Deborah Adeyanju, CFA, CFP®
On August 24th, President Biden announced an Executive Order directing the Department of Education to provide “targeted debt forgiveness” for student loans. The Order also makes changes to the Public Service Loan Forgiveness Program (PSLF).
An announcement on debt relief had been eagerly awaited ever since Biden took office on a campaign promise to, "forgive all undergraduate tuition-related federal student debt from two- and four-year public colleges and universities and private HBCUs and MSIs for debt-holders earning up to $125,000."
Now that the exact contours of the loan forgiveness proposal are finally public, what exactly is being forgiven, for whom, and when? Here’s the skinny.
#1 Are all student loans being forgiven?
No. Biden’s student loan relief plan forgives $10,000 of federal student loan debt for individuals earning up to $125,000 a year, and $250,000 for married couples filing their taxes jointly. Pell Grant recipients will receive an additional $10,000 of loan forgiveness.
Income eligibility will be determined based on taxpayers’ adjusted gross income for the 2020 or 2021 tax year. The relief applies to loans entered into prior to 2022. Borrowers are eligible for forgiveness whether or not they completed their education programs.
#2 Do I need to do anything to get relief?
It depends. Eligible borrowers enrolled in income-driven repayment plans (IDR) who have recently certified their income, should get relief automatically. Other borrowers can apply through the Department of Education’s still to be determined application process. Your loan servicer should have more specific details about your loans.
#3 Are monthly payments on my remaining loans still paused?
Yes. In addition to outright loan forgiveness for some borrowers, Biden once again extended the pause on student loan payments that was first enacted with the March 2020 Coronavirus Aid, Relief and Economic Security (CARES) Act. The pause will now run through December 31st, 2022.
#4 How will loan forgiveness affect my taxes?
Typically, the IRS considers debt that is forgiven to be taxable income. Congress passed a law last year though, that temporarily made all COVID-related student loan forgiveness tax-free. It’s not yet clear whether the roughly 26% of states, including New York, Pennsylvania, and Virginia, that tax forgiven debt as income will follow the federal government’s lead. If they don’t, and some of your loans are forgiven, you’ll likely see an impact when you file your state tax returns.
#5 What else do I need to know?
Loan forgiveness is contentious – with policy experts, economists, and others arguing for and against its merits and fairness. The administration and members of Congress differ over whether the President has the legal authority to unilaterally forgive loans. Accordingly, Biden’s executive order is likely to be challenged in the courts.
That said, the Executive Branch, through its control of the Department of Education, which administers the student loan program, has broad discretion under the Higher Education Act (HEA) of 1965 to administer federal student loan programs, including making modifications to them. Our initial read is that the major elements of the plan are likely to survive.
GRID 202 Partners is an African-American owned Registered Investment Adviser (RIA) specializing in fee-based, comprehensive financial and investment planning for individuals, couples, businesses and institutions. We serve successful, ambitious professionals and business owners, mission-driven organizations, and households that are committed both to creating wealth for themselves and future generations and to aligning their financial assets with their social impact objectives.