Author: Kyle Labelle
If you have paid attention to the news over the past few months, you’ve likely heard of the Biden Administration's plan for student loan debt relief announced on August 24th. The application is live, making now the time to act for eligible borrowers.
While debt relief received much of the headlines of late, another debt relief program, the Limited Public Service Loan Forgiveness (PSLF) Waiver is set to expire at the end of the month. Eligible borrowers that have yet to opt in must do so very soon or lose out on the opportunity to do so.
Student Loan Debt Relief
The Biden Administration and Department of Education’s plan to cancel up to $20,000 of federal student loans per borrower is based on several factors, including the borrower’s income in 2020 or 2021, the types of loans held, whether the borrower received Pell Grants in college, and their outstanding loan balance. The rules for each of these conditions are discussed below.
Amount Eligible for Debt Relief
The amount of cancellation a borrower qualifies for depends on whether they received Pell Grants while in college. Borrowers are eligible for cancellation of up to:
- $20,000 in debt relief for those who received a Pell Grant.
- $10,000 in debt relief for those who did not receive a Pell Grant.
The amount that is cancelled under the debt relief plan depends on the borrower’s loan balance at the time they apply for cancellation. Borrowers whose loan balance is greater than their applicable cancellation limit would receive the full amount of debt relief possible. For example, an eligible borrower with $12,000 in qualified loans who did not receive Pell Grants in college would receive $10,000 in debt relief and have a final balance of $2,000.
Not all student loan borrowers are eligible for debt relief. To qualify for student loan cancellation, a borrower must have had an adjusted gross income (AGI) in either 2020 or 2021 of less than:
- $125,000 if filing as single or married filing separately
- $250,000 if filing as head of household or married filing jointly
You can find your AGI by looking at the first page of your completed IRS 1040 tax return.
Eligible Student Loan Types
Not all student loans are eligible for debt relief. Currently, only the following loan types qualify:
- Federal Undergraduate and Graduate Direct Loans (both subsidized and unsubsidized)
- Parent PLUS and Grad PLUS Loans
- Consolidated Loans that were disbursed on or before June 30, 2022
- Federal Family Education Loans (FFELs) held by the Department of Education
- Perkins Loans held by the Department of Education
The following loan types are not eligible for this debt relief: private student loans, FFELs held by private lenders, and Perkins Loans held by private lenders.
Applying for Debt Relief
If you are eligible for the loan cancellation, do not wait to apply. The application takes less than five minutes to complete and does not require any supporting documentation.
Even though borrowers may apply for relief through December 31, 2023, several legal actions threaten the Department of Education’s plan to implement student loan debt relief. Those eligible for forgiveness should apply as soon as possible due to this uncertainty,
Approximately 8 million borrowers automatically qualify for debt relief and are in the process of being notified by the Department of Education. This applies to borrowers with existing Income-Driven Repayment Plans that recertified their income in either 2020 or 2021.
Parents, Current Students, and Dependents
Current students with qualified loans disbursed on or before June 30, 2022, also qualify for debt relief. However, if a student is claimed as a dependent on their parent’s tax return, then the parent’s 2020 or 2021 income is used to assess eligibility.
Parents with eligible loans and/or Parent PLUS Loans qualify for debt relief that is limited to a combined total of $10,000/$20,000. Parents cannot receive debt relief of $10,000/$20,000 toward Parent PLUS Loans and another $10,000/$20,000 toward their own loans. For this reason, parents and children need to individually apply for debt relief.
Requesting a Refund of Payments to Loans since March 2020
The Department of Education announced borrowers may request a refund for payments made toward federal loan balances since the COVID pandemic began. Applicable borrowers can contact their loan servicer and request a portion of those payments be refunded up to their eligible debt relief limit.
Taxation of Loan Cancellation
Thanks to the American Rescue Plan Act, cancellation of federal student loans between 2021 and 2025 will not be subject to federal income tax. However, this may not be the case for state income taxes. Those who receive student loan debt relief should confirm with their tax preparer whether it will be taxable in their state. If you live in New Hampshire, you will not have to pay state taxes on the forgiven amount. It is not clear if that will be the case for residents of Massachusetts. Currently, the Massachusetts Department of Revenue has not issued final guidelines on whether the Biden Plan qualifies as a nontaxable event under the Heroes Act.
Limited Public Service Loan Forgiveness Waiver
The Public Service Loan Forgiveness (PSLF) program allows borrowers working at qualified employers to have eligible student loans forgiven after 120 qualifying monthly payments. To see if this applies to you, go to Federal Student Aid’s PSLF information page.
For those who qualify for the PSLF program, the Department of Education has a one-time waiver that allows previously made non-qualified payments to now qualify under the program. This potentially reduces the time until loans are forgiven. The waiver is set to expire on October 31, 2022, making it important to act now.
Key Changes under the PSLF Waiver
The regular rules for the PSLF program require borrowers to be on the Standard Repayment Plan or an Income-Driven Repayment Plan for loan payments to count toward the 120 qualifying monthly payments. The PSLF waiver changes this allowing payments under any repayment program to qualify. Still, the bowered must have made the payments while a full-time employee of an eligible employer.
The waiver also allows partial payments and forbearance periods of greater than 12 consecutive months to count toward the borrower’s 120 monthly payments.
Borrowers with FFEL Loans, Perkins Loans, or other nonqualified federal loans can consolidate them into Consolidated Direct Loans that would then qualify for the PSLF program and be eligible for loan forgiveness. This consolidation must occur before the PSLF waiver expires on October 31st. Unfortunately, Parent PLUS Loans still do not qualify for the program.
To qualify for this waiver, borrowers must certify their employment for periods for which they are seeking credit toward PSLF. Certified employment includes full-time work at a 501(c)(3) not-for-profit company, other not-for-profit companies offering qualified services, and federal, state, or local government agencies.
Borrowers seeking forgiveness under the PSLF program should review their student loan situation immediately and, if applicable, apply for the limited waiver on the Federal Student Aid website before it is too late.
Elimination of any debt is fantastic, and the Student Debt Relief Program and the Public Service Loan Forgiveness program are both geared toward helping borrowers get to zero student loan debt. If you are eligible for these programs, take advantage of them now!
If you need help reviewing your overall financial plan, please reach out to our team.
Kyle Labelle is a Planning Associate at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services and have unlimited access to our advisors. We receive no commissions or referral fees. We put our client's interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.