On the 24th of August, President Joe Biden put out an exciting announcement regarding student loans. The new student loan forgiveness process will help millions of borrowers by extending the payment pause and cancelling thousands in debt.
The Rules of Student Loan Forgiveness
By September 2022, the Biden administration has already forgiven almost $32 billion of the $1.6 trillion Americans have in student loans, including the debts of public-sector workers, disabled borrowers, and students who were defrauded by for-profit colleges. But now, the White House has announced that more borrowers will be getting some relief.
How much can each American expect in forgiveness? Well, it depends on their Pell grant status and income. The White House concluded that the Pell grant has only increased borrowing in the past several years, as it covers just a third of the cost of a college degree. “The Pell Grant program is one of America’s most effective financial aid programs — but its value has been eroded over time. Pell Grant recipients are more than 60% of the borrower population,” a statement from the White House said.
However, high-income families or individuals will receive less in aid. While those with Pell Grants, which are given to lower-income students with greater financial aid need, can have up to $20,000 in debt erased, those who did not receive Pell Grants will only get up to $10,000 in forgiveness. In order to be eligible for any forgiveness at all, individuals and families must also earn less than $125,000 a year as an individual borrower or $250,000 as a married couple.
Student Loans and Taxes
As the White House stated, the student loan forgiveness process will “provide relief to up to 43 million borrowers, including cancelling the full remaining balance for roughly 20 million borrowers.” In October, borrowers will be able to apply for forgiveness on studentaid.gov and can expect to have relief in four to six weeks.
While the federal student loan repayment pause has been extended once more until December 31, applicants are urged to submit their information before November for faster results. The Department of Education will work hard to try to process the applications by the end of the year, but it could take time with so many borrowers.
However, the process has raised a question for some borrowers: how will student loan forgiveness work with taxes? The relief won’t trigger federal taxes, as the American Rescue Plan of 2021 dubbed student loan forgiveness tax-free until 2026. Be careful with the state tax laws, though. Some states might try to play off the forgiveness you received as a part of your income. While most states have decided not to levy income tax, Arkansas, Minnesota, West Virginia, and Wisconsin have yet to announce whether they’ll tax loan forgiveness as income.
In addition to student loan forgiveness, the Biden administration proposed a new income-driven repayment plan. Currently, borrowers are required to pay no more than 10% of their monthly income, but now, that will hopefully go down to 5%. Exempt, “non-discretionary income” limits will grow, too. With all these new rules applied, individuals with $12,000 in loans (after forgiveness) will be able to pay them off in 10 years instead of 20.
Sources: CNBC, CNN, The White House