Way back in March 2020, at the start of the pandemic, one of the first pieces of Covid-related legislation to be passed was the Cares Act. The $2.2 Trillion Bill contained many things, one of which was the forbearance of all Federal Student Loans. This put a pause on all required repayments of those loans, as well as 0% interest on the outstanding balance for the duration of the pause.
Fast-forward two and a half years later, and the original repayment relief period of a few months has been extended seven times. During that period, most borrowers have not made a payment. Most recently the extension was pushed out to December 31st, 2022, and the White House indicated this would be the final extension for the 48 million Americans with the loans. Interest accrual will also restart, the rate that is charged is loan specific.
The other major piece of the recent announcement was the partial forgiveness of some of the outstanding loans, subject to income limits of $125,000 per year for individuals or $250,000 per year for households. $10,000 can be forgiven for any borrowers of Federal loans under the income thresholds, and up to $20,000 for anyone who received a Pell Grant. A Pell Grant is not a loan that needs to be paid back, but it is a means-based aid program. Any recipients of that aid qualify for the higher forgiveness amount. It’s also worth noting this forgiveness only applies to Federal loans – not private loans. Parent PLUS loans are also eligible for forgiveness, so as a parent you could receive some debt cancellation as well, subject to the income limits. For the sake of the forgiveness, parents and students are considered separate people. Both parents, and any students, could all separately receive the full forgiveness amounts assuming sufficient debt was in their name and income requirements were met.
We wanted to take this opportunity to welcome any questions that you or a family member may have about this, as well as share some information that may help. Our belief is that planning ahead will help the transition back into making payments.
Student Loans – some things to consider:
- Studentaid.gov contains a lot of useful information for anyone with Federal loans, or who has received any other Federal student aid. It will show you the amount of loans or grants that you have received or paid, as well as the current carrier of your loans.
- The application process for the forgiveness will open later this year. It would be helpful to sign up for the notifications on Studentaid.gov to be informed when this becomes available.
- Make sure you are familiar with the current service provider for your loans. Several of the largest loan servicers have ended, or will be ending, their relationship with the Department of Education. You don’t want to be in a situation where you know the loan needs to be paid, but don’t know where to pay it. Double-checking your login info and making sure your contact info with the providers is current will go a long way in avoiding this.
- While interest rates have increased this year, that generally does not affect your student loan payments. All Federal loans have a fixed rate, so the rate that is listed on your loan does not change, even if market rates change.
- Make sure that you know the repayment plan you are on – and keep in mind that you can change this at any time for free. The Standard repayment plan is a fixed payment over 10 years, but there are other options to gradually increase the minimum payment over time, base the payment off of your income, or extend the repayment period up to 25 years. Keep in mind these repayment methods have various benefits and drawbacks, most notably the amount of interest paid over time.
- Preliminary research shows that it’s possible more than a dozen states may tax the loan forgiveness, meaning an increased liability for State Income Taxes. Virginia is one of the states mentioned as possibly taxing the benefit.
- It’s worth noting that the Public Service Loan Forgiveness program is currently in a waiver period that expires on October 31st, 2022. Until that time, the parameters have been expanded for getting full-balance loan forgiveness. The base requirement of having made 10-years’ worth of payments and working for a qualifying entity still stands (government, 501c3 non-profit, or other entity that provides qualifying service).
- There are some concerns and questions as to whether the current forgiveness plan would survive a legal challenge.
- Another major change beyond the loan forgiveness is the new Income-Driven Repayment plan (IDR). Under current rules you can elect one of a few income-based plans. Usually these plans reduce your payment by only making you pay 10% of your discretionary income – discretionary income being calculated as your income minus 150% of the Federal Poverty Level for a family of your size. Under current rules, any outstanding balance is typically forgiven after 20-25 years of payments on an income-driven plan. The new plan reduces the percentage of discretionary income for loan repayment to 5%, and it also increases the reduction of your income to 225% of the Federal Poverty Level. In addition, it reduces the full-balance forgiveness period to 10 years for those with less than $12,000 in Federal loans.
Please contact your team at EBW if we can be of any assistance or answer any questions!