If you or your child has student loan debt, listen in! In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by John Williams, Wealth Advisor at Bautis Financial. Together, they provide the need-to-know facts regarding the student loan debt forgiveness plan coming out of The White House.
In this episode, you will learn:
- The three main parts of the student loan debt relief plan.
- How to determine if you are eligible for student loan debt forgiveness.
- What you need to do to get forgiveness.
- If you will owe taxes on the student loan amount.
- And more!
Resources:
White House Fact Sheet: Student Loan Debt Relief Plan | studentaid.gov | Sign up for alerts from the Department of Education: www.ed.gov/subscriptions | Schedule an Introductory Call | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today I’m joined by John Williams, Wealth Advisor at Bautis Financial, to talk about everything we know so far about the student loan forgiveness plan introduced by the White House.
Loan forgiveness was an integral part of Joe Biden’s presidential campaign. According to data released by the White House, there are more than 45 million borrowers that have about $1.6 trillion in federal student loan debt.
On August 24, President Joe Biden announced a three-part forgiveness plan that the Department of Education will implement, which is expected to help most federal student loan borrowers.
These changes are being implemented via executive action rather than through legislative passage, meaning that, unlike proposed legislation that often undergoes many transformations while winding through committees and debate in both houses of Congress, there are less likely to be substantial changes to the Biden administration’s proposal before its implementation
Here’s what we know about it so far:
- The Department of Education will forgive $10,000 in federal student loan debt for single borrowers whose income is less than $125,000 and households that made less than $250,000 in 2020 or 2021.
- Recipients of Pell Grants will receive an additional $10,000 (totaling $20,000 in debt forgiveness) with the same income thresholds.
- Borrowers of federally-held undergraduate, graduate and Parent Plus loans are eligible, even if the loans are in default.
The student loan payment moratorium is also extended through December 31, 2022. This means payments start on the borrower’s new balances as of January 1, 2023.
One other provision that’s not making as many headlines is that under new Department of Education rules, monthly payments on undergraduate debt will be slashed to 5% of a borrower’s “discretionary income,” and the amount of income shielded from repayment calculations will also increase.
This rule change could end up halving monthly payments for millions of people and might be an even bigger deal than one-time forgiveness.
Who is Eligible For the Student Loan Forgiveness?
The loan forgiveness plan is limited to federal borrowers who make less than $125,000 per year, or married couples/heads of households earning less than $250,000 per year. The same income thresholds apply for Pell Grant recipients.
There’s some good news for borrowers hoping for relief: it’s been confirmed that, although the measuring years are 2020 and 2021, it is not necessary for income to be below the thresholds in both years. Rather, as long as an individual’s income was below their applicable threshold in either 2020 or 2021, they will qualify for the relief.
Here’s an example:
Example 1
Bryan is a single taxpayer and has $20,000 of outstanding student loans (he was not a Pell Grant recipient).
In 2020, Bryan won $100 million in the lottery.
In 2021, he worked and had an AGI of $124,999.
Since Bryan’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 bad news for some borrowers, however, is that all indications seem to point towards the income thresholds being ‘cliff’ thresholds. In other words, as long as an individual’s income is below their particular threshold, they can qualify for the full amount of relief. But upon reaching the threshold, their entire benefit – up to $10,000, or $20,000 for Pell Grant recipients – is eliminated (similar to the way Medicare Part B/D Income-Related Adjustment Amounts [IRMAAs] work).
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 seem to provide strong evidence that individuals with just a single dollar of income over the threshold would ‘fall off the cliff’ and receive no benefit at all.
Example 2
Adam is Bryan’s lucky twin brother and is also a single taxpayer with $20,000 of outstanding student loans.
In 2020, Adam also won $100 million in the lottery.
In 2021, Adam 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 Adam’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 use of a cliff threshold could create very interesting dynamics for some borrowers. In some cases, a few extra dollars of earnings could be the reason an individual failed to qualify for relief. And in other cases, borrowers who earned less in 2020 or 2021 could actually end up in superior financial positions (as Bryan did in Example 1).
Using 2020 and 2021 as the measuring years means that for most borrowers, at this point, there is no planning that can be done to qualify for loan forgiveness. Either their income was below the applicable threshold during those years, or it wasn’t. However, for individuals who did not qualify based on their 2020 income but have not yet filed their 2021 tax returns, there are still a limited number of planning strategies that could help them qualify for forgiveness.
First, to the extent an individual is a business owner and still has the ability to make deductible contributions to a retirement plan for 2021 (e.g., a self-employed person contributing to their own SEP IRA), if those contributions, and the corresponding deductions, reduce AGI enough to get under the applicable threshold, such contributions should be carefully considered.
In addition, if the thresholds for single filers are also applied to married individuals who file separate returns, married couples with student debt should evaluate whether filing separate returns for 2021 makes sense, even if they normally file joint returns. If the debt forgiveness available to one spouse exceeds the additional tax burden (plus any other applicable costs, such as tax prep fees) created by filing separately, it could be a net win.
Which Loans Qualify?
Any debt under what’s called the William D. Ford Federal Direct Loan Program qualifies, as long as the borrower is under the income cap. That includes Direct Stafford Loans and all Direct subsidized and unsubsidized federal student loans. Under the Direct program, Parent Plus and Grad Loans are also eligible for relief.
All private student loans are excluded from the plan. That includes student loans that have been refinances to a private company.
What is a Pell Grant, and Did I Receive One?
Pell Grants are a type of federal financial aid available to low-income undergraduate students. They are awarded by the Department of Education to help students – who have demonstrated exceptional financial need on their FAFSA – pay for college costs.
According to data released by the White House, nearly all Pell Grant recipients come from families with incomes of $60,000 or less.
If you’re unsure whether you received a Pell Grant or not, you can check your account on studentaid.gov. On the main page of your account, select the section titles “My Aid” to determine the details of your financial aid package. You can also ask for the information from the financial aid office at the college you attended.
What Do I Need to Do to Get Forgiveness?
While the details are still being hammered out, The Education Department said it will launch an application by October in which borrowers can input their income data and request the loan forgiveness. The deadline to submit an application for forgiveness will be December 31, 2023. A spokesperson for the Education Department said it could take around eight weeks from the application date for the debt to be discharged.
Those who filled out FAFSA forms in 2021-2022 for themselves or their dependent children may be automatically enrolled in the forgiveness program because their relevant income information is already on file. The Department of Education said it already has the earnings information for nearly 8 million borrowers.
You can sign up for alerts and updates from the Department of Education at www.ed.gov/subscriptions.
Will I Owe Taxes on the Forgiven Loan Amount?
While you would typically owe federal taxes on forgiven debt, the American Rescue Plan of 2021 exempted student loans from the usual federal tax rules through 2025. According to a fact sheet from the White House, this law covers President Biden’s student loan forgiveness, too.
However, you may still owe state levies. Many states have already said they won’t tax the relief, but some states haven’t announced their position yet, and might go on to do so.
If you’re unsure of your state’s position, contact a tax professional before filing your state tax return.
What if I Made Loan Payments During the Moratorium?
It’s very likely that you will get a refund. Any payments on your qualifying federal loans made since March 13, 2020 can be refunded by contacting your loan servicer.
What if I Owe Less in Qualifying Student Loans Than is Being Forgiven?
The relief is capped at the amount of a borrower’s outstanding eligible debt.
When is the Cutoff Date for Cancellation?
Any student loans taken out after June 30, 2022, are not included in the relief plan.
Should I Take Out More Loans So They’ll Be Forgiven?
Please don’t. So far, only loans initially disbursed by June 30, 2022 will be covered by this plan. Anything taken out afterward will not be eligible.
What About the Pause on Federal Student Loan Repayment?
To ensure a smooth transition to repayment and prevent unnecessary defaults, the plan included another pause on federal student loan repayment through December 31, 2022. In the fact sheet from the White House, it says this extension is coming “one final time.” Borrowers should expect to resume payment in January 2023.
We’re expecting a lot of scammer activity targeting people waiting for student loan relief. Please be very careful with emails or text messages claiming to be about your loans. Your safest bet is to get your information straight from reliable sources, like the Department of Education and your student loan servicer’s official website.
Alright, that covers everything we know as of now. If you’ve listened all the way through this episode, thank you for sticking with us. I know this was a lot of information all at once. We’ll know more about the details of the plan in the weeks ahead, but if you have questions or want to update your strategies in anticipation of lower (or no) student loan payments, you can set up a call with our team of advisors at bautisfinancial.com/call. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show.
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