What was announced?
On Wednesday, President Biden announced a long-awaited three-part plan that makes sweeping changes to the federal student loan landscape. This plan can provide up to $20,000 of debt cancellation for borrowers, make changes to payment forbearance, and potentially add a new income-based repayment plan. Only federal student loans qualify, so borrowers with private loans are not eligible under the plan.
Here’s what you need to know.
What’s included in Biden’s student loan forgiveness plan
Biden’s student loan forgiveness plan is three-pronged:
- Student loan payment pause extended - Payment forbearance, often called the payment pause, was extended through December 31, 2022. Payments are scheduled to restart in January of 2023.
- Student loan debt relief for up to $20,000 - Borrowers who meet income requirements may see up to $10,000 in debt canceled. Borrowers that received Pell Grants may see up to $20,000 canceled.
- Proposed new income-based repayment plan - Under the proposal and new repayment plan, monthly payments could be capped at 5% of the borrower’s monthly discretionary income. Existing programs cap payments at either 10% or 15% based on the plan selected. The new plan may also forgive loan balances after 10 years of payments (traditionally 20 years), but restrictions may apply.
Who qualifies?
Borrowers who meet income requirements may see up to $10,000 in debt canceled. For Pell Grant recipients, up to $20,000 is potentially available for forgiveness.
Eligibility is limited to individuals who earned less than $125,000 in the previous year and $250,000 for married couples filing jointly. The income figure to be used is your adjusted gross income.
You can choose to use your 2020 or 2021 income taxes to determine your eligibility.
Top questions answered:
- Do PLUS loans qualify for debt cancellation? The debt relief plan did not mention PLUS loans for both parents and graduate students. However, they are federal loans, and several sources are reporting that they could qualify for loan forgiveness.
- What if I have more than $10,000 in federal loans? If your outstanding loan balance exceeds the $10,000 or $20,000 potential relief amounts, you will have to make payments based on the remaining balance when the payment pause ends after December 31, 2022.
- What if I already paid off my student loans? Unfortunately, there are no refunds for paying off your loans. Outstanding balances as of June 30, 2022 are eligible for forgiveness.
- What about loans for current students? Current students are eligible as well. Only loans disbursed by June 30, 2022 are eligible. So loans for future years will not count. Eligibility will be based on the parent’s income in most situations.
- Will the forgiven loan amount be taxable? No. Any amount forgiven will not be taxable at the federal level. State taxation was not discussed, so it’s recommended to speak with a tax professional to make sure you plan accordingly.
What does it mean for you?
First, we recommend patience with this new program. Details are still coming out around when the Department of Education will be ready to take applications and provide debt cancellations.
There are whispers of legal challenges since this was an executive order and not a bill passed by Congress and signed into law by the President. Initial guidance says that cancellations could take as long as one year.
Second, it’s critical to make sure you know if you are eligible for loan cancellation, what amount, and what your loan payments will look like come January of 2023 if you still have an outstanding balance. It’s recommended to talk to your loan servicer to determine your new payment and if it makes sense to make changes to your current repayment plan.
Third, create a plan to pay down and off any remaining loan balances. It’s recommended that you get additional information on any loan forgiveness programs you may be eligible for (under public service or income-based repayment plans).
Creating a plan to pay down existing debt and how to allocate any monthly savings following the changes can help you take advantage of all of these modifications.
What do you have to do?
- Update your contact information - Make sure your contact information is up to date with your loan servicer. This will ensure they know how to contact you with any additional information or guidance as more details are released. You can find it on the Student Aid website if you are unsure who your loan servicer is.
- To participate in the extended payment pause - No action is required. The payment pause is automatically extended through the end of the year.
- To apply for loan cancellation - If the U.S. Department of Education already has accurate income data for you or your household, the relief will be applied automatically. However, confirming the information they have on file for you can't hurt. If they do not have complete data regarding your income, you will have to submit an application to receive any loan forgiveness. The Department of Education hasn't released the application yet, but promised to do so before the end of the year.
- To update your repayment plan - While repayment isn’t scheduled to restart until January of 2023, now is a great time to plan ahead, review your payment plan options, and update your student debt strategy. Talk to your loan servicer or a CFP® Professional to discuss your options, help understand the necessary trade-offs, and make the most sound decision.
Where can you find additional information?
- You can read the full announcement of the debt relief plan at the Federal Student Aid website.
- You can get more information on your loans and the relief program at either the National Student Loan Data System or the Federal Student Aid websites.
- Not sure who your loan servicer is? You can find out HERE.
Final word
This is a big change across the board for millions of people. If you have loans, it’s important to understand the details (or to talk to someone that does). It can save you not just thousands of dollars in student loan debt but possibly hundreds of dollars per month if you have the right repayment plan.
When in doubt, give your loan service a shout. And don’t feel bad about calling multiple times to confirm the information as more details are released. Not all information is known at this point, so even loan services may not have the answers yet, and you want to make sure you are acting on the most accurate information.
Learn how a CFP® Professional at Facet can help you navigate changes to your current loan payment plan.
