What not everybody knows about Student Loan Forgiveness
$10-20k of student debt relief was the main plank of the Biden Administration’s Student Debt Relief package. There are many subtleties to the proposal, though. I want to call out a few of the next-level details that escape the big picture primers.
What everybody knows:
In case you haven’t been paying close attention for the past two weeks, The Biden Administration announced a Student Debt relief plan that will forgive $10,000 of federally owned student debt per borrower. That increases to $20,000 if the borrower received Pell Grants.
The forgiveness is limited to borrowers with income below $125,000. The limit is $250,000 for married filing jointly couples or Heads of Household. This limit excludes the highest 5% of household income earners in the US (really, the top 7-ish% according to the 2020 Census
Almost every major media outlet has FAQs covering the high-level parts of the plan. One outlet doesn’t because they think it’s a terrible idea and an insult to freedom, decency, and your grandpappy. I’ll let you guess which one. Some of those primers are basic. Some are surprisingly comprehensive.
What not everybody knows:
On the income limit: You will qualify as long as your income was below the applicable threshold in either 2020 or 2021. If you qualified in either year, you qualify for the forgiveness. Your estimated 2022 income does not matter when it comes to eligibility.
Your $10-20k of debt forgiveness won’t be taxable (maybe). Usually, the IRS considers forgiven debt as taxable income for the person whose debts get Houdinied. Under changes from the American Rescue Plan of 2021, this student debt discharge will be Federal income tax-free. Most states will follow that lead. This might be state taxable in states that don’t follow the federal tax laws. The most likely culprits are Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin.
There are deadlines involved: Two important dates to mark on the calendar if you are eligible for forgiveness.
November 15, 2022 – This is the recommended deadline for borrowers to apply for forgiveness. This will give enough time for the application to be processed before payments start again in January 2023.
December 31, 2023 – This is the deadline to apply for $10-20k of loan forgiveness. Note that this is the end of 2023. That’s 16 months from when I’m writing this.
On who can receive the debt relief: Debt relief is done on a per borrower basis, not a per student basis. This means if a parent took out PLUS loans and students took loans to pay for undergrad, they can BOTH qualify for $10k of debt relief if they both meet the income thresholds.
If parents took out PLUS loans to support more than one child’s college expenses, they are only eligible for a total of $10k relief unless they took out the loans as separate individuals.
You’ll have to apply. The application isn’t out yet. While there are clearly going to be legal challenges to the debt forgiveness (it is an election year, after all), you will have to apply for the forgiveness. If you want to stay in the loop on when you can apply, you should sign up here.
This is the last pause on debt repayment. One more (presumably final) pause on repayments through 12/31/22 is part of the plan. On Jan 1, 2023, interest will start accruing again and your monthly payment will likely be due by January 31, 2023.
If you are on an Income-Driven Repayment plan or are counting on Public Service Loan Forgiveness, it could be worth talking to a financial planner. There are several proposed changes to IDRs and some fine-printy things going on with PSLF, especially once the payment freeze thaws. If you don’t feel confident, a talk with a knowledgeable expert could help you maximize your benefit.