Could You Be Eligible for the Student Loan Forgiveness Benefit?
Associate Wealth Advisor Jackie Winkler has published an article on LinkedIn about the new student loan forgiveness program.
On August 24, 2022, President Biden made the long-anticipated announcement that the Federal government will be forgiving a certain amount of student loan debt for eligible borrowers.
While many details are being finalized and further information will be released, there are a few key points to understand how this might affect you.
Who is eligible for forgiveness?
Individuals that file single and earn under $125,000 or are married filing jointly that earn under $250,000 annually, qualify to have up to $10,000 of their federal loan balance forgiven. Private student loans are not currently eligible for forgiveness through this program. Adjusted Gross Income (AGI) in 2020 or 2021 will be used to determine eligibility. Earnings in 2022 will not have an impact.
President Biden has also announced that borrowers that received Pell Grants will be eligible for an additional $10,000, bringing the total possible debt cancellation up to $20,000. You can visit studentaid.gov to view your total loan history if you are unsure whether you received a Pell Grant in the past. Forgiveness is capped to total federal loan balance if less than the amount you qualify for.
What if I'm a current student or have a child that is?
Current students are eligible for debt cancellation on any loans taken prior to June 30, 2022, given they meet the income requirements. If the student was claimed as a dependent for the 2021-2022 school year, then parental AGI will be used for qualification purposes. Parental PLUS loans are eligible for forgiveness as well.
What are the tax implications?
Student loan forgiveness is typically treated as taxable earnings by the IRS. However, the American Rescue Plan of 2021 made student loan forgiveness tax-free through 2025. While those with loans forgiven will not need to worry about a higher federal tax bill, some states may treat the forgiveness as taxable income. Your tax professional will be able to provide guidance on your specific situation.
What if I make too much to qualify?
Even if you do not meet the income requirements for loan forgiveness, there were items announced that effect all borrowers. The pause on all federal student loan payments has been extended through the end of the year. President Biden has also proposed to cap payments at 5% of discretionary income for those on Income Driven Repayment models. Most existing plans have a cap of 10-15% so certain borrowers could see a reduction in monthly payments.
All borrowers that qualify for forgiveness should look for guidance and next steps, if applicable, directly from your loan service provider. Be sure to double check your contact information is up to date. The Department of Education will be releasing a simple forgiveness application for those that are not currently enrolled in an income driven repayment plan and have not already submitted their most recent tax return to certify income. You can sign up for email notifications at studentaid.gov to receive up to date information on when the application has been made available.
To view the article on LinkedIn click here.
Serving Northern New England with offices in the Burlington Metro area, Copper Leaf Financial Advisors can look closely at your specific situation to determine how this new program may impact your overall financial plan. Copper Leaf develops a customized wealth management plan designed to integrate every aspect of your financial life. Call us today at 802-878-2731 to schedule a strategy session and begin building your road map to financial success.
By Jackie Winkler, Associate Wealth Advisor, Copper Leaf Financial