On September 7, 2022

Student loan forgiveness

By Kevin Theissen

You may have heard that the Biden administration announced it was forgiving five-figure loan amounts to as many as 43 million federal college loan borrowers. Also noteworthy was the announcement that it would be extending its loan repayment pause one more time through Dec. 31. This will be the seventh extension since the pause started during the Trump administration.

There were two other new federal loan initiatives that were overshadowed by the loan forgiveness news. The first, the Fresh Start program is a massive program for federal borrowers who were delinquent or in default and to rehabilitate struggling borrowers. The second is a proposed new income-based repayment plan. Currently there are four federal income-based repayment plans for borrowers. In this newest program, participants would only have to pay 5% of their discretionary income with 0% interest. Sophisticated clients might be able to benefit from the latest income-based plan that the U.S. Department of Education is proposing.

The new student loan forgiveness program will eliminate a massive amount of federal student debt for millions of borrowers. Up to 43 million federal loan borrowers will qualify to have debt forgiven. Roughly 20 million borrowers, according to a White House fact sheet, will have all their debt eliminated. Borrowers who don’t exceed an income cap will qualify for an elimination of $10,000 or $20,000. Borrowers who were recipients of a Pell Grant the major federal grant for low and middle-income individuals, will have $20,000 in college debt discharged. Pell Grant recipients represent roughly 60% of student borrowers. The vast majority of Pell Grants are awarded to households making under $60,000. To qualify for $20,000 in loan forgiveness, borrowers did not have to be awarded a Pell Grant during all their undergraduate years. Receiving just one full or partial Pell Grant will suffice to qualify for the highest loan forgiveness amount. Borrowers who aren’t sure if they ever had a Pell Grant can sign into their account at StudentAid.gov and click on My Aid in their account to find out. Eligible borrowers who never had a Pell Grant while in college, will have $10,000 of debt wiped away.

An individual borrower with federal student loans must have income below $125,000 in either 2020 or 2021 to qualify for the loan forgiveness. For a married couple filing joint taxes or a head of household, the annual income must not exceed $250,000. Eligibility will be based on adjusted gross income. Borrowers can use income from either 2020 or 2021 to qualify. Income from 2022 cannot be used. Current dependent college students can qualify for the loan forgiveness, but they would have to use parental income from 2020 or 2021 to qualify. All federal college loans are eligible as long as the loans were issued no later than June 30, 2022.

The Department of Education says it’s going to work “quickly” and “efficiently” to set up a simple application process for borrowers to claim debt relief. The administration says the application will be available in early October. Borrowers should apply as soon as the application becomes available so the forgiveness will hopefully take place before the loan pause stops on Jan. 1, 2023. The federal government says the forgiveness should be seen on a borrower’s balance by no more than six weeks after the forgiveness submission.

No federal taxes will be owed on the forgiven debt. Thanks to the American Rescue Plan, passed by Congress last year, student loan forgiveness will not be subject to federal taxes through 2025.

Borrowers in some states, however, could be subject to state taxes for the forgiven amount, which likely includes Vermont.

The loan forgiveness program will almost certainly get scammers excited. You shouldn’t give out personal information, such as date-of-birth and Social Security numbers to individuals who say they represent a loan servicer. Borrowers should log into the loan servicer portal to verify any communication.

It’s expected that the loan forgiveness program will be challenged in court. In a legal memo, the Biden Administration said it was using executive authority permitted under the HEROES Act, passed after 9/11, that allowed for expanded presidential powers during a national emergency. Critics argue that President Biden does not have the authority to forgive debt on such a massive scale and that it does nothing to curtail the rising cost of college. Ultimately this could end up being decided by the U.S. Supreme Court.

Kevin Theissen is the owner of HWC Financial in Ludlow.

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