Federal Student Loan Relief Program: What You Need to Know

September 21, 2022

Federal Student Loan Relief Program: What You Need to Know

Biden Administration Announces Student Loan Relief
On August 24, President Biden introduced the Federal Student Debt Relief Plan. The 3-part plan, designed to alleviate economic stress caused by student loan debt, will provide relief to approximately 43 million borrowers, and cancels the full remaining balance for roughly 20 million borrowers.

The following is a summary of key components of the plan.

Final extension of the student loan repayment pause

During the pandemic, student debt repayments have been paused several times. The recent program will make one final repayment pause through December 31, 2022. Payments will resume in January 2023.

Student loan forgiveness
Student debt borrowers with annual income less than $125,000 - or $250,000, for married couples - will be eligible for this debt relief. There will be no pro-rated student forgiveness for individuals who go over the income limitation.

The debt relief is only applicable to federal government loans that have been disbursed by June 30, 2022 to current and past students.

Types of loans forgiven
The Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education, and up to $10,000 in debt cancellation to non-Pell Grant recipients.

Income tax implications
The Biden administration’s student loan forgiveness program is not taxable due to the American Rescue Plan Act of 2021, which made any form of federal student loan forgiveness tax-free through 2025. However, state, and local tax implications will vary - and Pennsylvania will also not tax the forgiven student debt.

Please consult your Herbein tax advisor for advice regarding the treatment in other states.

How to Apply for and Receive Student Loan Forgiveness
Nearly 8 million borrowers may be eligible to receive relief automatically because their relevant income data is already available to the Department of Education, which will work quickly and efficiently to set up a simple application process for borrowers to claim relief.

The application will be available no later than when the pause on federal student loan repayments terminates at the end of 2022.

How to check if you are eligible to submit an application for forgiveness.

Refinanced loans
Unfortunately, Federal Loans that have been refinanced into private loans are not eligible for student loan forgiveness.

Changes to Student Loan System for Current and Future Borrowers
Cutting monthly payments in half for undergraduate loans
The Biden administration is proposing a new income-driven repayment plan that protects more low-income borrowers from making any payments - and caps monthly payments for undergraduate loans at 5% of a borrower’s discretionary income—which is half of the rate that borrowers must pay now under most existing plans.

Raising of non-discretionary income
Raising the amount of income that is considered non-discretionary income and therefore is protected from repayment, which would guarantee that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment.

Forgiveness of loan balances
Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with loan balances of$12,000 or less.

Unpaid monthly interest
Cover the borrower's unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower's loan balance will grow if they make their monthly payments—even when that monthly payment is $0 because their income is low.

Fixing the broken Public Service Loan Forgiveness (PSLF) program
Changes include proposing a rule that borrowers who have worked at a nonprofit, in the military, or in federal, state, tribal, or local government, receive appropriate credit toward loan forgiveness. These improvements will build on temporary changes the Department of Education has already made to PSLF, under which more than 175,000 public servants have already had more than $10 billion in loan forgiveness approved.

How to check eligibility and changes for Public Service Loan Forgiveness

Reducing the Cost of College and Holding Schools Accountable
The Biden administration championed the largest increase to Pell Grants in over a decade, and one of the largest one-time influxes to colleges and universities. To further reduce the cost of college, the administration will continue to fight to double the maximum Pell Grant and make community college free. Meanwhile, colleges have an obligation to keep prices reasonable and ensure borrowers get value for their investments, not debt they cannot afford. The administration has already taken key steps to strengthen accountability. The Department of Education is announcing new efforts to ensure student borrowers get value for their college costs.

The proposed student debt relief program is unprecedented and may likely be challenged in court. However, for now federal student debt borrowers should consider whether they are eligible for debt relief under the program and determine how to apply for the applicable relief.

Please contact your Herbein tax advisor through the form below if you have questions.

Article contributed by Adam Dopkowski