President Biden announced major changes to student loans 8/24/22. There is much more than just widespread student loan cancellation to consider here. Here is what you need to know:
- $10,000 student loan cancellation for federal student loan borrowers
- Income must be below $125,000 if single, $250,000 if married filing jointly to qualify
- Income will be based on 2020 or 2021
- It is unclear at this time how income will be counted or verified (AGI, Taxable Income, will 2020 or 2021 be used)
- Cancelled amount will be tax free
- Loans taken out before 7/1/22 are eligible
- Cancellation is applied automatically if you qualify and studentaid.gov has your income information (from FAFSA completion or IDR re-certifications)
- You will need to apply for cancellation if your income information is not on file. The application will be available “in the coming weeks” according to studentaid.gov
- If you have private loans that you refinanced in the past – there will not be any forgiveness for those loans
- If you are currently in school, you may be eligible for loan cancellation, but qualification will be based on your parents income
- $20,000 student loan cancellation for Pell Grant recipients
- Same rules apply as above but for Federal Pell Grants.
- Federal Pell Grants usually are awarded only to undergraduate students who display exceptional financial need and have not earned a bachelor’s, graduate, or professional degree.
- Student loan repayment pause extended through 12/31/22
- Payments set to resume January 2023
- This is the 7th time the repayment pause has been extended (and the 4th “final” extension)
- Start to budget for your student loans resuming now to make sure you are prepared
- If you will have trouble making your payments, or are working towards PSLF, consider applying for an Income Driven Repayment Plan
- New Income Driven Repayment (IDR) Plan Proposed
- Your monthly student loan payment will likely be significantly lower under the proposed Biden repayment plan compared to current IDR plans
- The new plan will not be available until mid 2023 at the earliest
- You will need to apply for the new IDR plan when it is available to enroll
- Discretionary income is Adjusted Gross Income (AGI) minus 225% of the federal poverty level (most current IDR plans are 150% of the poverty level)
- Undergrad loan payments capped at 5% of discretionary income (most current IDR plans are 10% of discretionary income)
- Grad loans capped at 10% of discretionary income
- If you have undergrad and grad loans, your repayment will be based on a weighted discretionary income rate of your undergrad and grad loans (5-10%)
- Interest will not accrue if your payment is less than interest owed
- If you are going for PSLF and this plan reduces your payment, it will increase your total forgiveness amount
- The proposed plan is far more generous than the existing 5 IDR repayment plans and may drastically simplify the process of choosing the right repayment plan
- If you are not going for PSLF or another existing student loan forgiveness plan, enrolling in the IDR plan may not be in your best interest because it will increase the amount of time taken to repay your loan
This information is based on my understanding of the rules based on the initial announcement made 8/24/22. There is still a lot of detail that needs to be announced for how this program will be implemented.
To make matters a bit murkier – this comes with a huge price tag (Projected to be $500 billion). I’m not a legal expert, but I do expect to see legal challenges to the President’s authority to do this in the coming weeks. If you are a federal student loan borrower, there is plenty to be excited about here. However, there is still more to come before you pop a bottle of champagne.
If you still have questions on how this news will impact your student loans – send me a message at matt@pulsefinancialpalnning.com. I will continue to update this post as new information arises, but for now I’m getting a lot of this: