There has been a lot of speculation over the past year about student loan forgiveness, which is now officially being called “cancellation” and the continued freeze on federal student loan payments. Right before the latest federal student loan payment freeze was set to expire in August, the Biden administration announced that they will extend the payment freeze once again through January and also offer some relief for federal loan borrowers. We do not have all the information as of now, but we have outlined what we do know below.
All federal student loan payments are scheduled to resume in January 2023. There is nothing needed to continue with the pause. Make sure that all of your payment information is up to date with your loan provider for when they do resume.
Federal loan cancellation
Eligible borrowers will receive a $20,000 cancellation if they received a Pell Grant and $10,000 if they received any other federal student loan.
Most federal student loans are eligible.
- Federal Direct Loan (Direct Loan) Program loans. All federal loans issued after 2010 are in the Direct Loan Program and any loan through this program will qualify including:
- Subsidized loans
- Unsubsidized loans
- Parent PLUS loans
- Graduate PLUS loans
- Federal Family Education Loan (FFEL) Program loans held by The Education Department (ED) or in default at a guaranty agency. FFEL was the program used to lend federal student loans until 2010 and if you have a loan through this program held by a private lender such as Navient, Nelnet or Suntrust to name a few, your loan will not qualify. You will need to consolidate your loan through Direct Loans to be eligible for forgiveness.
- Federal Perkins Loan Program loans held by ED. If your Perkins loan is held by a university or its servicer, your loan does not qualify and must be consolidated through Direct loans to be eligible.
- Defaulted loans (includes ED-held or commercially serviced Subsidized Stafford, Unsubsidized Stafford, parent PLUS, and graduate PLUS; and Perkins loans held by ED)
- Federal consolidation loans are eligible as long as all of the loans that were consolidated were distributed before June 30, 2022.
- Single or married filing separately: Your income will need to have been less than $125,000 in 2021 or 2020.
- Married filing jointly or Head of household: Your income will need to have been less than $250,000 in 2021 or 2020.
Some borrowers will get automatic relief, but most won’t. There will be an application to submit, but it has not been released yet. The estimated release date is early October 2022. Borrowers will have until December 2023 to apply. We encourage people to apply before the end of 2022 because the cancellation amount may affect your monthly payment amount scheduled to start in January.
- Make sure you are registered on your loan provider’s website. Some loans have transferred to new providers so if you are not sure you can log into the Federal Student Aid site.
- Update your contact information on the Federal Student Aid site and your loan provider’s site.
- Have your 2020 or 2021 tax return available. (We aren’t sure what the application will ask for just yet, but you will want this ready if needed).
How do I know if my loans qualify?
High level, there are two types of loans, federal and private loans. Private loans are held by private companies. Within federal loans, there are 2 main programs: Direct Loans and FFEL (Federal Family Education Loans.) Direct loans are held by the Department of Education, while FFEL loans may be held with the Department of Education or a private lender. You can log into the Federal Student Aid site to see an overview of all your federal loans. This will also list out what type of federal loans you have. (Direct, FEEL, Pell, etc.)
What if I qualify for PSLF?
The $10,000 of cancellation is in addition to public service loan forgiveness. This means that if your balance is $10,000 or less, you should not have to continue to apply for PSLF once your loans are forgiven.
Will there be any tax implications?
Due to the COVID relief packages, any student debt canceled or forgiven from December 31, 2020 through January 1, 2026 will not be taxable at the federal level. There are some states who may tax that forgiveness or cancelation at the state level though, as of now there are an estimate of 13 states who will tax forgiveness. States decisions for tax treatment are not final, more information will be released by the states as decisions become final.
New Income Driven Payment Plan With Lower Payments
There is a proposal for a new income-driven repayment (IDR) plan. Like the current IDRs, your payment will be based on a percentage of your income, but the new proposed plan would have lower monthly payments than the existing plans. So far they have proposed the following:
- Subsidize the unpaid monthly interest on the loans so loan balances don’t balloon while on an Income Driven Repayment plan
- Decrease the monthly payment amount. Payments will be no more than 5% of monthly income. (Versus the 10-15% currently)
As of now they have not specified who would qualify for the new IDR plan. This would affect your monthly payment when payments resume in January so keep an eye out for the new payment plan option to see if it’s a good fit for you.
We will be updating our clients as we get more information. But, you can also sign up for email alerts about student loan updates from the U.S. Department of Education through this link.
By Danielle Arlotta, CFP®