Still confused about the loan forgiveness announcement? We got you!

You’re probably already aware about the student loan forgiveness announcement that President Biden made on August 24th. You also might still be scratching your head as to what this plan even means, if you qualify and what’s next. That, or you tuned it all out once you heard that repayment was delayed again. Either way, we want to provide you with a breakdown of this plan, which is why we asked Chris Obara, Revive’s Chief Financial Officer, a former wall street bond trader, and an expert with more than 15 years of experience in financial advising and consulting, to help with that. Read on to help improve your financial health!

HOW MUCH STUDENT DEBT IS BEING FORGIVEN PER PERSON?

• $20,000 if the individual received Pell Grants
• $10,000 if the individual did not receive Pell Grants

WHO IS ELIGIBLE?

• Single individuals making less than $125,000
• Married individuals making less than $250,000
• Loans made and serviced by a public government entity (i.e. The Department of Education). More formally stated, the loans made under the “William D. Ford Federal Direct Loan Program” are eligible. These include: Direct Stafford Loans, Parent Plus, Grad Loans, all Direct subsidized federal student loans, and all unsubsidized federal student loans. 

HOW MANY PEOPLE ARE ELIGIBLE

• ~37 Million based solely on Loan Type and issuer (Could be ~43 Million if FFEL loans are included)
• ~20 Million after considering income restrictions
• ~12 Million of those eligible will need to submit applications
• ~8 Million of those eligible will receive automatic forgiveness

HOW DO YOU KNOW IF YOU HAVE PELL GRANTS?

It is estimated that approximately 60% of those eligible for forgiveness received Pell Grants.  Pell grants are provided solely for undergraduate degrees, and are given to those with “exceptional financial need”.  If you are unsure if you have received a Pell Grant there are two easy ways to find out:

1.  You can check your account on studentaid.gov. On the main page of your account, there’s a section titled “My Aid.”
2. You can check with the financial aid office of the college that you attended.

WHY DO SOME PEOPLE GET AUTOMATIC FORGIVENESS?

In order to qualify for forgiveness, borrowers must submit financial information to the Department of Education.  Approximately 8 Million of the eligible borrowers have already recently submitted financial information for other reasons (mainly for applying to an income-driven repayment plan), and will not be required to resubmit this information.  Those that have not recently submitted income information will be required to submit an application, which includes their income information. 

WHY ARE ONLY SOME LOANS FORGIVABLE?

A loan is a contract.  The president does not have the authority to unilaterally change the terms of a contract made between two private entities.  As the head of the executive branch of the government, Biden is arguing that he does have the authority to modify the terms of contracts (i.e. loans) made specifically with the government.  As a result, only loans made and serviced by a US government entity can be impacted by the president’s executive order.

The good news for borrowers is that student loans are overwhelmingly made by the US government, so most individuals will have most or all of their loans eligible.

There are some loans which exist in a gray area, where we still await guidance. FFEL loans are an example of this, as these are private loans that are guaranteed by the government. Another example are the Federal Perkins Loan Program loans, as many of these are held at individual universities and not with the government. Currently, the language of the executive order would exclude these, but it’s possible that they may be included as the program gets underway. If you would like to know if your loans are FFEL or Federal Perkins, you can check the same way as checking if they are Pell Grants (discussed above).

WHAT’S HAPPENING WITH THE PREVIOUS PAUSE ON STUDENT LOAN PAYMENTS?

The pause is still in effect, and as part of Biden’s executive order he has extended it again to December 31, 2022.

WHAT IF I OWE LESS THAN WHAT IS BEING FORGIVEN?

Your loan balance will drop to zero.  The forgiveness amount is capped at the outstanding loan balance for each borrower.

WHAT IS THE CUTOFF DATE FOR DEBT FORGIVENESS?

Only student loans taken out prior to July 1st, 2022, will be eligible for loan forgiveness.

WILL THERE BE TAX IMPLICATIONS?

Federal Taxes = No!

State taxes = Maybe!

Loan forgiveness is generally added to your tax return as income (i.e. if you have $1,000 forgiven or written off, you have to add that $1,000 to your total annual income and then pay taxes on that $1,000).  However, student loan forgiveness is currently exempt from being federally taxed until the end of 2025.  As a result, there will be no federal taxation of student loan forgiveness.

At the state tax level, it’s more complicated.  There are 13 states that currently would tax the loan forgiveness.  These states are: Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin.  However, we saw a similar situation recently with the COVID-Era PPP program.  The forgiveness for PPP was taxable at the state level in many states, but several of those states passed laws making it non-taxable.  It’s likely that we would see similar movements by states for student loan forgiveness.

WHEN CAN I APPLY FOR LOAN FORGIVENESS?

Online applications are expected to be available in early October, and officials are encouraging borrowers to submit their applications prior to November 15th, 2022.

WHERE CAN I SUBMIT THE FORGIVENESS APPLICATION?

This information has not been made available yet, but it’s expected to be through the official Department of Education website.

WANT TO STAY UP TO DATE?

You can subscribe for updates directly from the US Department of Education here: https://www.ed.gov/subscriptions

We want to make sure you’re well informed as to what this all actually means for your financial health because this portion of your life is connected to your overall wellness. Feel free to refer back to this as you engage in your financial wellness practice and let us know if you have more questions!