Broker Check

Let's Talk Forgiveness & Forbearance (of Student Loans)

September 01, 2022
Share |

This past week Joe Biden announced his Student Loan Plan, which will be taken via executive action.  This has been speculated about for months and unsurprisingly has mixed reviews, largely driven by partisan politics.  We’ll stay out of the politics related to this decision, but we want to highlight the key components and how it may impact you.


Forgiveness of Student Loans

The most significant component of this Student Loan Plan is the forgiveness of current federal student loans.  For most individuals, this forgiveness amount is up to $10,000.  There’s no retroactive component for previously paid off loans.

If you received a Federal Pell Grant (which are typically awarded only to undergraduate students who display exceptional financial need), then your forgiveness eligibility is $20,000 as opposed to $10,000.

Loan forgiveness eligibility is tied to income limitations based on either 2020 or 2021 income, whichever is lower (Source: White House Press Briefing, August 24, 2022).  The Biden Plan calls for income thresholds to be $125,000 for single filers and $250,000 for households.  The IRS has not yet stated exactly which income is considered, but the government uses Adjusted Gross Income (AGI) for Income-Driven Repayment calculations related to student loans.  It’s likely that a similar metric will be used for this forgiveness plan.

It’s important to note this applies to federal student loans and does not include private student loans.  It can include both federal student loans held by the student and/or the parent (Federal PLUS loans).  The important thing to remember is the forgiveness is based on the borrower, not the recipient of the loan.  With this in mind, a parent who borrowed for their child could get $10,000 forgiven AND their child who borrowed for their own school could get $10,000 forgiven.

Related to this forgiveness is the potential for additional taxes at the state level.  Any forgiveness is tax-free at the federal level but there are 13 states that could tax forgiveness at the state level.  These include Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin (Source: Forbes - August 29, 2022).  If you live in one of these states, you should be aware that you may owe state taxes on the forgiveness amount.

The Biden Plan placed a June 30, 2022 as the date the loans needed to be funded to be eligible for forgiveness.  With this in mind, a new college freshman who took their first loans after June 30, 2022 would not be eligible for forgiveness.

If you have federal student loans in your name AND qualify based on the income limits, then you may need to complete an application in the coming weeks/months.  Some loans will be forgiven automatically based on data already in the Department of Education’s system.  For those who need to apply, the application is not yet available, but is expected to be published in the coming weeks.  While you can apply until December 31, 2023, the Department of Education is recommending borrowers apply before November 15, 2022 in order to receive relief before forbearance ends (see below).

 

Final Forbearance Extension (Payments Begin Again in January)

Since mid-2020 federal student loans have been in forbearance, meaning interest has not been accrued and payments have not been required.  As part of Biden’s Plan, this forbearance period was again extended from August 31, 2022 through December 31, 2022.  As part of the Plan, it was made clear that this is the final extension. Beginning on January 1, 2023, federal student loans will once again accrue interest and payments will be required as they were before 2020.  It will be important to re-visit these loans before and after December 31, 2022 to ensure updated payment information is on file and is being applied towards student loans appropriately. 

As with most debt, when paying more than the minimum we typically recommend focusing on the higher interest rate debts first.  Understanding the implications of a strategy like this is best viewed through your larger financial plan.  We’re happy to discuss your specific loan payoff strategy with you.

 

Income-Driven Repayment Plan

One aspect of the Biden Plan that has received less attention is the change to the calculation of Income-Driven Repayment Plans.  Under the new plan, the baseline for non-discretionary income will increase from 150% of the federal poverty line to 225% of the federal poverty line.  This non-discretionary income is protected from repayment obligations. 

Additionally, the maximum annual payments on discretionary income was lowered to 5% for undergraduate loans and 10% for graduate loans.  It had previously been double that: 10% for undergraduate and 20% for graduate.  This will significantly lower monthly payments for those using the Income-Driven Repayment plan.

Finally, the remaining balances on an income-driven repayment plan will be forgiven after 20 years of payment (or 10 years of payments if the original loan balance was $12,000 or less).

  

Public Service Loan Forgiveness (PSLF)

This program has been around for some time, but has temporary changes through the end of October 2022.  In short, if you have worked in public service (federal, state, local, tribal government, military, or a qualified non-profit organization) for at least 10 years (120 payments) you can have your outstanding student debt forgiven. 

 

The Biden Plan temporarily changes/waives certain eligibility requirements of the Public Service Loan Forgiveness Program.  One key temporary change in the Biden Plan allows past periods of repayment to count towards the 10-year requirement, even if the payments were not on time or for less than the amount due.  For further information and to apply for PSLF, visit www.studentaid.gov/pslf.  This needs to be completed before October 31, 2022 to take advantage of the temporary eligibility changes/waivers.

 

Financial Planning

For many, student loan repayment remains a critical component of their financial plan.  We look forward to working with you to find the most economical and prudent strategy for eliminating student loans, allowing you to focus on other financial goals.  Don’t hesitate to reach out with any questions you may have.

  

 

Content and opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through V Wealth Advisors LLC, a registered investment advisor and a separate entity from LPL Financial. Impact Wealth Planners is also a separate entity from LPL Financial.