Last week, the White House announced a plan to forgive up to $20,000 of debt relief for borrowers who qualify. The move was met with both celebration and criticism.
Those who agree with the president say that the cost of an education burdens too many for too long and it’s time to provide some breathing room. Some even argue the administration hasn’t done enough and that loans should be completely forgiven for some, as the president promised on the campaign trail. Others feel forgiveness is unfair to those who have already paid off their debt and fear it will contribute to inflation.
We won’t tackle politics or the advisability of such a program in today’s post. We will, however, explore what you need to know about student debt relief and how to determine if you qualify.
Who Gets What?
Most borrowers with subsidized or unsubsidized federal loans qualify to have $10,000 in debt forgiven. This forgiveness will not be federally taxable, but state income tax may be due depending on where you live.
For those with Pell Grants, an additional $10,000 of forgiveness is available. This additional amount is not to pay off the Pell Grant, which generally does not have to be repaid. However, a recipient of a Pell Grant qualifies for a total of $20,000 in relief for their federal student loans, assuming they owe that much and meet other criteria.
Single-filing borrowers who claimed less than $125,000 in either 2020 or 2021 tax years will qualify for relief.
Married borrowers filing jointly and earning less than $250,000 together will also qualify. It’s important to note that while income qualification depends on the total combined income on a tax return for a married couple, the relief amount is on a per-person basis.
Example: John and Lucy earned a combined $200,000 in 2020. John owes $8,000 in federal student loans, and Lucy owes $25,000. Since they earned less than $250,000, John will have all $8,000 forgiven, and Lucy will have $10,000 forgiven.
Are Payments Still “Paused”?
The pause of federal student loan repayment will be extended, once again, until December 31, 2022. The White House claims that this will be the final extension.
What To Do Now
Forgiveness will not be automatic for everyone. According to the Federal Student Aid website, some borrowers will need to submit an application to the Department of Education. This application is expected to be available in October.
If you have an income-driven repayment plan, the department already has your income data, and forgiveness should be automatically reflected toward the end of the year.
For those submitting an application, the Department of Education claims their account will reflect forgiveness in about 4-6 weeks.
For some business owners who may be on the bubble in terms of income qualifications, it may make sense to increase retirement plan contributions to a SEP IRA or solo 401(k) plan for the 2021 tax year before the tax filing extension deadline of October 17, 2022.
If you have any questions about your personal situation, feel free to contact Joe Nafziger at email@example.com. Joe is well-versed in student loans and education financing and would welcome your questions.