An Update on Student Loan Forgiveness
This past August, President Biden announced his administration’s student loan forgiveness plan. Like you, we’ve been watching the legal challenges. Currently, applications for student loan forgiveness are closed because the courts have issued orders blocking the program. The Biden administration is seeking to overturn those orders, and the Supreme Court heard oral arguments in February. The Supreme Court’s decision is expected sometime in June 2023 but could come earlier.
In the meantime, let’s explore exactly what this student loan forgiveness plan entails.
Who Qualifies for Student Loan Forgiveness?
This Biden-Harris Administration’s Student Loan Forgiveness plan only applies to those still holding federally funded loans. Private loans are not eligible for relief. If you consolidated federal loans into a private (non-federal) loan, that consolidated private loan is not eligible for debt relief.
The student loans eligible for forgiveness are:
William D. Ford Federal Direct Loan Program loans
Subsidized loans
Unsubsidized loans
Parent PLUS loans
Graduate PLUS loans
Federal Family Education Loan (FFEL) Program loans held by the Education Dept. or in default at a guaranty agency
Federal Perkins Loan Program loans held by the Education Dept.
Defaulted loans (includes Education Dept. or commercially serviced Subsidized Stafford, Unsubsidized Stafford, Parent PLUS, and Graduate PLUS; and Perkins loans held by Education Dept.)
Consolidation loans are eligible for relief, provided all underlying loans that were consolidated were first disbursed on or before June 30, 2022.
There are also income qualifications because the plan targets low- and middle-income families. If you’re single, your income must be less than $125,000. If you’re married and file jointly, your income must be less than $250,000. Your eligibility will be based upon your AGI from either 2020 or 2021.
How Much of My Student Loans Will be Forgiven?
Each eligible borrower can apply to have $10,000 forgiven. If you’re also a Pell Grant recipient, you’re eligible for an additional $10,000. Your relief is capped at the amount of outstanding debt. For instance, if you owe $5,000, you can have that amount forgiven and then be done. You wouldn’t receive an additional $5,000.
How Do I Apply for Student Loan Forgiveness?
For those who’ve already applied, your application is being held and no further action is required. For those who have not applied, it is expected that applications will open up again if the Supreme Court rules favorably.
What Is the Timeline for Student Loan Payments to Restart?
The date that student loan payments will restart largely depends on when the Supreme Court issues it’s decision on Biden’s student debt relief program. The US Department of Education has announced that payments will restart either:
60 days after litigation over the student debt program resolves
60 days from June 30, 2023, If the legality of the debt relief program hasn’t been resolved
Because we’re unsure when the Supreme Court will issue their decision, the timeline of payments restarting is somewhat up in the air.
What If I Made Student Loan Payments During the Payment Pause?
If you continued making payments during the pandemic regardless of the payment pause, you will receive an automatic refund
If you successfully apply for and receive debt relief under the Administration's debt relief plan
AND your voluntary payments during the payment pause brought your balance below the maximum debt relief amount you're eligible to receive.
The federal Student Aid website gives the following example:
Let's say you’re eligible for $10,000 in debt relief. If you currently owe $9,500, that amount of relief will be applied to your loan(s). If you paid $1,000 during the payment pause, you’ll be automatically refunded $500—the remaining amount of your $10,000 of debt relief.
This automatic refund process allows you to recoup that money and take advantage of the full amount of debt forgiveness available.
What Happens Once I Receive Student Loan Forgiveness?
Your remaining loan balance after relief will be re-amortized, meaning your monthly payment will be re-calculated based on your new balance. This could potentially reduce your monthly payment. Your loan servicer will communicate your new payment amount to you.
What Are the Tax Consequences for Student Loan Forgiveness?
This loan forgiveness is exempt from federal taxes, thanks to the American Rescue Plan Act. Normally, forgiven debt is treated as income and therefore taxable, so this is notable.
Most states are more than likely to follow the federal government’s lead and not collect taxes. Some states, however, may impose state income taxes. Because this is new legislation, states are still in the process of determining their stance. As of this publication date, borrowers in Minnesota, Indiana, North Carolina, and Mississippi will pay income tax on their forgiven amount. Wisconsin, California, and Arkansas are currently reviewing.
At Capstone, we’re watching this closely to determine how to best advise our clients. When in doubt, reach out to your Wealth Manager for guidance.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.