This is a segment of Bautis Financial’s college planning series, which includes webinars, podcast episodes, blog posts and downloadables to aid college-bound students and families in the admissions process. Visit our college planning hub for more valuable resources.
You’ve probably heard by now that the government plans to forgive federal student loans for roughly 20 million Americans. Here’s what we know about the loan forgiveness so far:
- The Department of Education will forgive up to $10,000 in federal student loans to single borrowers who earned less than $125,000 and households that made less than $250,000 in 2020 or 2021.
- Borrowers of federally-held undergraduate, graduate and Parent PLUS loans are eligible, even if the loans are in default.
- Recipients of Pell Grants will receive an extra $10,000 (totaling $20,000 in debt forgiveness) with the same income thresholds.
The student loan payment moratorium is also extended through December 31, 2022. This means payments start on your new balance on January 1, 2023.
But here’s a big detail that got left out of most headlines:
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.
To follow, we’ll answer some common questions we’ve received about student loan forgiveness.
Will I owe taxes on the forgiven loan amount?
It depends. While you would typically owe federal taxes on forgiven debt, the American Rescue Plan exempted student loans from the usual federal tax rules. Many states have decided not to levy state taxes, but some states explicitly will or haven’t announced their position. Depending on where you file state income taxes, you may owe taxes.
What if I made loan payments during the moratorium? Can I get a refund?
It’s very likely. Any payments on your qualifying federal loans made since March 13, 2020 can be refunded by contacting your loan servicer.
How do I get my loans (or my kids’ loans) forgiven?
According to the Dept. of Education, an online application will be available by October, and you’ll have until December 31, 2023 to apply.
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.
How big a deal is this whole thing, economically speaking?
It’s hard to say yet. Court challenges or administrative hurdles could change what actually happens and for whom.
Some people think that forgiving student loans is a bad idea.
The thing is, the federal government has forgiven loans for defrauded students, small businesses, farms and public service employees for years, so those concerns are probably overblown.
Goldman Sachs economists ran some numbers on the expected effect of the current plan on the economy; they concluded that it probably won’t have much macro impact at all, though the caps on monthly payments should increase household income.
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 do I need to do right now?
Nothing. The details are still being hammered out and more information will be coming. A great place to get alerts is from the Dept. of Education. You can sign up for them at www.ed.gov/subscriptions.
Begin your journey of mastering the college admissions process with Bautis Financial. Whether you’re a parent or guardian, student or school counselor, book a free consultation to discuss how our financial advisors can be a college planning resource.
Get instructions on how to enable our Flash News Briefing skill to your Amazon devices: