Important Details on Student Loan Forgiveness
By: Sydney B. Burchett - Paraplanner
On August 24th, 2022, President Biden announced a Student Loan Forgiveness Plan through executive order. This newsletter is meant to provide information that is currently available on this student loan forgiveness and helpful details to determine if you qualify.
The plan was comprised of three main components: debt cancellation, reduction of monthly payments, and updates to the current PSLF program.
Student loan forgiveness under the new executive order is dependent on factors detailed in this section.
Per the Federal Student Aid website, loan types eligible for relief include the following*:
- William D. Ford Federal Direct Loan (Direct Loan) Program loans:
- Subsidized loans
- Unsubsidized loans
- Parent PLUS loans
- Graduate PLUS loans
- Consolidation loans (underlying loans must be first disbursed on or before June 30, 2022)
- Federal Family Education Loan (FFEL) Program loans held by ED or in default at a guaranty agency
- Federal Perkins Loan Program loans held by ED
- Defaulted loans (ED-held or commercially serviced Subsidized Stafford, Unsubsidized Stafford, parent PLUS, and graduate PLUS; and Perkins loans held by ED)
* Loans must have outstanding balance as of June 30th, 2022
The amount of forgiveness you are eligible for depends on two factors: your income level and whether you were a Pell grant recipient.
- To receive any loan forgiveness, your income level must be under $125,000 for Single and Married Filing Separately filing statuses and under $250,000 for Head of Household and Married Filing Jointly filing statuses. This is based on either your 2020 or 2021 Adjusted Gross Income (AGI).
- These are believed to be “cliff thresholds” and should be interpreted as $1 or more above the limit would disqualify you.
- Current Students with debt are eligible. However, if that student is currently being claimed as a dependent on their parents’ income tax return, their parents’ income will be used to determine eligibility, not the students.
- Most Federal Student Loan borrowers whose income level is below the limits will be eligible for $10,000 in forgiveness.
- Pell grant recipients are eligible for an additional $10,000 in forgiveness.
For individuals who made payments on eligible loans during the payment pause which took them beneath the level of forgiveness they would otherwise have been eligible for:
- You can request payments made on qualifying loans (since the pause on payments started 3/13/2020) [LS1] be refunded from your loan service provider. It may take your loan servicer 30-60 days to process the refund request.
- It is possible that you may be able to request forgiveness on a balance from refunded payments.
- However, there is uncertainty regarding whether this strategy would be successful.
Individuals who have already provided income information to the U.S. Department of Education may automatically receive forgiveness. For other borrowers, the online form to apply for forgiveness will be available in early October. The deadline to apply for the $10,000-$20,000 in student loan forgiveness is 12/31/2023.
The second part of student loan forgiveness plan is designed to make payments more manageable following the end of the payment pause.
- The new plan offered the final extension to pause loan payments until December 31st, 2022.
- A new Income-Driven Repayment plan has been established that will lower monthly payments and potentially reduce time required before loans will be eligible for forgiveness for eligible borrowers.
- Previously on Income-Driven Repayment plans payment limits were 10% of borrower’s discretionary income, the new plan lowers this to 5%.
- For eligible borrowers, loans of less than $12,000 may be eligible for forgiveness after 10 years of payments.
- The new income driven repayment plan goes into effect July 1st, 2023.
Public Service Loan Forgiveness (PSLF)
The third component of the plan is to update the current PSLF program. Previously, the requirements to qualify for PSLF restricted which borrowers would be eligible for forgiveness far more than was intended. Many borrowers were deemed ineligible due to reasons such as:
- being on the wrong repayment plan
- wrong loan type, or
- The only type eligible previously was the 10-year Standard repayment plan or longer Income-Driven Repayment plan
- making late/insufficient payments
To combat this the U.S. Department of Education announced plan to update the PSLF program in October of 2021. The Biden administration announce a 1-year period where eligible borrowers can file a waiver to apply their 10-year repayment history regardless of if any of the past payments were not eligible under the normal rules.
Under the waiver repayment credit was extended to the following for borrowers working for eligible employers:
- borrowers with FFEL loans
- borrowers on previously ineligible repayment plans
- borrowers who made late, short, or lump-sum payments
Eligible Employers include:
- Federal, state, and local government
- Non-profit Organizations
After the 1-year period in over PSLF rules will revert to the original rules, with some proposed permanent changes. The changes include making the following eligible:
- late, partial, or lump-sum payments
- periods of deferment or forbearance due to enrollment in the Pearce Corps, AmeriCorps, National Guard or active military service.
Those eligible for PSLF should apply for waiver before October 31st, 2022 deadline. Additional information can be found on the Federal Student Aid website here, PSLF Program Information.
Things to Consider
- This forgiveness is not subject to Federal Income tax.
- Under current Ohio law this forgiveness is not taxable, however that could be subject to change.
- For non-Ohio residence we suggest looking at whether it is expected your state will tax student loan forgiveness.
- As an executive order this can still be challenged and therefore is subject to change.
- To check the type of loans you received you can log into your Federal Student Aid Account, https://studentaid.gov, and select the “My Aid” tab.
- If you received a Pell grant prior to 1994 it will not be displayed on studentaid.gov, but the ED has this information and you will still be eligible.
- To prepare for the application on forgiveness opening it is suggested you log in to your studentaid.gov account and make sure your contact information is up to date. You should also make sure your loan servicer has your up to date contact information as well.
- To be sent updates regarding the Federal Student Loan forgiveness you can subscribe on the U.S. Department of Education website, ED Subscriptions, and select the “Federal Student Loan Borrower Updates” option.
Policy and processing related to the Student Loan Forgiveness plan is subject to change. Please contact our office if we can be of any assistance.
- Kitces - Biden Student Loan Debt Forgiveness Relief Plan
- StudentAid.gov Debt Relief Announcement
- White House Fact Sheet