Student Loan Debt Relief Plan: What You Should Know

Ken Weingarten |
Categories
College Planning
Student Loans

The Biden administration recently announced a new Student Loan Debt Relief plan which seeks to provide aid to student loan borrowers as we transition back to the norm before the pandemic-related support came in place. While some of the details have yet to be fully rolled out and there is likely to be some political pushback to prevent its implementation, it is important to understand what the provision of the plan is in its’ current state. Here we will go over the main provisions of this plan.

Final Extension of Loan Forbearance

Since the first pandemic forbearance plan was announced, the date in which one would have to restart payments has been pushed forward several times. Part of this relief plan is to have one final repayment pause which will end on 12/31/2022. This has been done in part to help ensure a smooth transition into the new year with the other provisions that will be covered below. As with the previous pauses, this will occur automatically.

Targeted Debt Relief Depending on Income Levels

One of the major provisions covered as part of this plan is forgiveness of up to $10,000 in Federal student loan debt or up to $20,000 for Pell Grant recipients. Individuals who qualify for this debt relief must have had Adjusted Gross Income (AGI) in 2020 or 2021 of:

  • Less than $125,000 for Single/Married Filing Separately
  • Less than $250,000 for Married Filing Jointly/Head of Household

While the White House has indicated that some of the debt relief may occur automatically through a review of filed tax returns, the US Dept of Education will be releasing an online application in early October to ensure you obtain debt relief (assuming you qualify).

In general, when debt is forgiven, the forgiven debt itself is considered taxable income in the year it was forgiven. However, due to the changes made by the American Rescue Plan Act of 2021, student debt that is forgiven through 2025 will be tax-free at the Federal level.

Extended Public Service Loan Forgiveness (PSLF) Program

Individuals working full-time for Federal, State, local government, or qualifying non-profit organizations are eligible to have their remaining federal loan balance forgiven after making 120 payments towards their loans. In recent years, there have been many instances where loans have not been forgiven due to poor administration, incorrect payment plans, missed payments, etc.

Temporary changes, ending on 10/31/22, made by this plan include a waiver application allowing borrowers to receive credits for past periods of payments made that would not have qualified otherwise such as: gaps in employment, part-time status (at least 30 hours/week), full-time volunteer service. To find out if you are eligible, you can fill out the questionnaire provided by Federal Student Aid website.

Reduced Income-Based Repayment Plan (IDR) Payments

Generally, the program sets the monthly student loan payment at a percentage of discretionary income. Per the US Dept of Education, discretionary income is the difference between annual income and 150% of the poverty line for family size and state of residence. Until now, it was set at 10% of discretionary income, though this will now be lowered to 5%. In addition, several other changes have been made to his program:

  • Raising the amount of income considered non-discretionary income to 225% of the poverty line.
  • Loan balances to be forgiven after 10 years instead of 20 years for borrowers with a balance of $12,000 or less.
  • Covering a borrower’s unpaid monthly interest – In many instances with IDR plans, borrowers have found their accrued loan interest grew higher than the required monthly payment, which would usually result in an increasing loan balance despite making required payments.

Dates to Look Out For

  • Early 10/2022 – Application for Federal Student Loan Relief (Recommended to apply even if you have automatic forgiveness)
  • 10/31/22 – PSLF Waiver Application expires
  • 12/31/22 – Repayment pause expires
  • 11/15/22 – Apply for $10k-$20k of debt relief so that it is processed before payments restart on 1/1/2023
  • 12/31/23 – Final deadline to apply for debt relief

Conclusion

While much of the logistics of this new plan is still being figured out, those who may be affected should remained informed of upcoming changes. Consulting with a fee-only financial advisor can help you develop a strategy to navigate through this new relief plan.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.