Unless you live under a rock, you have probably heard about the Biden Administration’s plan to forgive around $300 billion in federal student loan debt. It is estimated that this action would entirely wipe out the debt owed by one third of borrowers[i]. The plan, regardless of how you feel about it, is an audacious one and requires some explanation. In this week’s post, I want to take a moment to discuss the key components of the proposal, some things that you might not know, and how to prepare for loan forgiveness should you qualify.
The Basics
The proposal set forth by the Biden Administration states that individual borrowers making less than $125,000 annually or married couples making less than $250,000 could be eligible for at least some amount of loan forgiveness[ii]. The amount that a borrower can have forgiven will depend on the type of assistance that they received from the federal government. A typical student loan will be eligible for up to $10,000 in loan forgiveness while Pell Grant recipients will be eligible for up to $20,000 in loan forgiveness. If you aren’t familiar with Pell Grants, they are awarded on an income need basis to low-income students.
Lesser-Known Change
While the media attention surrounding this executive action may have given you the impression that federal student loan forgiveness is a new concept, that is simply not the case. In 2009, the Income-Driven Repayment (IDR) system was created in order to help borrowers pay off their student loan debt. The program was designed to reduced, and forgive, a portion of the borrower’s debt as long as they agreed to make a consistent monthly payment that was based on their after-graduation income. Congress later enacted changes to this system meant to lower the amount owed by those in the program even further. President Obama expedited those changes to go into effect in December of 2012[iii]. President Obama again reduced the thresholds for loan repayment via executive action in December of 2015.
Under the Biden Administration’s plan of student loan forgiveness, still further changes are to be made to the IDR system. Currently, borrowers in the system are required to pay 10% to 20% of their income annually for a period of 10 to 20 years. After that period of repayment is complete, any remaining debt is forgiven. Additionally, only income that is more than 150% above the poverty line is considered for IDR calculations. The Biden Administration has proposed to lower the required payments to 5% for undergraduate loans and 10% for postgraduate loans. The plan would also increase the amount of income excludable from IDR calculations to 225% above the poverty line. For context, about 32% of all federal student borrowers are enrolled in the IDR program[iv].
What if I Qualify?
If you think that you qualify for student loan forgiveness, it would be a good idea to make short work of rounding up your financial documents. Specifically, you should confirm if you qualify based on income and the type of loan or grant that you received. A good first step would be to find your tax returns from 2020 and 2021 and find your adjusted gross income (AGI) for those years. This should be found on line 11 of your form 1040. It would also be prudent to go online to studentaid.gov in order to confirm the type of assistance that you received. The types of loans that will qualify under the program are “Direct Stafford Loans, and all Direct subsidized and unsubsidized federal student loans”[v]. This includes Parent Plus Loans under the Direct program. This would also be a good time to check if your loan is a Federal Family Education Loan (FFEL) which is actually a commercial loan and not held by the Federal government.
With all of the changes in this world at least there is one constant, that is, your song of the week! Here’s a classic ballad from Travis Tritt. Enjoy!
The opinions voiced in this blog are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
[i] https://fortune.com/2022/08/30/biden-student-loan-forgiveness-loophole-college-tuition-rise-idr/
[ii] https://www.freep.com/story/money/personal-finance/susan-tompor/2022/08/31/how-soon-will-student-loans-get-forgiven/65462248007/
[iii] https://www.savingforcollege.com/article/income-driven-repayment#:~:text=Income%2DBased%20Repayment%20(IBR),and%20the%20Direct%20Loan%20Program.
[iv] https://fortune.com/2022/08/30/biden-student-loan-forgiveness-loophole-college-tuition-rise-idr/
[v] https://www.cnbc.com/2022/08/30/how-to-get-ready-to-apply-for-student-loan-forgiveness.html