Matthew P. Sorce, CFP®
Assistant Vice President - Wealth Advisor
[email protected]941.366.7222 x41969
On August 24, 2022, just a few days before federal student loan
repayment was set to resume, President Biden announced a
plan for additional student loan debt relief.
Federal student loan repayment was originally halted in March
2020 at the start of the pandemic. The new plan extends the
payment moratorium through the end of the year, offers partial
debt cancellation, and includes proposed updates to the
Public Service Loan Forgiveness program and a new income-based
repayment plan.
Loan cancellation. The plan will cancel $10,000 of federal
student loan debt for borrowers with an adjusted gross income
less than $125,000 ($250,000 for married couples filing jointly).
The loan cancellation increases to $20,000 for borrowers who
are Pell Grant recipients.1 (A Pell Grant is a federal financial
aid grant award to students from low-income households.)
Eligibility is based on income from 2020 or 2021, but not 2022.
The pause on federal student loan repayment is being extended
one "final" time through December 31, 2022. President Biden's
announcement states that "borrowers should expect to
resume payment in January 2023."2 In practice, borrowers
should expect to hear from their loan servicer at least three
weeks before their first payment is due.
Borrowers who are employed by a nonprofit organization,
the military, or the government may be eligible to have their
federal student loans forgiven through the Public Student Loan
Forgiveness (PSLF) program due to time-sensitive changes.
These temporary changes waive certain eligibility criteria
for the program and make it easier for borrowers to receive
credit for past periods of repayment that would otherwise not
qualify for PSLF. These changes expire on October 31, 2022.
Important note: Borrowers who might qualify for loan
forgiveness or credit under the PSLF program due to these
time-sensitive changes must apply to the program before
October 31, 2022. Borrowers can visit the administration's
PSLF website for more information.
In addition, the Department has proposed allowing certain
kinds of deferments and forbearances, such as those for Peace
Corps and AmeriCorps service, National Guard duty, and
military service, to count toward PSLF.
Lastly, there will be a new income-based repayment plan.
For most borrowers, no. The Department of Education has
released a "simple" application for borrowers to claim relief,
which is available at the Department of Education’s website,
studentaid.gov. Once borrowers complete an application,
their loan cancellation should be processed within four to six
weeks. The Department recommends that borrowers apply
before November 15 in order to receive loan cancellation
before the payment pause expires on December 31, 2022. (The
Department will still process applications even after the pause
expires.)
Some borrowers, however, may be eligible to have their loans
cancelled automatically because the Department already has
their income data on record.
Graduate students are eligible for loan cancellation of federal
loans such as a Direct Loan or Grad PLUS Loan, provided
income limits are met. Parent PLUS Loans also qualify for
cancellation provided income limits are met; however, private
loans are not eligible.
Understanding repayments for student loan debt can be
overwhelming, especially when juggling other financial
obligations. No matter what life stage you are in, our financial
planning team can help you create a clearer path to your overall
financial goals.
Will I have to fill out an application for forgiveness? If so, is this application process through my servicer? How do I apply?
Yes, you will need to fill out an application. The Biden administration has released a form that is relatively short and simple. Borrowers don’t need to upload any supporting documentation or use their Federal Student Aid ID to submit the application. The form is accessible online via the Department of Education’s website. If you already have your income on file with the Department of Education, (roughly 8 million borrowers) your loans will be forgiven automatically.
My highest interest loan at this rate has 13% interest, and I'd love for this to be the loan that's forgiven even though it has the lowest balance. Will I have a choice of how to apply forgiveness?
The education department has an order to which loans receive relief.
- Defaulted federally owned loans
- Defaulted commercially owned FFELP (Federal Family Education Loan Program) loans
- Direct loans and federally owned FFELP loans in good standing
- Federally owned Perkins Loans
If you have several loans of the same type, your highest statutory interest rate loan will come first. So yes, your highest interest rate loan will be forgiven first. If interest rates are the same, unsubsidized loans get relief before subsidized loans. If the rate and subsidy are the same, the newest loans get relief first.
How is income eligibility calculated? Which year's tax return will be used?
Eligibility will be based on your 2021 or 2020 Adjusted Gross Income (AGI) filed with the IRS. The relief is limited to borrowers who make less than $125,000 per year ($250,000 for married filing jointly and head of household).
When will funds be disbursed? Will they be applied directly to my account, or will I receive a check?
Funds should follow approximately 4-6 weeks after you submit an application barring any additional legal challenges. The relief would be applied directly to your loan account. If you paid off your loans during the deferment period, you would receive a refund in the form of a check based on the amount of your payments after March 13, 2020. For example, if you made $5,000 in voluntary payments during the pandemic, $5,000 would be refunded to you and $5,000 would be applied to your remaining balance (if you received a pell grant in the past the maximum forgiveness would be up to $20,000).
I am getting married next year. How does my future spouse's income impact forgiveness and income-based repayments?
Your future spouse’s income does not impact your forgiveness eligibility since the income used is from the 2021 or 2020 tax years. Your income-based repayment plan needs to be recertified each year including your income and family size. Your payment may change.
Sources: 1) U.S. Department of Education, 2022 2) White House Fact Sheet, August 24, 2022.
©2022 Broadridge Investor Communication Solutions, Inc. All rights reserved. This material provided by Matthew Sorce.
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