Summary Sheet: Federal Student Loan Forgiveness Program

by Joshua Hahn, Senior Investment Analyst

Summary

• The Biden administration announced it was cancelling up to $10,000 of outstanding federal student loans.
• Cancellation won’t take place until at least 2023; until then, the administration has extended the pandemic-era payment and interest pause on federal student loans.
• Individuals making $150,000+ a year or couples making $250,000+ a year are not eligible.
• Cancellation won’t be taxed at the federal level.
• Loan forgiveness expected to take place in early 2023.

In August 2022, the Biden administration announced the cancellation of a portion of some graduates’ federal student loan debt. Borrowers are eligible to receive up to $10,000 each. Further, individuals that were eligible for Pell Grants, typically from low-income households, can qualify for more relief – up to $20,000 in loans.

The administration also used the opportunity to announce that it was extending the ongoing student loan pause until 2023. This is an extension of a pandemic related policy in which these payments were paused that has been ongoing since March 2020. The White House stated this could potentially be the final extension of the pause.

In order for loans to be eligible for forgiveness, there are several criteria that need to be met.

Crucially, forgiveness only applies to outstanding federal debt. This means that private federal loans don’t qualify. Although a small portion of loans, Federal Family Education Loan (FEEL) program borrowers may apply if able to consolidate into a direct loan program, but borrowers should discuss with their lender about the potential options. Consumers that are unsure where their loan is held may visit studentaid.gov to check.

Additionally, those borrowers with Parent PLUS loan holders, in which children and parents are co-signors, may qualify separately for up to $20,000 in cancellation, as long as both individuals meets the requirements separately. 

The administration imposed an income requirement as well. Eligible loans are capped at individuals making under $125,000 a year or couples making less than $250,000 a year. This applies to the Adjusted Gross Income (AGI) from either the 2020 or 2021 tax return, so individuals who did not meet the requirement in 2021 may be eligible depending on their 2020 AGI.

According to Bloomberg, at the federal level, student loan forgiveness is not taxable. However, several states have a tax code in which the cancellation of student debt will be taxed including AR, CA, IN, MN, MS, NC, and WI. Borrowers with debt discharged should talk to a trusted tax professional.

Operationally, how student loan forgiveness will work is still somewhat unclear. The Department of Education (DoE) stated that in some instances (approximately 8 million), the lender will reach out to borrower because they have enough income information without additional information from borrowers. However, the DoE also estimates that they will release an application in October 2022 for all other borrowers.

In either instance, if you have determined that you are eligible for student loan, borrowers should follow DoE communications in case an application is released via https://www.ed.gov/subscriptions.

Consumers should also be wary of potential scams and phishing attempts; it’s possible bad actors may take advantage of the situation by reaching out to individuals stating they’re from a lender or the DoE.

Potentially, the lawfulness of the order could be challenged; however, the outcome, or whether lawsuits will occur, remain to be seen.

Per the Wall Street Journal, the plan is expected to benefit 43 million individuals in the United States with $1.6 trillion in student loan debt. 

The DoE has not given a time table on when student loan forgiveness will take effect; however, they have stated that it will be before interest and payments are required once again in 2023.