relief, only public federal loans.

5. Parent Plus loans will be eligible for relief.

How Do I Receive Student Loan Forgiveness if I Qualify?

1. Forgiveness will be automatic for borrowers whose 2020 and 2021 income information is on record with the Department of Education.

2. For borrowers who do not have income information on file with the Department of Education, you will need to fill out an application.

a. This application is currently unavailable, but the department was instructed to finalize one by the end of 2022.

b. You can sign up for updates on the Department of Education website by using the following link: https://www.ed.gov/subscriptions.

Do I Need to Pay My Student Loans Now?

1. Also included in the August 24th announcement was a “final extension” to the student loan payment freeze to December 31, 2022.

2. While nothing is set in stone, this announcement does seem to signal that mandatory payments and accrual of interest will resume in January 2023 for the first time since March 2020.

3. Voluntary payments may still be helpful from now until the end of the year if the new program likely will not forgive all of your student debt.

Will Forgiveness I Receive Be Taxable?

1. It appears that forgiveness will not being taxable to the borrower at the Federal level.

2. State income tax consequences will be determined on a state-by-state basis and could be taxable.

What Other Changes and Enhancements Were Announced?

1. The proposed plan also includes permanent updates to the Public Service Loan Forgiveness program (PSLF). The updates will aim to make it easier to obtain loan forgiveness.

2. Additionally, the plan includes the creation of a new Income Driven Repayment (IDR) option. There are currently 4 IDRs, and this proposed plan would be the most generous option for borrowers.

a. The new IDR would cover all unpaid monthly interest, a significant beneficial provision.

b. The new IDR would lower the required payment to 5% of one’s discretionary income compared to 10%-20% under the current IDR options.

c. Additionally, the calculation of “discretionary income” is generously decreased, further enhancing the benefits of the new option.

d. The new IDR option would allow the entire balance of eligible loans to be forgiven after 20 years of monthly payments, and 10 years if the original balance of the loans was less than $12,000.

e. Many questions remain unanswered regarding who will be eligible, what types of loans will be eligible, etc.

Many students have accrued and managed significant student debt.  These changes could significantly reduce debt levels and future payment requirements.

SageVest Wealth Management is dedicated to helping clients remain abreast of financial updates that impact themselves and their family members.  We invite you to contact us to discuss your finances.

Prepared by SageVest Wealth Management. Copyright .
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