Q+A: Student Loan Forgiveness Program

As college students begin to return to campus, many are watching the headlines related to the plan unveiled by President Biden, announcing student loan relief. If you are searching for some answers on this program and what it may mean for you (or your friends, colleagues, and family members), read below for our take on some of the frequently asked questions about this plan. 

What are the basics of the student loan forgiveness update? 

The Department of Education will provide $10,000 in loan forgiveness for individual federal borrowers ($20,000 for Pell Grant recipients) earning less than $125,000 annually and households earning less than $250,000. The qualifying income years include 2021 or 2020. Additionally, the current pause on federal student loans was extended through December 31, 2022. Payments will begin in January of 2023 for those with remaining balances.  

Will A Parent Plus Loan be forgiven? 

Yes, if the parents meet the income limits. But again, the forgiveness amount is only up to the $10,000 or $20,000 mark, whichever applies based on whether the student received a Pell Grant in college. 

Are there any tax implications for loan forgiveness? 

In March 2021, the American Rescue Plan Act was passed which made all student loan forgiveness that occurs tax-free at the federal level through the end of 2025. While exempted at the federal level, it is not exempt at the state level. Most states will conform to federal tax law and exclude the debt from taxable income. According to the tax foundation, some states could treat the student loan forgiveness initiative as taxable income to borrowers. The states who currently could make the income taxable are Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin. Several others have noted if they do not currently conform to federal law, that they will make moves to.  

How do you apply for student loan forgiveness? 

For borrowers whose income information is currently on file with their loan servicer, forgiveness is supposed to occur automatically within the coming weeks. For those whose income is not on file, they can proactively apply for forgiveness starting in early October. Borrowers must then complete that application by November 15, 2022 to receive relief before the payment pause ends on December 31, 2022. 

I made a payment during the pause; can I get a refund? 

Yes – any borrower who made a payment during the pause can get a refund for any payment made (beginning March 13, 2020). To receive the refund, you need to contact your loan servicer to make the request. If requesting a refund, you should ensure that you qualify for the $10,000 or $20,000 in forgiveness for those who received Pell Grants. Once the refund is made, your total loan balance will increase, and you will then likely need to complete the application for loan forgiveness. 

What other changes might impact student loan holders? 

The Department of Education is working through details of a new income-driven repayment plan that will cap monthly payments for undergraduate loans at 5% of a borrower’s discretionary income. For purposes of federal student loans, discretionary income is the difference between your annual income and 150% of the poverty guideline for your family size and location. The new repayment plan calculates discretionary income by raising the amount of income that is protected from repayment. This will guarantee that no borrower earning less than 225% of the federal poverty level (about $30,578 for 2022) will have to make a payment. Also, any unpaid interest will be covered by the Department of Education, meaning that interest won’t accrue, and your loan balance won’t grow if you make your monthly payments. 

Lastly, one of the bigger changes in addition to loan forgiveness was the revamp of the Public Service Loan Forgiveness (PSLF) program. If you are employed by a U.S. federal, state, local, or tribal government or not-for-profit organization, you might be eligible for the Public Service Loan Forgiveness Program. The PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. If you currently work for a qualifying employer, you have until October 31 to apply to the program and receive credit for past payments that may have otherwise not been counted towards the 120-payment requirement. To see if you qualify and apply for the program you can walk through the Department of Education’s PSLF help tool here.  

What’s Next?

As we learn more about this program, we’ll offer additional guidance and commentary. Of course, we believe strongly in discussing your options with a financial advisor who can help navigate these changes, especially on the tax side. And if you’d like a refresher on some of the best ways to save for education (including types of financial aid opportunities), check out our recent blog post on what you need to know when saving for education.  

Commas is a wholly-owned subsidiary of Truepoint Inc., a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A and Form CRS filed with the SEC, can be found at www.usecommas.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice.