UPDATED: Student Loan Forgiveness Program Q&A 

As of October 17, 2022, President Biden’s application for student loan debt relief is live. You can view and complete the application here.

While the final deadline to apply for relief is December 31, 2023, those who wish to apply are strongly encouraged to complete the application before November 15, 2022, to allow their application to be processed before the federal repayment pause ends on December 31, 2022.

Q&A

What are the basics of the student loan forgiveness update? 

The Department of Education will provide $10,000 in loan forgiveness for individual federal borrowers ($20,000 for Pell Grant recipients) earning less than $125,000 annually and households earning less than $250,000. The qualifying income years include 2021 or 2020. Additionally, the current pause on federal student loans was extended through December 31, 2022. Payments will begin in January of 2023 for those with remaining balances.  

How do you apply for student loan forgiveness? 

The application is live as of October 17, 2022. You can view and complete the application here. We encourage borrowers to complete the application by November 15, 2022, to receive relief before the payment pause ends on December 31, 2022. 

Will A Parent Plus Loan be forgiven? 

Yes, if the parents meet the income limits. But again, the forgiveness amount is only up to the $10,000 or $20,000 mark, whichever applies based on whether the student received a Pell Grant in college. 

Are there any tax implications for loan forgiveness? 

Federal Tax: No. In March 2021, the American Rescue Plan Act was passed which made all student loan forgiveness that occurs tax-free at the federal level through the end of 2025.

State Tax: Possibly. According to the tax foundation, some states (Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin) could treat the student loan forgiveness initiative as taxable income to borrowers.

I made a payment during the pause; can I get a refund? 

Yes – any borrower who qualifies for forgiveness and made a payment during the pause can get a refund for any payment made (beginning March 13, 2020). To receive the refund, you need to contact your loan servicer to make the request. If requesting a refund, you should ensure that you qualify for the $10,000 or $20,000 in forgiveness for those who received Pell Grants. Once the refund is made, your total loan balance will increase temporarily before loan forgiveness applies

What other changes might impact student loan holders? 

The Department of Education is working through details of a new income-driven repayment plan that will cap monthly payments for undergraduate loans at 5% of a borrower’s discretionary income. For purposes of federal student loans, discretionary income is the difference between your annual income and 150% of the poverty guideline for your family size and location. The new repayment plan calculates discretionary income by raising the amount of income that is protected from repayment. This will guarantee that no borrower earning less than 225% of the federal poverty level (about $30,578 for 2022) will have to make a payment. Also, any unpaid interest will be covered by the Department of Education, meaning that interest won’t accrue, and your loan balance won’t grow if you make your monthly payments. 

Lastly, one of the bigger changes in addition to loan forgiveness was the revamp of the Public Service Loan Forgiveness (PSLF) program. If you are employed by a U.S. federal, state, local, or tribal government or not-for-profit organization, you might be eligible for the Public Service Loan Forgiveness Program. The PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. If you currently work for a qualifying employer, you have until October 31 to apply to the program and receive credit for past payments that may have otherwise not been counted towards the 120-payment requirement. To see if you qualify and apply for the program you can walk through the Department of Education’s PSLF help tool here.  

What’s Next?

We believe strongly in discussing your options with a financial advisor who can help navigate these changes. And if you’d like a refresher on some of the best ways to save for education (including types of financial aid opportunities), check out our recent blog post on what you need to know when saving for education.  

Commas is a wholly-owned subsidiary of Truepoint Inc., a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A and Form CRS filed with the SEC, can be found at www.commas.devphase.io. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice.