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By Andrew Paulson, CSLP, Principal Student Loan Consultant and Co-Founder of our partner site StudentLoanAdvice.com
The long-awaited day has finally arrived for the seventh student loan payment holiday and the announcement of $10,000 in student loan forgiveness. On August 24, President Biden announced that student loan repayments had been extended again and would now begin in January 2023. That means the status quo for four more months, with no payments or interest. In addition, the administration granted $10,000 in student loan forgiveness to borrowers earning less than $125,000. It’s going to be met with a legal battle, and it’s sure to take some time to roll out.
The app is not out yet, but you can subscribe to get notified when it is here. Another income-based repayment option will also be offered.
Here’s everything you need to know about the latest student loan vacation extension and everything announced by the administration.
Extended student loan payment break
Federal student loans have been on hold since March 2020, and when this latest extension ends, there will be nearly three years of no payments or interest on your student loans. The president said it was the last break, but we’ve seen this movie before and I want to see a January 31 payout date before I start believing it.
I hope you’ve collected payment accounts for Public Service Loan Forgiveness (PSLF) or saved some money to throw into your loans if you plan to refinance privately. If you haven’t signed up for autopay yet, be sure to log into your repairer’s site and sign up.
Income certification for Income Contingent Repayment (IDR) plans was scheduled to begin in March 2023, but will likely be moved to later in the year. If the past is any indication of the future, revenue certification dates will be required six months (at the earliest) after payments resume.
More information here:
How to Guarantee Student Loan Forgiveness Through the PSLF Program
Widespread student loan forgiveness
President Biden is using his executive power under the HEROES Act to cancel student loan debt. The HEROES Act was passed after 9/11 to expand presidential powers during national emergencies. COVID-19, classified as a national emergency, was the catalyst for the use of the HEROES Act to cancel student loans. In 2021, the Trump administration reviewed the law and concluded in a memo that it failed to discharge student loan debt.
It is clear that Congress has the ability to cancel student debt, but there is no general consensus to do so. That’s why the Biden administration looked into the HEROES Act and concluded in this legal memo that it Is have the ability to cancel student debt. Executive action will likely be challenged in court.
Borrowers whose annual income during the pandemic is less than $125,000 for individuals or less than $250,000 for couples who received a Pell grant in college will be eligible for a discount of up to $20,000 on their existing federal student loans. If you were not eligible for Pell Grants, you are eligible for relief of up to $10,000. Some households will be eligible for a rebate of up to $40,000. The amount of the canceled loans will not be federally taxed as income. However, there may be state taxes levied on this discount for those in a few states. You should consult a tax advisor for your particular state.
The income to use when claiming a rebate is the income you submitted on your last IDR form. Due to the pandemic, most borrowers have not certified their income since 2019 or 2020. If you are not yet enrolled in an IDR plan, you will need to declare your income on a simple request. Reading the tea leaves, I assume this is your 2020 or 2021 tax return, as the government has hinted at income during the pandemic. Whichever is lower is what you could submit.
Federal student loans eligible for forgiveness are Direct Stafford Subsidized/Unsubsidized, Direct Consolidation, Direct PLUS Graduate, Parent PLUS, and potentially some Federal Family Education Loans (FFEL). Perkins loans and private student loans will not be eligible.
The application to register for widespread loan forgiveness has not yet opened, but will be in the coming days. Here is the link to be notified when the app is available.
Here are some questions I still have (feel free to ask your questions in the comments, and I’ll answer them as best I can):
- What if a borrower is married and earns less than $125,000 but has a high-income spouse who would push him above the $250,000 income threshold as a household and he files taxes married separately? While the government follows the pattern for most IDR plans when couples file MFS taxes, it only takes the adjusted gross income of the spouse who has student loans. Therefore, this borrower would qualify because they have an income of less than $125,000.
- Will I be eligible for loan forgiveness while I’m still in school? There is no employment requirement to receive this pardon. All it takes is income below the threshold I mentioned earlier and current federal student loans.
- If I take out loans now, will I be eligible for them to be forgiven? Probably not. The deadline will probably be this summer, such as June 30. There are people who will try to game the system. Don’t be surprised if IRS auditors try to track these people down.
- Are Federal Family Loans for Education (FFEL) eligible? I think those held for commercial purposes will not qualify and those held by the Department of Education (ED) will. FFEL loans held for business purposes would require direct federal consolidation to qualify.
- Can this discount be targeted to my higher interest rate loans? Honestly, I have no idea at this point. We will update when we have more direction.
There are a lot of unknowns about how long it will take to implement and some background details. As these become available I will continue to update this post. However, most of you should not worry about this and change your overall student loan repayment plan. If you haven’t made a plan yet, be sure to check out WCI’s 101 Guide to Student Loans or book an appointment with one of our student loan professionals.
More information here:
Managing student loans when both spouses are working
New Income Driven Repayment Plan
The new income-focused repayment plan is still in proposal form and will seek public comment. Implementation would likely not occur until mid to late 2023. This would now create the sixth IDR option for borrowers, which could further complicate repayment plan selection. But it seems to be particularly advantageous for undergraduate borrowers. Here is what was proposed:
- Monthly payments will be calculated as 5% of Discretionary Income on undergraduate loans and 10% on graduate loans. Borrowers with both undergraduate and graduate loans will have a pro-rated payment percentage based on the percentage of their undergraduate to graduate outstanding debt.
- The poverty level deduction used to calculate discretionary income will increase from 150% of the federal poverty level to 225%. A household size of 1 deduction (in the lower 48 states) would increase from $20,385 to $30,578.
- The forgiveness will occur after 10 years of payments if you have loan balances of $12,000 or less.
- If the monthly interest is not covered by your monthly payment, it will be covered by the government. Loan balances will not increase in this IDR plan when payments are less than interest. This applies to undergraduate loans and I’m not sure graduates will receive the same treatment. If they do, it could be huge for the residents.
There’s no mention of how spousal income will be treated, whether there will be a payment cap, or whether you need to qualify for partial hardship to enroll. After the proposal process, some details may change for this program. I will update this article as I learn more.
What about the PSLF exemption and the IDR exemption?
The Biden administration and the ED were pretty quiet on the PSLF waiver and made no mention of the IDR waiver. The PSLF waiver is due to expire on October 31, 2022, so you must do your paperwork before then if you want to qualify under the relaxed rules. There have been proposals to implement elements of the PSLF waiver into the current PSLF law. This consists of counting late payments, partial payments, deferrals and abstentions as a PSLF credit.
The first four years that borrowers were eligible for the PSLF, from October 2017 to October 2021, about 18,000 borrowers received it. Since July 2022, more than 175,000 have received it. People are getting their loans forgiven, and it’s mostly older borrowers with FFEL loans.
Is it time to refinance my student loans privately?
With the final payment paused, it’s time to get serious about privately refinancing your student loans. Borrowers who are not pursuing a federal loan forgiveness program should seriously consider refinancing their loans privately. Recently, refinance interest rates have started to stabilize, and they may look favorable for what you’re paying when payments and interest resume in January 2023. WCI, in partnership with our Approved Private Student Loan Lenders, negotiated a cash bonus for any borrower who refinances their loans by December 31, 2022. And, if you’re refinancing $60,000 or more, WCI will launch our flagship financial course, Fire Your Financial Advisor: A Step-by-Step Guide to create your own financial plan, a value of $799.
Student loan programs will continue to change and we hope this process will become easier. Until then, I’ll continue to educate you on what you need to know and how to create your plan for dealing with your student loans. If you need personalized advice, make an appointment with a member of our StudentLoanAdvice.com team.
What do you think of the student loan holiday break? Does it help or hurt you? Is this policy fair? Comments below!