If you, your kids or your grandchildren are struggling to pay back federal student loans, relief may be on the way.
That’s because the Biden administration has proposed a series of loan forgiveness provisions for those meeting certain income requirements. While these provisions haven’t been finalized yet, it’s still worth understanding what they are, since the deadline to apply for them is tentatively set for December 31, 2022.
While an overview of the debt relief plan is available on the Federal Student Aid website, this article summarizes some of the main points.
Reduction of student loan balances
Those who earn less than $125,000 per year (or $250,000 as a married couple) may be able to have up to $10,000 of their student loan debt cancelled. This amount may rise to $20,000 for low-income borrowers who also received Pell Grants.
Parents may benefit, too
Many parents take out Direct PLUS Loans issued by the federal government to help pay for their children’s college costs not covered by financial aid and scholarships.
At the moment, it appears that parents will also be eligible for up to $10,000 in Direct PLUS loan forgiveness if they also meet the same income requirements as their children. Since federal student loans and Direct PLUS loans are considered separate debt obligations, both children and their parents may be able take advantage of these provisions.
One last repayment-delay extension
Since the COVID-19 crisis, most students haven’t had to make payments on their federal student loans and interest hasn’t accrued during this time.
This grace period may be coming to an end, as the Biden administration proposes to start requiring borrowers to resume making payments in January of 2023.
Elimination of some or all loan balances for qualified public sector workers
The Public Service Loan Forgiveness (PSLF) program cancels outstanding federal student loan balances for those who have been employed by federal, state, local or tribal governments, the military or qualifying non-profit organizations for at least 10 years and who have made at least 120 student loan payments.
However, for a limited time, those who don’t haven’t met the 10-year, 120-payment threshold may be able to have some of their debt cancelled. The catch? Qualified borrowers must apply for this relief by October 31, 2022 at the Public Service Loan Forgiveness Program Web Site.
Revamping repayments for eligible borrowers
While not finalized, the Biden administration wants to make it easier for eligible lower-income borrowers to manage repayments. Some proposals include:
- Reducing minimum required monthly repayments of undergraduate loans from 10% to 5% of a borrower’s discretionary monthly income.
- Eliminating loan balances after 10 years of payments, instead of 20 years, for those with balances of $12,000 or less.
- Covering the borrower's unpaid monthly interest, so that 100% of their monthly payments can be used to reduce their loan principal.
At the moment, the IRS does not treat student loan debt forgiveness as income subject to federal income taxes and won’t until 2025. However, North Carolina and Mississippi will be counting debt forgiveness amounts as income subject to state taxes and it’s possible that other states will follow suit.
Still in flux
Other than the temporary changes in eligibility requirements for the Public Service Loan Forgiveness program, all of the Biden administration’s proposals are just that—proposals. It’s possible that some or all of them may be cancelled or delayed if challenged in court or Congress.
And while the deadline for applying for student loan debt relief is December 31, 2022, it’s unclear what process borrowers will need to go through to receive or request loan forgiveness.
The Biden administration suggests that up to 8 million borrowers may be able to receive relief automatically because the Department of Education already has their income data. Other borrowers may need to apply for this relief and provide income-verification documentation.
Students and parents who want to be informed when updates become available to should subscribe to the Department of Education’s notification list. They may also want to meet with their accountant or tax preparer to discuss possible tax implications.
This article was authored by David Jaeger and Jeffrey Briskin, with additional content provided by Commonwealth Financial Network®. David is a financial advisor at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or email@example.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
© 2022 Canby Financial Advisors and Commonwealth Financial Network.