After months of deliberation, the Biden administration has announced plans to forgive or cancel up to $20,000 in federal student debt. This will eliminate or significantly reduce student debt payments for millions of qualifying Americans.
The student debt forgiveness program outlined by the administration has the following main criteria and qualification thresholds:
- Cancel up to $10,000 in federal student loan debt for borrowers making under $125,000/$250,000 (single/married filers). Each spouse can each cancel up to $10,000 of debt.
- Those low-income students who received federal Pell Grants and currently make less than $125,000 a year would be eligible for total debt forgiveness of up to $20,000.
- The forgiveness applies to students with federal loans from both undergraduate and graduate programs, as well as those under Parent Plus loans.
- Student loan payments pause extended through to December 31st, 2022, from the existing August 31st deadline.
- Cap undergraduate loan repayments at 5% or disposable monthly income, versus current 10% cap.
“All of this means people can start finally to climb out from under that mountain of debt….to finally think about buying a home or starting a family or starting a business.”President Biden
How can I apply for Student Loan relief?
The Department of Education (DoE) will provide guidelines and application procedures (likely online) for this program in the coming weeks, subject to final approvals and likely legal challenges from the Republican party around the ability of the President to forgive loans via executive order.
However qualifying borrowers with student debt should be able to apply for relief before the extended repayment pause expires at the end of the year. The DoE website to enable this should be live before thanksgiving, following the timeline and template used in past forgiveness programs.
Ahead of the program go-live, the following actions should be done to ensure your application is ready to go.
- File a current tax return. You can efile for free or use leading providers like TurboTax to do so. Your latest tax returns will likely be used to verify income levels, required to qualify for the forgiveness program. So if you haven’t already filed a return for this, get to it (will be free for most qualifying folks).
- Gather, review and understand your loan documents. You may have not looked at these for a while, but you will need to ensure they qualify for relief. If you don’t have the origination documents, review your latest statements and/or call your loan provider.
There is a very high chance that when the program is live the DoE systems and processes will suffer many human and technical/system glitches as millions of borrowers try and submit applications online. So you will need to be patient and monitor the latest updates.
What is the cost of this program?
According to various independent estimates this program will cost more than $300 billion over 10 years. This is a fraction of the ~$1.7 trillion in outstanding student loans for over 42 million Americans.
Today the average student loan balance is over $30,000, up nearly threefold from the 1980’s, thanks to rapidly rising college costs and growth in further/graduate education programs.
Under the Biden student debt forgiveness program, nearly 10 million borrowers could see their entire student loan balance wiped out completely.
Given the actions under the plan are being done via a Presidential executive order using existing precedents and DoE authority, it is expected that Republicans will challenge the legality of this program. So it may take a while for the final program application and funding to become available.
How will this student debt forgiveness be applied (and tax treatment)?
While debt forgiveness is often treated as taxable income, the total amount of the canceled student debt will be federally tax exempt per the ARPA bill (Section 9675), between 2021 and until the end of 2025.
To be federally tax free, the loans must have been made, insured or guaranteed by the federal government, including federal agencies (e.g DoE), state governments, colleges and universities, and private education loan lenders.
This means that any student debt relief will not be added as income in your federal 1040 filing for the 2022 to 2025 tax years. This does not preclude this income for counting towards state taxes, if they do not follow federal guidelines on student loan forgiveness.
Most leading tax software packages will be updated to account for this once final guidelines under this program are provided.
Dependents and those with less than $10K of debt
Also for those with less than $10,000 of student loan debt, only the outstanding balance can be cancelled. You will not get a refund check for the difference between your outstanding debt and maximum $10,000 cancellation amount.
Current students can also claim student debt forgiveness under the program, but will have to use their parents/guardians income levels to determine eligibility if claimed as a dependent.
Is the President sending the wrong message with more loan bailouts?
As expected with a program this side and given our current state of partisan politics, there is a lot of criticism around the cost of this student debt forgiveness program.
The main argument against this program is around the primary benefit or bailout going to college educated Americans, versus blue collar non-college tax payer.
It also provides no benefit for those middle-class Americans who didn’t use student loans to pay for college, and had to work or save hard to complete their university programs.
There are also concerns that this forgiveness could be inflationary as it frees up money used for those making loan servicing payments.
These loan and interest repayment savings would essentially act as another stimulus payment and potentially stoke inflation given the millions of lower-income Americans who stand to benefit from this program.
However, proponents argue that this stimulus is already baked into inflation given the long pause on student loan repayments due to various pandemic relief programs over the last two years.
What is a Pell Grant?
This grant is provided by the US Department of Education (DoE) to eligible lower-income students based on financial need. The Pell grant can be used to pay for college costs, including tuition, fees, room and board, and other educational expenses.
Pell Grant recipient graduates generally have more in debt than other graduates and are from lower income groups, hence the larger benefit.
The DoE estimates that 27 million borrowers will qualify under the Pell Grant relief program and get up to $20,000 in loan forgiveness.