Biden cancels student loans
After much anticipation, the Biden administration finally announced their Student Loan Debt Relief plan on August 24, 2022. The proposal’s main point is to offer $10,000 of student loan forgiveness for Federal student loan borrowers (and $20,000 for borrowers who received a Pell Grant) with an income under $125,000 for single individuals and $250,000 for married couples. This has caused quite a commotion as people try to understand how this will impact them.
Biden extends student loan forbearance
Student debt forgiveness is only part of the administration’s student debt relief proposal. In addition to $10,000 to $20,000 in potential forgiveness, the strategy incorporates a (final) extension of the Federal student loan payment pause until December 31, 2022.
The Department of Education’s proposal includes the following: A push for borrowers who may be qualified for the Public Service Loan Forgiveness (PSLF) Waiver to apply before it expires on October 31, 2022 (along with several major adjustments to PSLF eligibility criteria going forward); and the creation of a new Income-Driven Repayment (IDR) plan that would decrease monthly payments and potentially shorten the time period needed for loan forgiveness in eligible borrowers.
Some aspects of the administration’s plan will automatically occur (such as many borrowers with IDR plans who have already recertified their income with the U.S. Education Department being eligible for loan forgiveness). In contrast, others may require more action on your part.
For instance, if you’re a borrower who has made payments on your loans since the pause of student loan payments in March 2020, you may want to request a refund for those particular payments. Although doing so will raise your loan balance, it could also mean more debt forgiveness overall. Plus, this would give you the chance to keep the money from the refund!
Student loan cancellation Biden
In 2020, Joe Biden promised that student loan borrowers would see some relief, including a promise to cancel at least $10,000 of student debt per person.
In his first year and a half as president, Biden didn’t follow through on a campaign promise to cancel student debt, leading many people to question if he’d lost interest in what would’ve been groundbreaking progress toward reducing the $1.7 trillion of outstanding Federal student loan debt.
On August 24, 2022, the Biden administration completed its long overdue student loan relief program announcement. The new program has many features, but most notably it forgives up to $10,000 of student loan debt for borrowers (and up to $20,000 of forgiveness for Pell Grant recipients) who fall below certain income thresholds.
Bide Student Loan Debt Relief Plan
Many of the headlines reporting on the Student Loan Debt Relief Plan have focused on student loan forgiveness, but the administration’s proposal combines a number of important provisions that are also relevant to existing and future student loan borrowers.
The following are some of the provisions included in the bill:
- Cancellation of student loan debt:
- Up to $10,000 for borrowers with income under $125,000 for single individuals and $250,000 for married couples;
- Up to $20,000 for Pell Grant recipients, with the same income thresholds as above;
- Another (final) extension of the pause on Federal student loan payments through December 31, 2022;
Some of the changes originally made by the Public Service Loan Forgiveness (PSLF) Waiver will become permanent provisions of PSLF, even after the waiver ends on October 31, 2022, and will be publicized through an awareness campaign aimed at eligible individuals. These changes will involve allowing credit for late or lump sum payments and for deferment or forbearance for people with qualifying employers (e.g., Peace Corps, military deployment); and
- Creation of a newly proposed Income-Driven Repayment (IDR) plan that limits payments on Federal undergraduate loans to 5% of the borrower’s discretionary income and forgives loans of less than $12,000 after 10 years of payments.
Because these changes are being enacted by executive action rather than through Congress, the Biden administration’s proposal is unlikely to change much before it goes into effect (aside from adding more specifics that have not yet been announced).
However, because Republicans who oppose the plan are highly likely to launch legal action against it in order to prevent its implementation, the ultimate outcome of the legislation may be determined by the courts.
However, with an estimated 43 million student loan borrowers in the United States – not to mention other stakeholders like spouses, parents, children, and employers who are also impacted by a borrower’s student debt – the relief plan has the capacity to affect a large number of households.
Although the specifics of many of the plan’s “fine print” remain hidden, student loan advisors can still play an important role in assisting their customers in beginning planning now to ensure they can reap the most out of these plans when they are released.
Biden Cancellation Of Up To $10,000 Or $20,000 In Student Federal Loan Debt
Although people who were pushing for student debt relief asked the Biden administration to forgive $50,000 of student debt per borrower, the administration chose lower but still high maximum forgiveness amounts. In other words, borrowers who meet the requirements and make a certain amount of money (which will be discussed later) can have a maximum of $10,000 forgiven. And for borrowers who got Federal Pell Grant awards before, the maximum amount that could be forgiven is now $20,000.
However, because future Department of Education guidance may lead to a different result, the total amount of a student’s Pell Grant does not appear to influence the maximum forgiveness amount at this time. Instead, any amount of Pell Grant money appears to be enough to qualify a borrower for the $20,000 limit.
It’s important to remember that the loan forgiveness for borrowers who received Pell Grants isn’t in place to repay the grants themselves. In fact, most of the time these types of grants don’t have to be paid back at all unless certain conditions are met. The reason why this is put into effect though is that Pell Grants are only given out to students who demonstrate exceptional financial need. Having a rough guideline like this available makes things easier on those borrowers who may not have as many personal or family resources readily available when trying to pay off their debt.
ELIGIBILITY FOR BIDEN STUDENT FORGIVENESS IS BASED ON TAXPAYER INCOME LEVELS
The maximum amount of student loan debt that can be forgiven is $10,000, or $20,000 for Pell Grant recipients. High-income earners are not eligible for this form of relief. It’s important to wonder who falls into the category of a high-income earner for tax purposes.
The Department of Education’s press release states that the income threshold for forgiveness is $250,000 for Head of Household filers, contradicting previous White House Fact Sheet claims that single individuals must make at least $125,000 and married couples must earn at least $250,000 to qualify.
The individual $125,000 threshold amount also applies to other filing statuses not mentioned, including married couples who file separately. This could be particularly significant for the large number of married borrowers using certain IDR repayment strategies and filing separately in order to reduce their monthly loan payments.
The definition of “income” has not been publicly solidified, but income-driven repayment (IDR) plans generally use an individual’s adjusted gross income (AGI). AGI would be the leading candidate for the definition of income.
We cannot know for certain when income matters, but we have a general idea. According to the White House Fact Sheet and U.S Department of Education Press Release, an administration official has confirmed that 2020-2021 are the relevant tax years for borrowers’ incomes.
The good news is that an individual only has to prove their income was below the poverty threshold in either 2020 or 2021, rather than both years, to qualify for relief.
Example 1:
Ryan is a single taxpayer and has $20,000 of outstanding student loans (he was not a Pell Grant recipient).
In 2020, Ryan won $100 million in the lottery.
In 2021, he worked and had an AGI of $124,999.
Since Ryan’s AGI in 2021 was below the $125,000 threshold for single filers, he will be eligible for $10,000 of student debt forgiveness from the Student Loan Debt Relief Plan.
The unfortunate news for some loan borrowers is that it seems the income thresholds will be “cliff” thresholds. To explain, as long as an individual’s earnings are below their particular threshold, they can qualify to receive the full amount of relief. But once they reach the maximum limit, their entire benefit—which could be up to $10,000 or $20,000 for Pell Grant recipients—will abruptly stop (much like how Medicare Part B/D Income-Related Adjustment Amounts [IRMAAs] work).
Most importantly, the White House Fact Sheet also states that “No individual making more than $125,000 or household making more than $250,000 – the top 5% of incomes in the United States – will receive relief.” This would strongly suggest that individuals with just a small amount of income over the threshold would not qualify for any benefit at all.
Example 2:
Mark is Ryan’s lucky twin brother and is also a single taxpayer with $20,000 of outstanding student loans.
In 2020, Mark also won $100 million in the lottery.
In 2021, Mark worked and had wages of $124,999, but he also won $5 on a scratch-off lottery ticket, which he diligently reported, bringing his AGI to $125,004.
Since Marks’s AGI was not below the threshold for single filers in either 2020 or 2021, he will not receive any student debt forgiveness from the Student Loan Debt Relief Plan.
The usage of a cliff threshold may provide interesting sequences for some borrowers. In some situations, a few extra dollars of earnings at the time might have prevented an individual from qualifying for aid. And in other cases, borrowers who made less money in 2020 or 2021 might actually end up in better financial situations (as Ryan did in Example 1 above)
Income-Tax Consequences Of Student loan Forgiveness
individual’s debt is discharged, the forgiven debt becomes taxable income. However, changes made by the American Rescue Plan Act of 2021 mean that most student debt discharged through 2025 (including any Student Loan Forgiveness program) will be tax-free at the Federal level.
Tax consequences vary at the state level. In states with no income tax or where state income taxes mirror Federal rules, debt that is discharged will also be tax-free. However, for some statesthat do not follow suit with Federal law, forgiven debt is taxable. For now, that’s how it stands.
Given the wide scope of relief offered by the Biden administration, certain states that would normally tax forgiven debt may choose to pass legislation (which they could make temporary or permanent) to make such forgiven debt tax-free at the state level as well. Borrowers should keep an eye on their state lawmakers.
Strategies To Qualify For Forgiveness
Because 2020 and 2021 are the measuring years, most borrowers will not be able to prepare for loan forgiveness at this time. Their income was either insufficient or it was not during those years. Individuals who did not qualify based on their 2020 earnings but have yet to submit their 2021 taxes may still utilize a few planning techniques to qualify for forgiveness.
If you own a business and can still make deductible contributions to a retirement plan for 2021 (for example, if you’re self-employed and contribute to your own SEP IRA), consider doing so. Reducing AGI enough to fall below the applicable threshold could save you money in the long run.
If you’re a married couple with student debt, and the thresholds for single filers also apply to individuals who file separate returns, you should analyze whether filing separately for 2021 makes sense– even if you normally file joint returns. If the amount of debt forgiven for one spouse exceeds what it would cost them in taxes (plus any other additional costs like tax preparation fees) by filing separately, then overall it would be beneficial.
TYPES OF LOANS WHICH QUALIFY FOR BIDENT STUDENT LOAN FORGIVENESS
In general, only Federal loans that were disbursed by June 30, 2022, are eligible for forgiveness, as announced by the Biden administration. However, if you consolidated existing debt (as of June 30, 2022) after the deadline, it is still available for forgiveness.
Private student loans are not eligible for the same benefits as government-issued student loans. This is cause for concern for many borrowers who took out FFELs, which were originally financed by private firms but are now guaranteed by the US Department of Education. Some of the FFELs were bought by the Federal government while others remained under private companies. And although those owned by the Department of Education will be forgiven, it is still undecided about how loans from private companies will be handled.
Initially, it was assumed that all privately held debt, including those owned by private firms, would be ineligible for forgiveness (meeting current guidance on forbearance and the 0% interest rate).However, the Department of Education has indicated an interest in extending forgiveness to borrowers whose FFEL loans are held by private corporations, whether directly or via loans that have been consolidated to Direct Federal Loans. Affected customers should keep a close eye on these developments.
Many people were shocked to learn that federal loans for graduate study are eligible for relief, as are Parent Plus Loans. The student appears to have little bearing on whether or not debt forgiveness is available. Parents who took out $30,000 in total Parent Plus debts over three children would be eligible for a maximum of $10,000 in forgiveness. By contrast, if a student’s parents had taken out $10,000 in Parent Plus loans for their child’s education and the kid had earned an additional $20,000 through a Pell Grant, up to $30,000 of educational debt may be erased ($10,000 for the parents and $20,000 for the kid).
It’s essential to remember that current students who have debt are also qualified for this relief program. That being said, if the student is a dependent on their parents’ income tax return, then the parents’ income will be used to assess eligibility.
APPLYING TO RECEIVE LOAN FORGIVENESS
For some borrowers, the forgiveness process is going to be relatively easy. Notably, roughly 8 million student loan borrowers already have income information on file with the U.S. Department of Education (e.g., borrowers who are on an Income-Driven Repayment plan option) that will allow them to automatically receive forgiveness. But anyone who is on an IDR Plan who has not yet submitted income information for 2020 or 2021 (as they were not required to) still needs to apply and submit proof of their income in order to qualify.
For others, the completion of a (purportedly) simple application will be necessary. The White House has directed the Department of Education to make the application available no later than the end of 2022, but the Department of Education has stated it intends to launch the application earlier than that, “in the coming weeks.”
Borrowers who want updates directly from the U.S. Department of Education can sign up to receive them by visiting https://studentaid.gov/debt-relief-announcement/.
Student Loan Payment Freeze Ending In December 2022
Borrowers of Federal student loans have benefitted from a temporary moratorium on student loan payments and interest since the early days of the COVID-19 pandemic, when former President Donald Trump issued an executive order in March 2020 first establishing the payment freeze. Subsequent extensions prolonged it for more than 2 ½ years, and though the freeze was set to expire at the end of August 2022, the Biden administration’s Student Loan Debt Relief Plan has added one final extension to the payment freeze, pushing the end date back 4 months from August 31 to December 31, 2022.
But, unlike previous instances when ‘final’ extensions were announced only to be re-extended further, the combination of this extension with the debt relief package makes it seem likely that this really will be the end of the line, and that Federal student loan borrowers will resume their payments in January 2023 after nearly three years of frozen payments and 0% interest.
REFUNDS OF PAYMENTS MADE DURING THE TEMPORARY PAYMENT FREEZE CAN POTENTIALLY INCREASE THE FORGIVENESS AMOUNT
When the CARES Act passed in March 2020, it included a clause that allowed borrowers to ask for a refund of any payments made after March 13, 2020, when the payment freeze was first announced. This messaging is still clearly laid out on the U.S. Department of Education’s website, which states:
You can get a refund for any payment (including auto-debit payments) you make during the payment pause (beginning March 13, 2020). Contact your loan servicer to request that your payment be refunded.
As of this writing, this policy is still in effect and may create a potential planning opportunity for a portion of the roughly 1.5% of borrowers who continued to make voluntary payments during the moratorium. More specifically, borrowers whose voluntary payments made after March 2020, after the passage of the CARES Act, reduced their outstanding loan balance below their maximum forgiveness amount could request a refund of such payments to increase their outstanding debt. This means that, to the extent, the increased debt remains below their maximum forgiveness amount, there is a possibility that it may qualify for forgiveness!
To be clear, this strategy, if viable (more on this below), would only be beneficial to those who have made voluntary student loan payments since March 13, 2020, and who had income in 2020 or 2021 below their applicable threshold, and who currently have loan balances below their maximum forgiveness amount.
To implement this approach, individuals meeting the conditions described above should call their loan servicer to request a refund of those payments. Loan servicers will add any amounts paid down after March 13, 2020, back to the borrower’s outstanding loan balance, and the borrower will receive a refund in approximately 30-45 days.
Of course, some borrowers may prefer to wait for more concrete guidance before taking action to avoid potentially wasting their time. This could be particularly true for borrowers who have a different loan servicer now than they did when they made their post-freeze loan payments, as it may be unclear which servicer is responsible for processing the refund.
In other cases, a borrower may have more than one loan servicer to deal with. In this case, the current servicer is the company that should be called to initiate the refund process. And, given the short timeline, until forgiveness may start being processed, a borrower who is certain that they will ask for a refund should do so as soon as possible.
The Temporary Public Service Loan Forgiveness (PSLF) Waiver
When the Public Service Loan Forgiveness (PSLF) program was initially implemented, it was created to forgive a borrower’s entire remaining Federal student loan balance for those who have spent 10 years working in a nonprofit or government job while making student loan payments. However, hundreds of thousands of qualified borrowers were rejected due to seemingly inconsequential oversights (e.g., being on the wrong repayment plan, having the wrong loan type, or making a payment that was just a dollar short), confusing PSLF requirements, and poor administration by service providers.
In response to these shortfalls, the U.S. Department of Education announced a plan to overhaul the PSLF program in October 2021, which provided a waiver temporarily expanding the types of loans and repayment plans eligible for forgiveness under PSLF, among other changes made. As part of this Public Service Loan Forgiveness (PSLF) Waiver, the Biden administration announced a 1-year window for Federal student loan borrowers to apply their repayment history toward the 10-year repayment period required by PSLF, whether or not any of their past payments were made to a previously ineligible loan type or through an ineligible repayment plan, or were disqualified earlier due to minor technicalities.
Specifically, the waiver allows borrowers who worked for eligible employers (Federal, state, and local governments and nonprofit organizations) during their loan repayment periods to get credit for their months of repayment when:
- Their loans were previously ineligible FFEL loans;
- They were on an ineligible repayment plan (i.e., not a 10-year Standard repayment plan or a longer Income-Driven Repayment (IDR) plan; and/or
- Their payment was late, short, or a lump-sum amount.
Additionally, the waiver allows borrowers who have consolidated multiple loans with overlapping repayment histories (e.g., consolidation of loans received for both undergraduate and graduate degrees) to receive credit for the largest number of qualifying payments of the loans that were consolidated (though presumably only payments going back to October 1, 2007, when the PSLF program began, will be considered when making this determination).
While the waiver is slated to expire on October 31, 2022, the Biden administration’s Student Loan Debt Relief Plan will update the PSLF program by permanently implementing some of the changes introduced by the waiver (explained later). Notably, while the waiver has been open for 10 months, it has so far led to $10 billion dollars of loan forgiveness for 175,000 public servants.
The National Bureau of Economic Research estimates that a total of 3.5 million borrowers could potentially benefit from the waiver and that at least $100 billion could be forgiven via the waiver if every eligible borrower were to complete the steps required. And with only two months left before the waiver expires, at which point many of the rules will revert to the previous requirements, borrowers must take steps immediately if they want to benefit from the waiver.
In addition to making some of these important changes introduced by the PSLF waiver permanent, the Biden administration’s relief plan also includes the designation of four PSLF “Days of Action”, dedicated to borrowers in specific sectors (government employees on August 24, educators on August 31, healthcare professionals and first responders on September 7, and private nonprofits on September 14), to raise awareness and encourage eligible borrowers to apply for forgiveness before the waiver’s October 31 due date.
FUTURE CHANGES TO PSLF MADE BY THE DEBT RELIEF PLAN
The Student Loan Debt Relief Plan also includes proposed future-looking changes to the PSLF program, most of which would permanently extend some of the provisions (though crucially, not all) included in the PSLF Waiver. The proposed changes include counting late, partial, or lump-sum student loan payments to qualify for PSLF. In the past, a payment that was one day late would be considered ineligible for PSLF. Similarly, lump-sum payments were previously only counted for one month, even if the amount paid was enough to cover more than one month’s required payment. The proposal would allow lump-sum payments to count for multiple months of qualifying credit towards PSLF.
The proposed changes would also credit the borrower under specific conditions when their loan is in deferment or forbearance. For example, if loans are placed into deferment while borrowers are enrolled in the Peace Corps or AmeriCorps, or if they are on National Guard Duty or active military service, the months when the loan was in deferment would now count towards PSLF even if no payments were made. Prior to the PSLF Waiver, those deferments would not count as qualifying months towards PSLF. This proposal looks to make that change permanent.
Although these provisions would be made permanent by the Biden administration’s debt relief proposal on a forward-looking basis, it’s important to note that in order to get credit for past payments previously considered ineligible – even for payments like late or partial payments that will be eligible going forward – borrowers must still apply for the PSLF Waiver prior to the October 31, 2022 deadline.
HOW PAYMENT REFUNDS MADE DURING THE FREEZE MAY IMPACT THE PSLF WAIVER
The policy permitting borrowers to request refunds of payments made after March 2020, when the loan payment freeze was implemented, has a potentially major impact on those who can benefit from the PSLF Waiver. This means that those who can now qualify for PSLF through the waiver can potentially have loan balances they may have paid down during the loan freeze refunded to them, and forgiven through PSLF instead!
Example: Grant took out FFEL loans to pay for his undergraduate studies and opted into the Income-Based Repayment (IBR) plan when he graduated in 2010. He got a job working as a nurse in a public school and made consistent loan payments for the 10 years he believed he needed to qualify for PSLF.
In January 2020, Grant applied for PSLF only to learn that his FFEL loans disqualified him and that he had 0 payments that qualified for PSLF. At that point, frustrated by the program, Grant decided he would increase his payments to pay his debt down as quickly as possible, making payments of $700/month every month beginning in January 2020.
When the PSLF Waiver was announced in October 2021, though, Grant realized it was designed precisely for him. First, he called his loan servicer, FedLoan, and asked for a refund of the 20 (payments made from March 2020 to October 2021) × $700 (monthly payment amount) = $14,000 he had paid since the payment freeze began.
Once his refund was complete, he then consolidated his FFEL loans into a Direct Consolidation loan and certified his employment. Because he now meets the requirements to fully qualify for PSLF, and had already made the required number of qualifying payments, his remaining balance has been totally eliminated.
Even though the PSLF Waiver would still have permitted Grant’s full balance to be forgiven, had he not requested a refund of the payments that he made after the CARES Act loan payment freeze was announced, he would have been out that $14,000.
As the example above illustrates, it can make sense for borrowers previously on a path to paying their debt to $0, but who are now eligible to pursue PSLF (thanks to the PSLF Waiver), to ask for a refund of any loan payments they may have made since March 2020 when the loan payment freeze was announced.
Newly Proposed Income-Driven Repayment (IDR) Plan
The Student Loan Debt Relief Plan includes a newly proposed Income-Driven Repayment (IDR) plan, which would go into effect in July 2023. The (as-yet-to-be-officially-named) ‘New IDR’ plan would be significantly more generous than any of the other current IDR Plans.
While many questions remain about who will be eligible for the new IDR plan and what its final terms will be, one of the most significant policy changes, perhaps as significant as the actual $10,000–$20,000 of relief being offered to so many borrowers, is the interest subsidy that promises to cover the borrower’s unpaid monthly interest.
INTEREST SUBSIDIES FOR LOANS UNDER THE NEW IDR REPAYMENT PLAN WILL HELP BORROWERS AVOID FUTURE NEGATIVE AMORTIZATION
Under the current IDR plans, borrowers face the detrimental phenomenon of negative amortization. This happens when accrued loan interest grows larger than the borrower’s required payment each month, which results in an increasing loan balance even when the borrower makes their required payments. However, the interest subsidy provision of the new IDR plan would potentially preclude any risk of negative amortization and interest capitalization.
According to the White House Fact sheet:
…the proposed rule would fully cover the borrower’s unpaid monthly interest, so that – unlike with current income-driven repayment plans – a borrower’s loan balance will not grow so long as they are making their required monthly payments…
By fully covering unpaid monthly interest, the new IDR repayment plan would remove many problems faced by borrowers that currently stem from interest capitalization. Currently, when a borrower moves from one repayment plan to another, enters or exits forbearance, or refinances to a private student loan, their unpaid interest capitalizes, which can result in the borrower owing interest on interest.
Example: Amir works as a public defender and has an Adjusted Gross Income of $60,000. When he went to law school, he borrowed $100,000 of unsubsidized Federal student debt at a 6% interest rate and opted into the REPAYE repayment plan.
Amir’s total annual loan payment was calculated to be $3,960 (based on his discretionary income). However, the total interest due on his loan was 6% × $100,000 = $6,000, which means that Samir had a total of $6,000 – $3,960 = $2,040 of unpaid interest in the first year.
Even though the REPAYE plan has the most generous interest subsidies of the existing IDR plans (providing a 50% interest subsidy), it still leaves 50% of the remaining interest unpaid. So while 50% of Samir’s $2,040 is subsidized, it brings his total unpaid interest down to $1,020.
Assuming no major life changes, Amir will be adding roughly $1,020 of interest to his loan balance every year. After 5 years, then, Amir will have paid roughly $3,960 (annual loan payment) × 5 = $19,800, but now owes $5,100 more dollars than he owed when repayment started!
At this point, Amir accidentally forgets to recertify his income on time, as is required annually, causing Amir’s account to be automatically moved into a different, less generous repayment plan. This is easily fixable, so Amir calls his loan servicer to fix it. A week later, he is put back into the REPAYE plan, but this triggers his outstanding loan interest to capitalize. Which means that his new principal balance is $100,000 (original balance) + $5,100 (outstanding interest capitalized) = $105,100.
Of course, with a higher principal balance comes higher interest. Thus, Amir now accrues $105,000 × 6% = $6,300 of interest annually, which means that in year 6, his total interest would be $6,300 – $3,960 (total loan payment) = $2,340. And with the 50% interest subsidy, his unpaid interest after 6 years of paying would now be $2,340 ÷ 2 = $1,170.
Many of the problems that arise from unpaid interest are often made worse when a borrower’s circumstances are even less favorable than in Amir’s example above (e.g., they have a less generous repayment plan, larger loan balances, smaller incomes, etc.). Negative amortization is a common phenomenon for many borrowers; a study by the Congressional Budget Office in 2020 found that, for borrowers who enrolled in IDR plans in 2010, over 75% of the borrowers owed more in 2017 than they had originally borrowed!
While this may be a non-issue for those pursuing PSLF (as PSLF amounts are not considered taxable income), it is a huge problem for those who are not enrolled in PSLF and are on track for loan forgiveness as, per current law, the amounts forgiven under IDR plans will again be considered taxable income after 2025. And after 20–25 years of repayment, many borrowers find themselves owing taxes on an even greater amount of money than they initially borrowed.
The interest subsidy offered by the newly proposed IDR plan would eliminate the potential for negative amortization. From a purely financial lens, this would significantly lower the total repayment costs to borrowers, both in loan repayment and potential tax triggered by eventual forgiveness.
From a psychological standpoint, borrowers would no longer see their balances balloon over time. Even if they are on track for PSLF with an expectation that their total loan balance will be forgiven, it’s still hard for borrowers to see their balance increasing over time (despite payments being made on time every month) without worrying that they’re on the wrong path.
From a career standpoint, at least for borrowers pursuing PSLF, there may be fewer barriers to changing jobs, as the strategies to reduce payments are most beneficial when their job is eligible for PSLF. But without the risks of negative amortization and interest capitalization, there may be more flexibility for borrowers to change jobs with higher pay, instead of remaining in a job purely because their student loan balance had increased so much to the extent that the cost of switching into a non-PSLF-eligible job would be too great.
OTHER PROVISIONS OF THE NEW IDR PLAN
Borrower Eligibility. It’s still unclear who will be eligible for the plan. With past rollouts of IDR plans, eligible borrowers have often been limited to those with loans after a certain date. For example, the “New IBR” plan is only available to new student loan borrowers after 7/1/2014. While we don’t know for certain, it seems likely that the newly proposed IDR plan will only be available to more recent borrowers instead of all student loan borrowers.
Loan Eligibility. It seems likely that only Direct loans will be eligible, and not Parent Plus loans. But this is purely speculation.
Determination of Monthly Payment Amounts. The newly proposed IDR plan is substantially more generous than other IDR plans, as borrowers will be required to pay only 5% of their discretionary income towards undergraduate loans, and 10% towards graduate loans. By contrast, other IDR plans require payments of 10%, 15%, or 20% of discretionary income.
For those with both undergraduate and graduate debt, payments will be calculated on a weighted average. For example, a borrower with $10,000 of undergraduate debt and $20,000 of graduate debt would have to pay 5%×($10,000 ÷ $30,000) + 10%×($20,000 ÷ $30,000) = 8.3% of discretionary income under this plan.
However, this plan also generously changes the calculation of “discretionary income.” In all prior IDR plans, discretionary income was calculated as a person’s total Adjusted Gross Income less 150% of their poverty line (as determined by their family size). In the newly proposed IDR plan, however, the calculation substantially decreases a person’s calculated discretionary income by increasing the percentage of the poverty line to 225%. Thus, under the new IDR plan, discretionary income is determined as follows:
New IDR Plan Discretionary Income = Adjusted Gross Income – 225% × poverty line
Forgiveness. This plan calls for the entire balance to be discharged after 20 years of making monthly payments on time. For those whose original balance is $12,000 or less, the entire balance will be discharged after only 10 years. The forgiven amounts will be considered taxable income.
Filing Status. We don’t know whether married borrowers will be able to file taxes separately so that the calculation of their monthly payments is based on only one spouse’s income. While this strategy is allowed on most IDR plans, it is not allowed on the REPAYE plan.
Payment Cap. We do not yet know if there will be a payment cap for the newly proposed IDR plan, or how this plan will work for married couples when both spouses carry Federal student loan debt. Currently, if both spouses are on an IDR plan, their required payments get prorated proportionally to each individual’s portion of the balance. This would become much more difficult when the required payment amount is different for graduate versus undergraduate debt.
REMAINING QUESTIONS ABOUT THE NEW IDR PLAN
The proposed IDR plan leaves a lot of currently unanswered questions. A summary of those are:
- Who will be eligible for the plan?
- What loan types are eligible?
- Will any interest accrue while borrowers are in school and not yet in repayment status?
- How will married couples with both individuals on IDR plans be handled?
- Can marry couples file taxes separately so that income from only the borrowing spouse is used to calculate monthly payments?
The administration will be publishing the newly proposed IDR plan in the Federal Register in the coming days, with the U.S. Department of Education hoping to finalize the rule by November 1, 2022. If finalized by then, it will go into effect on July 1, 2023.
Income-Driven Repayment (IDR) And Public Service Loan Forgiveness (PSLF) Account Adjustments
In addition to the Student Loan Debt Relief Plan announced in late August 2022, a separate announcement was made in April 2022 by the U.S. Department of Education about the Income-Driven Repayment (IDR) and Public Service Loan Forgiveness (PSLF) Program Account Adjustment. The proposed account adjustments are designed to address past problems with student-loan servicers incorrectly accounting for monthly payments made by borrowers, which can negatively impact progress towards loan forgiveness through IDR plans and PSLF.
Through the account adjustment changes, the U.S. Department of Education (ED) will conduct a one-time review of the past payment history of every student loan borrower on an IDR payment plan. Per the announcement:
- As part of this initiative, ED will conduct a one-time revision of IDR-qualifying payments for all William D. Ford Federal Direct Loan (Direct Loan) Program and federally managed Federal Family Education Loan (FFEL) Program loans.
- ED will conduct a one-time account adjustment to borrower accounts that will count time toward IDR forgiveness, including
- any months in which you had time in a repayment status, regardless of the payments made, loan type, or repayment plan;
- 12 or more months of consecutive forbearance or 36 or more months of cumulative forbearance toward IDR and PSLF forgiveness;
- months spent in deferment (with the exception of in-school deferment) prior to 2013; and
- any time in repayment prior to consolidation on consolidated loans.
- Any borrower with loans that have accumulated time in repayment of at least 20 or 25 years will see automatic forgiveness, even if you are not currently on an IDR plan.
- If you have commercially held FFEL loans, you can only benefit from the IDR account adjustment if you consolidate before we complete implementation of these changes, which is estimated to be no sooner than January 1, 2023.
- If you have made qualifying payments that exceed forgiveness thresholds (20 or 25 years), you will receive a refund for your overpayment.
Importantly, these adjustments can have a significant and immediate impact on PSLF applicants, especially for those who spent long periods of time with their loans in forbearance or deferment.
Example: Janet graduated from her social work program in 2014 with $90,000 of Federal student loan debt. In the same year she graduated, she began working as a social worker at the Veterans Administration (VA).
Janet struggled to make payments during the first 48 months out of school and spent the bulk of that time (43 months) with her loans in forbearance. She only made 5 payments on time in those 4 years.
In 2018, she got her finances sorted out and enrolled in the Revised Pay As You Earn (REPAYE) plan. Since then, she has earned a total of 50 monthly-payment credits toward loan forgiveness through PSLF.
Under the terms of their Income-Driven Repayment And Public Service Loan Forgiveness Program Account Adjustment, the U.S. Department of Education is expected to credit Janet with 43 additional months of credit towards PSLF forgiveness that she was previously ineligible for due to being in forbearance.
Janet needs to file her employment certification form for the time she was in forbearance and, once filed, the department should update her records to give her credit.
This brings her PSLF qualifying payments toward forgiveness up from 50 to 93, meaning Janet is now just 27 months away from forgiveness.
Since the announcement was made in April, no further FAQs have been released, so exactly how this program will be implemented remains unclear. However, the announcement notes that “ED will begin work on implementing these changes immediately, but borrowers will not see the effect in their accounts until fall of 2022.” Which means that borrowers should be reviewing their student loan accounts this fall to ensure they are properly credited for any months that should be eligible under this one-time adjustment.
ACTION STEPS TO ACCESS THE PSLF WAIVER AND IDR ACCOUNT ADJUSTMENTS
Borrowers who work in public service and have FFEL loans can benefit from consolidating their loans as soon as possible. It is also important to file employment certification forms for any months they worked at a qualifying job starting in October 2007. In addition to being required for PSLF, the consolidation is also necessary to access the $10-$20k forgiveness announced on August 24, 2022. So, even if a borrower does not end out qualifying for PSLF, there is no practical downside to consolidation right now and two different enormous possible upsides.
Borrowers who were previously on the wrong repayment plan to be eligible for PSLF should file their employment certification forms for all months they were previously ineligible. They can then enroll in a PSLF-qualifying repayment plan for when payments restart in January 2023. Going forward, the requirement will once again be that borrowers must be on a qualifying repayment plan to be eligible for PSLF. Qualifying repayment plans include any of the IDR Plans (Income Contingent Repayment, Income Based Repayment, Pay As You Earn, or Revised Pay As You Earn), as well as the 10-Year Standard repayment plan.
Another major change to the student loan landscape is different loan servicers. Previously, FedLoan was the servicer responsible for every borrower enrolled in PSLF. However, FedLoan will be exiting the student loan servicing business by the end of 2022. All borrowers who are pursuing PSLF will now have their loans managed by a different student loan servicer, MOHELA. FedLoan has already begun to send its student loan accounts to MOHELA and will continue this transfer in the coming months.
Once their loans have been transferred to MOHELA, borrowers should confirm that their monthly payment counts are accurate. As while the U.S. Department of Education does have records of historical payments, past servicer transitions have led to errors and inaccuracies. Additionally, those who are eligible for additional credits through IDR Account Adjustments should see an updated count of eligible payments once the manual review of accounts has been completed sometime this fall.
Last Words
If you’re feeling overwhelmed by your student loan debt, don’t worry. You’re not alone. Millions of people are in the same boat. But there is help available. Talk to a Student Loan Advisor today about your options for repayment and consolidation. Advisors can help you find the best plan for your unique situation and get you on track to becoming debt-free.
