Student Loan Forgiveness: What We Know So Far
On August 24, 2022, President Biden announced a three-part plan to help federal student loan borrowers transition back to regular payment as pandemic-related support ended. The plan details $10,000 in canceled debt for those earning less than $125,000 per year and $20,000 for Pell Grant recipients, as well as future changes for loan repayment.
To be notified of when the process has officially opened, sign up for the Department of Education email list. The last day to apply is December 31, 2023.
Part 1: The final extension of the student loan repayment pause through December 31, 2022.
To ease the transition back from the pause to the repayment period, and to prevent unnecessary defaults, the Biden-Harris Administration will extend the pause a final time through December 31, 2022. Payments resume in January 2023. The extended pause will occur automatically and does not require the borrower to sign up.
Part 2: Up to $20,000 in loan cancelations for federal student loan borrowers.
To help borrowers at highest risk of delinquencies or default once payments resume, the U.S. Department of Education will provide:
- Up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education.
- Up to $10,000 in debt cancellation to non-Pell Grant recipients.
Your relief is capped at the amount of your outstanding debt and the "up to" amount does not exceed your outstanding debt.
Borrowers are eligible for this relief if their income is less than $125,000 (individuals) or $250,000 (for married couples or heads of households.)
Federal Parent PLUS loans are eligible for forgiveness and are considered separate borrowers to students, and qualify separately.
Pell Grant recipients receive a higher amount of canceled loan debt, because to be eligible for Pell Grants, a borrower must come from a family that makes $60,000 a year or less. Statistically, those who receive Pell Grants tend to have more difficult repaying their student loan debt than those who did not receive a Pell Grant, according to a White House statement.
To check if you had received a Pell Grant, visit your StudentAid.gov Dashboard and click "View Grants." More than 60% of federal student loan borrowers received a Pell Grant, leading to an estimated 27 million borrowers being eligible for $20,000 in relief.
Nearly 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available to the U.S. Department of Education. The Administration will launch a simple application which will be available by early October. Once a borrower completes the application, they can expect relief within 4-6 weeks.
Borrowers are encouraged to fill out the application regardless before November 15, 2022 in order to receive relief before the payment pause expires on December 31, 2022. Applications will continue to be processed as they are received, even after the pause expires.
In addition, the Public Service Loan Forgiveness (PSLF) program may allow borrowers who are employed by non-profits, the military, or federal, state, Tribal, or local government to have all of their student loans forgiven after 120 payments working full-time with a qualifying organization.
Temporary changes, ending on October 31, 2022, make it possible to receive forgiveness by allowing borrowers to receive credit for past periods of repayment that would otherwise not qualify for PSLF. For more information on eligibility and requirements, go to PSLF.gov.
Enrollments on or after November 1, 2022 will not be eligible. Borrowers are encouraged to sign up as soon as possible.
Part 3: Revising the income-driven student loan repayment system to reduce future monthly payments.
Income-based repayment plans exist currently within the U.S. Department of Education, but current administration is proposing a rule to create a new income-driven repayment plan that will substantially reduce future monthly payments for borrowers.
The rule would require borrowers to pay no more than 5% of their discretionary income monthly on undergraduate loans, down from 10% under the most recent income-driven repayment plan.
The amount of income that is considered non-discretionary income will be raised and protected from repayment. This guarantees that no borrower earning under 225% of the federal poverty level — about the annual equivalent of a $15 minimum wage for a single borrower — will have to make a monthly payment.
Loan balances would be forgiven after 10 years of payments, instead of 20 years, for borrowers with loan balances of $12,000 or less.
The new plan would also cover the borrower's unpaid monthly interest, so that no borrower's loan balance will grow as long as they make their monthly payments — even when that monthly payment is $0 because their income is low. This will help prevent the "snowballing" effect common with current income-based student debt repayment plans.
Pennsylvania Residents May Owe Taxes
According to a blog post by Jared Walczak, Vice President of State Projects with the Center for State Tax Policy at the Tax Foundation, forgiven debt may be considered income and therefore be a taxable event.
Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin "have the potential to tax discharged student loan debt, though the final count could be significantly smaller if states make legislative changes or administratively determine that the debt forgiveness can be excluded, or if conformity dates are updated retroactively" (Walczak).
For Pennsylvania, the maximum likely tax liability is $307, assuming $10,000 in debt is discharged.
This number could increase if you're a Pell Grant recipient and receiving more than $10,000 in loan forgiveness. Proposals are not final, but decisions should be made in the next few months. It's recommended to discuss with a tax professional if you do plan to receive loan forgiveness to see how this could effect your future tax filling.
You May Be Eligible for a Refund
If you've made payments on federal student loans since March 13, 2020, those payments may be eligible for refunding. Those who made payments or completely paid off their federal student loans during the interest-free forbearance period are eligible for refunds.
To request a refund, you need the following information:
Your loan servicer’s phone number (see below)
Your Social Security number
Your Account number
Payment confirmation numbers or bank payment information used to pay the loan
The delivery address or your financial institution's account and routing number if you were making direct or automatic debit payments
However, since full details of the plan are still being released, borrowers should not rely upon potential refunds. Debt forgiveness amounts may be dependent upon previous loan balances and refunded payments will not maximize your cancellation amount.
Who to Contact for Your Loans
The U.S. Department of Education (ED) owns loans from the following servicers. For questions about your individual situation, contact your lender below.
|FedLoan Servicing (PHEAA)||1.800.699.2908|
|Great Lakes Educational Loan Services, Inc.||1.800.236.4300|
|Default Resolution Group|
(TTY: 1.877.825.9923 for the deaf or hard of hearing)
If you are unsure of who your loan servicer is, visit your account dashboard and view the "My Loan Servicers" section or call the Federal Student Aid Information Center (FSAIC) at 1.800.433.3243.
This article is for informational purposes, and the details are subject to change as student loan government programs evolve. As always, consult with your tax advisor to learn more about tax implications.