For those who have been patiently waiting, news of President Biden’s student loan relief finally arrived on August 24. The debt forgiveness plan means that 20 million borrowers will no longer have a balance due.

And if you’re one of the approximately 43 million borrowers who’ll see this forgiveness — or think you might be one  — you may have noticed that the details have been a little murky from the outset. One detail that’s still unclear is the allocation of the relief, or which loan or loans the relief balance will be deducted from. 

To bring some clarity to the situation, we got together as a team to share what we do know with you. As the details evolve, don’t hesitate to find some time on our calendars to talk it through.

Student Loan Relief In The Headlines

From Director of Cash-Flow and Insurance Planning, Regina Neenan

I’ll begin with the news. Biden’s announcement last month applies to single tax files who make less than $125,000. The same applies to married couples who file taxes separately. That amount increases to $250,000 for heads of households as well as married taxpayers who file jointly.

Borrowers of Stafford, Parent Loans for Undergraduate Students (PLUS), Graduate, Perkins, and Grad PLUS Loans are eligible for up to $10,000 of relief. As the forgiveness is based on the borrower, PLUS Loan parent borrowers are limited to up to $10,000 in relief in total rather than per student on whose behalf they borrowed. For those who received Pell Grants — a type of need-based loan for lower-income students — up to $20,000 of relief will be available. 

Those with private student loans or Federal Family Education Loans (FFELs) are not eligible for relief.

A Mini Case Study

Take a borrower with undergraduate loans who received Pell Grants. They took advantage of the pandemic forbearance and stopped paying their loans when they went to 0% interest. They now have a principal balance due of $8,477.14 split between two loans and qualify for debt relief. Thanks to the forgiveness, they with receive …

$8,477.14 in relief. 

Why not the full $20,000? They started with more than $20,000 in loan principal and had Pell Grants, after all! Well, the forgiveness only applies to outstanding balances due. This borrower overpaid their monthly balance due and is out of luck on the $11,522.86 that could have been forgiven. 

And that’s not a bad thing.

The debt relief plan is meant to bring that relief to borrowers who need it the most. In fact, it’s targeted toward low-to-middle-income borrowers, those who borrowed but didn’t graduate, and people of color, specifically Black borrowers.

Student debt has left many in these groups with difficulty purchasing homes, starting families, and saving for retirement. The relief is meant to ease their debt burden.

Income-Driven Repayment Plans

Other parts of reducing that debt burden include three major changes to income-driven repayment (IDR) plans. 

1. Previously, those on IDR plans would make monthly payments toward their loans based on 10% to 15% of their discretionary income. Biden’s student loan debt relief plan reduces that to 5% of discretionary income, allowing borrowers to keep more of their discretionary income on a monthly basis. 

2. The formula used to calculate discretionary income is also changing to include more expenses in non-discretionary income. This leaves a smaller amount of discretionary income for that smaller percentage to be based on, further reducing monthly repayment amounts.

3. No interest will be added to principal balances due for those making qualified IDR payments. In other words, balances won’t grow for those making their IDR payments.

Less major but nonetheless important, those who originally borrowed $12,000 or less would have their balances forgiven after 10 years of qualified payments versus the original 20 years of payments. Combined, these changes to IDR for those on such plans allow for more discretionary spending. Or discretionary saving, allowing them to inch closer to reaching those life milestones.

Strategizing Your Student Loan Situation

From Director of Estate and Financial Planning, Dan Andrews

Headlines and government policies influence financial plans. With payments set to begin after Dec. 31, 2022, this is a perfect time to review and possibly update your student loan repayment strategy.

For the pros and cons of strategies, visit our FPFoCo Academy module Education Planning and Student Loans.

To receive the forgiveness just announced from the government, borrowers who already share their income data with the U.S. Department of Education for their IDR plans will have the forgiveness amount automatically applied, if eligible. If the federal government doesn’t have your income data, they’ll share details in early October regarding an application to complete. 

The Federal Student Aid website encourages borrowers to submit their application by November 15 to ensure refunded amounts are processed by December 31.

Preparing to Repay by December 31

Every financial plan is different, and student loan repayment strategies will resume at some point. Here are some high-level strategies to consider that we can identify within your financial plan.

Continue your current repayment strategy.

If you made payments during the forbearance period and all or some of those payments would have been forgiven under Biden’s plan, contact your loan servicer. According to the Federal Student Aid website, “You can get a refund for any payment (including auto-debit payments) you make during the payment pause (beginning March 13, 2020).” 

Pursue Public Service Loan Forgiveness (if eligible).

Consider refinancing to private loans and making a lump sum payment now to decrease the total amount to be refinanced.

And, of course, details may change between now and the end of the year. To stay informed with breaking news, sign up for notifications by subscribing to “Federal Student Loan Borrower Updates” on the U.S. Department of Education website. 

Tax Impacts

From Director of Investment and Tax Planning, Jason Speciner

Usually, debt forgiveness = taxable income. In fact, there’s even an information return for that sort of situation: Form 1099-C. However, the American Rescue Plan Act passed in 2021 made all student loan debt forgiveness between 2021 and 2025 exempt from federal income tax. The good news here is that any amount forgiven will not show up on your federal income tax return.

The state income tax situation is a little murkier. Initially, the Tax Foundation published a list of 13 states where student loan forgiveness under the plan may be taxable. However, after clarification from several states, there are now likely only seven states which may tax the forgiveness:

• Arkansas
• California
• Indiana
• Minnesota
• Mississippi
• North Carolina
• Wisconsin

If you’re in one of these states, pay attention to upcoming announcements on possible relief from this tax. If you’re in another state — Colorado among them — it would seem that this debt forgiveness will be entirely tax-free.

In addition to the tax (or lack thereof) on student loan debt forgiveness, you can determine your qualification for forgiveness using information from your tax return. Specifically, the amount of “income” that determines your eligibility is your adjusted gross income (AGI) from your 2020 or 2021 federal income tax return. On the basic Form 1040, you can find the amount on line 11. If your AGI in either year is below the applicable $125,000 or $250,000 threshold, you will qualify for forgiveness.

Wrapping It Up

If you’re not eligible for this forgiveness due to your income being over the threshold or if you’re set to resume payments for any amount not forgiven, mark your calendar. We’re now in the final payment pause extension. If you didn’t request this extension on your loans, don’t worry: It occurred automatically. However, payments are scheduled to resume in January 2023.

If your loans were moved to a different servicer during the forbearance period or if you just haven’t logged in for a while (we don’t blame you!), be sure that you have access to your student loan account before the end of the year. There, you may be able to see what your balance(s) due will be. Keep in mind that you’ll likely owe less on a monthly basis if you’re on an IDR plan. Don’t forget to factor your payments into your budget, and make a plan to have that cash set aside in the new year.

Last but not least, don’t forget to let us know how we can help.