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The Biden-Harris Student Loan Plan Explained
On August 24, President Biden announced a three part plan to tackle student debt as families continue to recover from the additional struggles associated with the COVID-19 pandemic. This includes providing targeted debt relief, making the student loan system more manageable, and reducing the cost of college. The most pressing matter for borrowers was the debt relief strategies outlined by the President, specifically; how it works, who is eligible, and what steps need to be taken to maximize debt relief.
Targeted Debt Relief
With his announcement, President Biden outlined the student loan forgiveness amounts available and who will qualify. To be eligible for student loan debt forgiveness, a single borrower's adjusted gross income must be no more than $125,000 a year or no more than $250,000 for married couples or heads of households. To find your adjusted gross income, look on the front page of your most recent tax return (Form 1040), line 11. Your filing status is marked on the top on the same page. Borrowers who were dependents, also marked on the front page of the tax return, will base their eligibility on their parents income.
After confirming whether you qualify based on income, the amount available to you depends on the financial aid you have received. If the borrower was a Pell Grant recipient, the U.S. Department of Education will provide up to $20,000 in debt forgiveness for loans held by the Department of Education. If the borrower did not receive a Pell Grant, borrowers will be eligible for up to $10,000 in debt forgiveness. Pell Grants are usually awarded to undergraduate students who display financial need; most recipients came from families making less than $60,000 a year. If you are not sure if you have received a Pell Grant, you can check your account on studentaid.gov or with the financial aid office at the college you attended. The U.S. Department of Education estimates that 60% of borrowers are Pell Grant recipients.
Nearly every type of federal student loan qualifies for this debt relief opportunity; if your loans qualified for the federal student loan payment pause, they are likely eligible for relief. Debt relief is capped at the amount of your outstanding debt, meaning if you are eligible for $20,000 in debt relief but only have $13,000 in loans remaining, you will receive $13,000 in debt relief. According to the President, nearly 8 million borrowers may be eligible to receive relief automatically when it takes effect, as their income data is already available to the U.S. Department of Education through a recent submission of a FASFA form or application for an income-driven student loan repayment plan. Everyone else will need to fill out a simple application that will be available in early October, attesting to their income. Because it is unclear when exactly the student loans will be forgiven, all eligible borrowers are encouraged to fill out the application when it becomes available. Once submitted, borrowers should expect to wait about four to six weeks before receiving confirmation of forgiveness. Borrowers are also encouraged to submit their applications by November 15, 2022, so forgiveness can be applied before the student loan payments resume in January.
Furthermore, the student loan forgiveness that you receive will not result in a federal tax bill. Usually student loan forgiveness would be considered taxable, but according to President Biden this loan forgiveness plan falls under The American Recuse Plan of 2021, which made student loan forgiveness tax free though 2025. Taxable debt forgiveness is typically reported on form 1099-C and nontaxable debt forgiveness doesn’t usually require a tax form, but because of the millions of borrowers expected to receive some type of forgiveness, this might change. Borrowers who receive forgiveness should stay updated on the most recent developments and be on the lookout for a tax form. Although you will not owe federal taxes on the student loan forgiveness you receive, you may owe income tax at the state level. Indiana, Mississippi, and North Carolina have confirmed that student loan forgiveness will be taxable in their states, with Arkansas, California, Minnesota, and Wisconsin also a possibility.
Student Loan Repayment Pause
Even if you are eligible for $20,000 of student loan forgiveness, you may still have a loan balance to pay off. There have been several extensions of student loan payments since March 2020, with the current and final pause extending through December 31, 2022. For those borrowers with eligible loans, no loan payments have been required during this time and the interest rate on the loans has been set at 0%. There was no action required for these borrowers to extend their student loan pause through the end of the year. But, borrowers should be aware that payments and interest will resume in January 2023, as there will not be another extension of student loan repayment.
Check with your service provider to find out your payment amount and payment due date, as payments will be expected by that time each month from January 2023 and onwards. Also, your required payment may have changed after receiving forgiveness and autopay may still be in effect. Your interest rate will be the same as it was before the student loan pause. For any concerns, your service provider may have additional options regarding monthly student loan payments.
Because student loan interest was set to 0% and there have been no required payments for more than two years, most borrowers have not been eligible for the loan interest deduction on their tax return and so have not received a form 1098-E to report interest paid. Borrowers are able to deduct up to $2,500 a year in loan interest payments from their gross income, which decreases their tax liability. You do not have to itemize to take this deduction, but there are income thresholds that limit those allowed to take the deduction. If you will be required to make student loan payments when the pause ends, you will still be eligible for this deduction and should expect to receive a 1098-E to report on your 2023 taxes.
Current and Future Student Loans
The other aspects of President Biden's student loan relief plan revolve around keeping the cost of college and student loan payments down. The maximum Pell Grant award will be increasing from $6,495 to $6,895, and an enforcement unit has been reestablished to hold accreditors' accountable for predatory loan practices. Colleges will also be held accountable; a watch list will be published that details the college programs with the worst debt levels, allowing new students a chance to steer clear of poor performing programs. This will allow for more transparency and will help to bring down debt.
Also, student loan repayment plans will be restructured so borrowers will have smaller and more feasible monthly payments. Borrowers with undergraduate loans will only have to pay 5% of discretionary income each month for loan payments instead of 10%, and after 10 years of payments borrowers with original loan balances of $12,000 or less will be forgiven, instead of 20 years of payments. Those earning below 225% of the federal poverty level will not have a monthly payment and as long as a monthly payment is being made, even if the payment is $0, there will be a subsidy to cover any accrued interest to ensure that the loan balance will not balloon on those making the attempt to repay.
Should President Biden's student loan forgiveness plan take effect, approximately 40 million borrowers are expected to qualify, with an estimated 20 million having their outstanding loan balance completely cancelled. But, there have been questions and critiques about the legality of forgiving federal student loans and the fairness of the practice. It will be important in the coming months to stay up to date on new developments concerning the student loan forgiveness plan, to make sure you are taking full advantage of all of the opportunities available to you.
Please feel free to contact your Dermody, Burke & Brown tax advisor to further discuss any questions you may have.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.