It's finally here? The long-awaited student loan forgiveness that supporters (and some non-supporters) of the Biden Administration have been waiting for. Did they hit the mark with their decision to forgive up to $20,000 of student loan debt? For some, yes; for others, no, but regardless of how you feel...who are we to look a gift horse in the mouth?
As you know...we do taxes. So the most important thing for us to communicate to our clients (current and future) is the impact on their upcoming tax filings. However, with this impacting nearly 8 million Americans, we're including some other very important information to ensure you're prepared for the next steps of the Student Loan Debt Forgiveness Plan.
So how does this impact you on your 2022 tax filing?
If you are eligible, you will not have to pay federal income tax on the student loan debt forgiven, thanks to a provision in the American Rescue Plan Act that Congress passed last year.
But it's possible that some eligible borrowers may have to pay state income tax on the amount of debt forgiven. According to the Tax Foundation, a handful of states may tax discharged debt if state legislative or administrative changes are not made beforehand. The tax liability could be hundreds of dollars, depending on the state.
So who is eligible for this Debt Forgiveness?
Not every student loan borrower will be eligible.
Only federally owned student loans qualify. Private student loans are excluded.
High-income borrowers are generally excluded from receiving debt forgiveness.
Individual borrowers who make less than $125,000 a year qualify.
Married couples/heads of households who make less than $250,000 a year qualify.
If eligible, what do you qualify for?
Individual borrowers who make less than $125,000 a year or Married couples/heads of households who make less than $250,000 a year qualify to receive up to $10,000 of their student loan debt forgiven.
If a qualifying borrower also received a federal Pell grant while enrolled in college, the individual is eligible for up to $20,000 of debt forgiveness.
Income qualifications are based upon your income reported for either tax year 2020 or 2021.
How will the government know what my income was to know if I qualify?
The Department of Education says it already had income information for nearly 8 million borrowers, likely because of financial aid forms or previously submitted income-driven repayment plan applications. Those borrowers will automatically receive debt relief if they meet the income requirement.
Other borrowers will need to apply for student loan forgiveness if the Department of Education doesn't have their income information on file. It is recommended that eligible borrowers apply before November 15th.
When can I apply for this Debt Relief?
The application is expected to be available by early October. You can sign up to be notified when it is available through the Department of Education's subscription page. After submitting the application, you can expect the student loan relief within four to six weeks. It is recommended that eligible borrowers apply before November 15th. Be sure to pack your patience as the website is SURE to have issues with crashing and delays.
I am a current college student (or have a student in college). Are my loans eligible for forgiveness?
Yes, some current students are eligible. Eligibility for borrowers who filed the Free Application for Federal Student Aid, known as the FAFSA, as an independent will be based on the individual's own household income. Eligibility for borrowers who are enrolled as dependent students, generally those under the age of 24, will be based on parental income for either 2020 or 2021.
I am a parent who took out a Parent PLUS loan. Am I eligible?
Yes, if your income meets the eligibility threshold. A parent borrower with federal Parent PLUS loans for multiple children is still only eligible for up to $20,000 of loan forgiveness.
I will still have a balance on my Student Loans after this. How are my future payments impacted?
Borrowers with debt remaining after either $10,000 or $20,000 are wiped away could see their monthly payment amounts recalculated if they are enrolled in a standard repayment plan. Under a standard repayment plan, borrowers pay a fixed amount that ensures loans are paid off within 10 years.
Borrowers who are already enrolled in an income-driven repayment plan will not likely see their monthly payment amounts change due to the forgiveness because their payments are based on household income and family size.
Borrowers have not been required to make payments on their federal student loans since March 2020 because of the government's pandemic-related pause. Biden has extended the pause through the end of this year, and payments will resume in January 2023.
I made payments on my Student Loans during the Pandemic Pause. Can I get this money back?
Yes. Borrowers have not been required to make payments on their federal student loans since March 13, 2020, because of the pandemic-related pause. But if borrowers did make payments, they are allowed to contact their loan servicer to request a refund.
This has NO impact on your taxes as you are ONLY able to deduct the interest related to payments, and during the pandemic pause, all federally backed student loans were paused on accruing interest.
If you have additional questions or what to chat about your personal situation, CONTACT US for a free consultation today.