President Biden announced on Wednesday August 24th, 2022 the loan balances of millions of individuals who took out Federal student loans before July 2022 could fall by as much as $20,000. Additionally the Biden Administration is proposing a rule change that will forgive $12,000 in original loan debt if borrowers have paid on their loans for at-least 10 years. Below we’ll explain how his administrations plan would work under the information we currently have.

Who qualifies for loan forgiveness?

Based on what we currently know, individuals who are single and making up to $125,000 and those who file jointly making up to $250,000 in income would be eligible for student loan forgiveness. Currently it is unclear where the program will be pulling the income number from. Most tax professionals are assuming the $125K/$250K cap will be based on Adjusted Gross Income (Line 11 on your Form 1040 In either 2019, or 2020).

Current college students are eligible for student loan forgiveness

The White House has stated in it’s fact sheet, the cancellation announcement specifically applies to current students who took out their loans before July 2022. If the borrower is a dependent student, they will be eligible for relief based on their parents’ income rather than their own.

What loans qualify for forgiveness?

The loans that qualify for forgiveness are the following: Federal undergraduate, graduate, Parent PLUS loans all count under the forgiveness plan.

What loans are excluded from debt cancellation?

Those who have FFEL Loans and Perkins Loans that are held by the Department of Education are excluded from this student debt forgiveness program. The reasoning for this different treatment for FFEL loans is due to them being issued by credit unions, banks and savings associations rather than the federal government. Perkins Loans also aren’t owned by the Department of Education, those loans are issued by schools that use the funds received by the federal government. This diversion may not come as a surprise to some of you who have FFEL and Perkins Loans, as they also haven’t been included as loans eligible for the payment pause starting in March 2020.

How much of my Federal Student Loan will be forgiven?

President Biden announced that $10,000 in student loan debt will be forgiven for anyone who holds a federal loan and qualifies under the income requirements. An additional $10,000 will be granted to those individuals who received a Pell Grant while attending college. Pell Grants are given to undergraduate students who show a great financial need, and typically do not need to ever be repaid. This means if you ever received a Pell Grant and carry a student loan balance, up to $20,000 would be forgiven if you meet the loan type and income requirements.

How Do I find out if I received a Pell Grant?

The easiest way to figure out if you received a Pell Grant during college is to log into your Federal Student Aid account at studentaid.gov. Then do the following:

• Your official FSA Dashboard should show a visual breakdown of your aid account by “My Aid”
• The chart should differentiate between amounts of “Loans” and “Grants”. You can click “View Details” for further information and to learn if the grants were Pell Grants.

What if I paid off my loan after the March 2020 payment pause? Will I get a refund?

YES! According to Studentaid.gov anyone who made ANY payment on their loan(s) or paid them off completely can call their loan servicer and ask for a refund of any payments made on or after March 13, 2020.

Will I be taxed on the amount that’s forgiven?

Congress passed the American Rescue Plan Act (ARPA) which allows taxpayers with federal and/or private student loans forgiven for any reason from 2021-2025 to exclude the amount forgiven from their federal taxable income. Most states conform to the federal tax laws, and thus will not tax your student loan forgiveness. Other’s will pass their own regulations and may tax the forgiveness. For state’s that do and do not conform Tax Foundation has created a handy comparison below:

If you have less than $10,000 or $20,000 in loans, will your debt be forgiven?

Yes, if you are eligible for forgiveness based on the requirements above, and have an amount that is below the maximum forgiveness amount of $10,000 or $20,000 your entire debt will be forgiven.

Will these announced changes impact my monthly payment if I have debt over $10,000 or $20,000?

Absolutely, the Biden administration is proposing a rule to reduce the monthly payment minimum amounts from 10% to 5% of a person’s discretionary income, which is income after taxes and adjusted for living expenses. The rule would also guarantee no borrower making under 225% of the federal poverty line would need to make a monthly payment on their debt, and the unpaid interest would be covered so their loan balance will not grow. Additionally, the Biden administration is proposing that loan balances be forgiven after 10 years of payments for borrowers with $12,000 or less in original debt. The Department of Education has the authority to create income-driven repayment plans, and we’ll be waiting to see if they go through with these changes.

You can find these details and more from the White House here.

If you need any help regarding these issues Corridor Consulting would love to help, please schedule an individual consultation here. We’re looking forward to opening many more doors for you!

If you found this article helpful and enjoyed it please share it with others and join our newsletter below

This article is not professional tax or legal advice for your specific circumstances. Consult with your professional adviser to better understand how these items may impact you, or how they’ve changed