For those who’ve been waiting patiently, the news of the student loan forgiveness plan of President Biden finally came through on the 24th of August. The debt forgiveness program will mean twenty million people won’t have to pay a debt.
If you’re among the roughly 43 million people who will benefit from this forgiveness — or believe you might be oneyou’ve probably observed that the details are a bit hazy right from the beginning. One aspect that’s unclear is the distribution of the relief, or what is the loan or loans that the relief amount will be taken from.
In order to provide some clarity our understanding of the issue, we came together as a group in order to present what we know about the situation with you. As information becomes available do not hesitate to make time in our schedules to discuss the situation.
STUDENT LOAN RELIEF IN THE HEADLINES
From Director of Cash-Flow and Insurance Planning, Regina Neenan
Let me start with the latest news. Biden’s announcement from last month was applicable to individuals filing tax filings that earn under $125,000. The same is true for married couples who file their taxes separately. The amount rises by $250,000 in the case of heads of household and married taxpayers filing jointly.
Borrowers who take out Stafford and Parent loans for undergraduate students (PLUS) and Graduate Perkins as well as Grad PLUS loans may be eligible for up to $10,000 in relief. Since the forgiveness is contingent around who is the borrower PLUS Loan parents can only receive an amount of up to $10,000 in relief per all instead of for each student on behalf of whom they took out the loan. If you received Pell Grants – an aid based on need for students with lower incomes — up to $20,000 in relief is offered.
People who have personal student loans, and Federal Family Education Loans (FFELs) are not in the position of being eligible to receive relief.
A MINI CASE STUDY
A borrower who has undergraduate loans who were awarded Pell Grants. They benefited from the forbearance program and dropped their loans after they were able to pay zero interest. They have a principal balance of $8,477.14 divided between two loans, and are eligible as debt-free. Because of the forgiveness, they will be eligible to receive …
$8,477.14 as relief.
Why didn’t they get the full $20,000? They started with over $20,000 of loan principal, and also had Pell Grants in the end! However, the forgiveness is only available to the outstanding debts that are due. The borrower has overpaid the balance due each month and has no recourse with this $11,522.86 the amount that could be paid off.
It’s a good thing.
The debt relief program is designed to provide that ease to borrowers who require the most. It’s actually designed for borrowers with low-to-mid-incomes and those who have borrowed but did not graduate, and people of color, in particular Black borrowers.
The burden of student debt has left a lot people in these categories struggling with getting homes as well as starting families as well as saving money for their retirement. The relief offered is intended to help them reduce their debt.
INCOME-DRIVEN REPAYMENT PLANS
Other ways to reduce that debt burden include three significant modifications to IDR plans. (IDR) plans.
1. In the past, people with IDR plans had to pay monthly for their loans on the basis of 10 percent to 15% from their income discretionary. The Biden student loan relief program reduces this amount to 5 percent of discretionary income, which allows those who borrow to have more of their discretionary earnings in a monthly manner.
2. The formula that calculates discretionary income is changing so that it includes the greater expenses that are not considered discretionary. This results in a smaller percentage of discretionary income to this smaller percentage to base it on, which will further reduce the amount of monthly repayments.
3. There is no interest charged to principal debts by those who make qualified IDR payments. Also, the balances won’t increase for those who make IDR payments.
A little less significant but nevertheless significant, people who initially had a loan of less than $12,000 will have their debts forgiven after a period of 10 years of qualified payments instead of the initial 20 years of repayments. Together, these modifications to IDR for people on these plans permit greater discretionary spending. or savings that are discretionary, allowing the plan members to move closer to achieving those life milestones.
STRATEGIZING YOUR STUDENT LOAN SITUATION
From Director of Estate and Financial Planning, Dan Andrews
Politics and headlines affect the financial plan. With the first payments scheduled to start at the end of December. 31st 2022, this is the perfect opportunity to evaluate and perhaps update your repayment strategy for student loans.
To learn about the advantages and disadvantages of different strategies for maximizing your financial return, check out the FPFoCo Academy module Education Planning and Student Loans.
To be eligible for the forgiveness recently announced by the government, those who have already shared their income information to the U.S. Department of Education in order to establish the purposes of their IDR plans will receive the forgiveness amount applied automatically in the event that they are qualified. In the event that federal authorities does not have your income information the government will notify you about an application that must be submitted.
The Federal Student Aid website encourages applicants to submit their applications on or before November 15 so that the refunds are processed before December 31st.
PREPARING TO REPAY BY DECEMBER 31
Each financial plan is unique and student loan repayment strategies will come back at the time. Here are some strategies you can find within your budget.
Continue your current repayment strategy.
If you have made payments during the time of the forbearance, and all or a portion of them could have been cancelled under Biden’s program make contact with your lender. In the words of the Federal Student Aid website, “You can get a refund for any payment (including auto-debit payments) you make during the payment pause (beginning March 13, 2020).”
Apply for for Public Service Loan Forgiveness (if you are eligible).
Think about refinancing your private loan and making a lump sum installment today to lower the amount that needs that needs to be refinanced.
Also the details could change in the coming days and until close in the calendar year. To be updated on breaking information, sign up for updates by signing up to “Federal Student Loan Borrower Updates” on the U.S. Department of Education website.
TAX IMPACTS
From Director of Investment and Tax Planning, Jason Speciner
In most cases, debt forgiveness equals tax-free income. In reality, there’s an information return that can be used in this type of situation: Form 1099-C. However it is important to note that there was a change in the American Rescue Plan Act passed in 2021 made student loan debt forgivenesss between 2021 to 2025 exempted from federal taxation on income. The best part is that the amount you forgive is not reflected on your federal tax return.
The state tax situation is somewhat hazy. In the beginning the Tax Foundation published a list of states in which student loan forgiveness under the program could be tax deductible. But, following clarifications by several states, it is now likely to be only seven states that could tax the forgiveness:
- Arkansas
- California
- Indiana
- Minnesota
- Mississippi
- North Carolina
- Wisconsin
If you’re from either of those states, be sure to pay close attention to announcements coming soon regarding possible tax relief. If you’re located in another state, Colorado among the others — it will appear that the debt forgiveness is tax-free.
Alongside the taxes (or absence of tax) on student forgiven debt, you may determine your eligibility to forgive by analyzing the information on your income tax report. Particularly what is “income” that determines your eligibility is your adjusted gross income (AGI) from your 2020 or 2021 federal tax returns for income. On the standard Form 1040, you’ll see the amount on line 11. If your AGI in any year is lower than the threshold of $125,000 or $250,000 You will be eligible for a tax-free forgiveness.
WRAPPING IT UP
If you’re not qualified for this relief because your income is higher than the threshold or you’re planning to start paying in any amount that’s not paid, mark your calendar. Now we’re on this finalpayment suspension. If you did not request this extension for your loans but you’re worried about it, it was automatically granted. But, the payments will begin in January 2023.
If your loan was transferred to a different service provider during the time of forbearance or if you’ve not been logged into your account for a while (we aren’t mad at you! ) make sure there is access to the student loan account prior the close in the calendar year. You may be able to determine the balance(s) due. Be aware that you’ll probably owe less per month when you’re in IDR. IDR plan. Make sure to incorporate the cost of your monthly payments into your budget and create plans to have the money saved for the coming year.
And lastly, do not forget to tell us what we can do to help.
