Well, it FINALLY happened: the Biden Administration announced its long-awaited student loan forgiveness policy.
There were actually three important elements of the announcement this week:
- Student loan forgiveness;
- A "final" extension of the payment pause; and
- A new (and improved) Income Driven Repayment Plan option for borrowers.
These changes apply to Federal Student Loans only. If you've refinanced your loans through a private lender, these changes won't benefit you. Also, if you hold older, FFEL student loans, you likely will have to consolidate that FFEL loan into a new Direct Federal loan to benefit.
What impact will these new policies have on you? Read on to find out!
"Final" Extension of the Payment Pause
Let's start with the simplest element first: the extension of the payment pause. As was widely expected, the payment and interest pause on student loans has been extended once again. This "final" extension extends through the end of the year, December 31, 2022.
If this extension is truly the final one, that means you'll have to resume payments on your student loan balances sometime in January of 2023. And while no one knows for certain, I have a feeling that this actually will be the final extension of the payment pause. You should prepare to resume payments in the new year.
Student Loan Forgiveness & How to Apply
Arguably the most exciting element of this week's announcement is the forgiveness element. This forgiveness will be offered only to those with annual earnings below certain thresholds.
If you file your taxes as a single individual, your annual earnings need to be under $125,000. If you file taxes married or as the head of household, your earnings must be below $250,000.
All student loan borrowers under these income thresholds will see $10,000 of debt forgiven. If you took out borrowings under a Pell Grant, you are eligible for an additional $10,000 in forgiveness (for a total of $20,000 forgiven).
From what we know so far, those $125,000 and $250,000 earnings thresholds will be based on Adjusted Gross Income (AGI), which is an amount calculated and displayed on your tax return. It sounds like you will be able to use either 2020 or 2021 tax year amounts to qualify.
If the Department of Education already knows your income level, they apparently will process your debt forgiveness automatically. They'll rely on Income Driven Repayment income certifications and completed FAFSA forms for this required earnings data.
If the Department of Education does NOT know your earnings level, you'll need to apply for forgiveness. We don't know how that will work exactly, but apparently they will release an application form by the end of the year.
Regardless of whether you expect your debt to be canceled automatically or if you suspect you'll need to provide that income data to qualify, I wouldn't assume that things will happen quickly, smoothly or without errors. Keep an eye on your student loan balances to ensure that you get credit for the amount of forgiveness you qualify for.
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A new IDR Payment Plan
Although the student loan forgiveness stole most of the headlines this week, the creation of a new Income Driven Repayment ("IDR") plan might be the more interesting part of the story.
This new IDR plan won't be available until at least summer of next year, so we'll have to wait a while to learn all the details. But here's what we know so far.
While it's been advertised as primarily for undergraduate borrowers, it sounds as if graduate (and beyond) borrowers will also be able to use this new IDR plan. For many borrowers it will reduce the required monthly payments well below the monthly payments offered by the existing IDR plans. Which means it will certainly be worth considering next summer when all the details are finalized.
This IDR new plan also promises to eliminate the accumulation of unpaid interest. Unpaid interest accumulates when your IDR-based monthly payments aren't high enough to cover the interest being charged on your loan balance. This unpaid interest is what leads to the discouraging phenomenon where your student loan balances actually INCREASE even though you've been paying on them for years.
This unpaid interest issue might feel a bit wonkish and in the weeds (and it is), but it could end up being a pretty big deal and will potentially reduce the dreaded "tax bomb" you might face upon achieving long-term student loan forgiveness. We'll all have to stay tuned to see how these details unfold.
Will any of these policies be challenged in court or overturned?
Some folks are a bit grumpy about this announced forgiveness. And yes, forgiveness may end up being challenged in court. Then again, it sounds like those who might wish to challenge this forgiveness may lack legal standing to bring a court challenge.
Of course no one, including me, can predict the future. Yet I suspect the chances of this forgiveness being overturned are pretty low. That said, the potential that this forgiveness ultimately gets taken back is another reason to make sure you apply for forgiveness as soon as you can: even if the policy is eventually repealed, it's extraordinarily unlikely that you'd be required to repay an amount that's already been forgiven.
When it comes to the payment pause and the new IDR plan, these are much less likely to be repealed or challenged in court. The authority of the Administration to implement these policies is fairly well established.
What's the bottom line?
The bottom line with all of these changes is that it pays to pay attention when it comes to your student loans. Really the only way to get in trouble with student loans is by neglecting them.
I realize this is a LOT easier said than done.
When you have a seemingly insurmountable amount of student loans, pretending they don't exist can be a very tempting coping strategy. But we all know that wholesale avoidance never works out that great in the end.
So if you have any questions about what these most recent changes to Student Loan policy mean for you - or if you just need someone to help you look at the intimidating reality of your student loan situation, please CONTACT ME and let me know what's on your mind.
Helping folks navigate every element of their financial lives - especially the ones that feel too overwhelming to handle yourself - is something I help folks do every day!
Turning Point is a registered investment advisor in the state of California. Please visit turningpointhq.com for important information and additional disclosures. This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes financial, legal or tax advice; a recommendation for purchase or sale of any security; or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Read the full Disclaimer here.