After years of talk about student loan cancellation, it looks like it is happening. President Biden announced his student loan cancellation plan last week. Since then, there have been a lot of questions and I will do my best to address them below.

How much debt will be canceled?

Up to $20,000 of federal student loans can be canceled. If you received a Pell Grant, you are eligible for up to $20,000 of forgiveness. If you did not receive a Pell Grant, then you are eligible for up to $10,000. The amount that may be forgiven cannot exceed your outstanding loan balance.

If you are unsure if you received a Pell Grant, log in to the Federal Student Aid website (studentaid.gov). If you have never made an account before, that’s ok- you can still make one now to see all of your student loan details.

Who is eligible?

Eligibility is based on your 2020 or 2021 income. Based on how everything is currently worded, it appears that if you made less than $125,000 (for single filers) or $250,000 (married filing jointly) in either 2020 or 2021, you would be eligible. There also appears to be no phase-out. This means if you made even $1 more in both of those years, you are not eligible for any cancellation.

It is unclear exactly what is meant by “income”, but it is most likely Adjusted Gross Income (AGI). There are not a lot of planning opportunities here since the income measure being used is from 1-2 years ago. However, if you have not filed your 2021 income taxes yet, then there may be some opportunities. Talk with your CPA if that is the case for you as the extension deadline is approaching.

Are private loans eligible?

There is no forgiveness for private student loans. The only loans that are eligible are federal student loans. If you are unsure what type of loan you have, log into the Federal Student Aid website, and everything will be broken down for you.

What about Grad Loans?

Federal loans for graduate school are eligible for cancellation. The same rules apply for income limits and forgiveness amounts.

What about Parent Loans?

Parent Plus loans are eligible. Again, this only applies to federal Parent Plus loans and does not apply to any private loans that you may have taken out for your child.

Can current students get loan cancellation?

Yes, even if you are still in school (undergrad or grad) you can have loans canceled even if you have never had to make any payments. You cannot, however, get loans now with the hopes that they will be canceled. Loans issued after 6/30/22 do not qualify for this program.

Is the debt cancellation taxable?

These student loan cancellations will not be taxable at the federal level. It will be taxable at the state level in certain states, but not all. There is still more to learn about which states will consider student loan forgiveness taxable income and how they will handle it.

What do I need to do?

If the department of education has your income information, there isn’t anything else you should need to do. If they do not have your income information, the White House has said that a short form will be available by early October. The Whitehouse says that after the form is filled out you can expect your debt relief to take place in 4-6 weeks. They recommend filling out the form before November 15th to have your debt canceled before the payment pause ends at the end of the year.

I recommend logging into the Federal Student Aid website now, so you understand your current student loan situation and to be ready if you need to take any action.

What happens if I have made recent payments on my student loans?

If you have paid off your loan completely since March 13^th, 2020 or have made payments that reduced your balance below the forgiveness amount for which you are eligible, you can call your loan provider and ask for a refund. Auto-debited payments are eligible for refunds as well.  I have heard anecdotally that this has worked for people and they did receive refunds, but be aware that this could take a couple of hours on hold with your loan servicer. Again, this is another area where there is not much information available yet.

If you do receive a refund, I would recommend holding the refund amount in cash until you have verified that your debt has been cancelled. Once you have verified the debt has been cancelled, you can direct that money towards boosting your emergency fund, paying off high-interest debt or investing for retirement or another future goal.

When will student loan payments resume? 

Payments on federal student loans will resume on January 1^st, 2023, after nearly 3 years of an interest-free payment pause. The White House indicated that this is indeed the end of the student loan payment moratorium. If all your debt will not be cancelled, now would be a good time to start thinking about how you will make those payments and investigate income-driven repayment options if necessary.

If you have any questions about your specific student loan situation, please contact us!