On August 24, President Joe Biden made the much-anticipated announcement of student loan forgiveness. Low- to middle-income borrowers will see as much as $10,000 erased from their federal loan balances in the coming months. What does this mean for you Biden plans to forgive up to $10,000 in federal student loans for borrowers with incomes below $125,000 and who did not receive a Pell Grant, a promise he made in 2020. Students who qualify for the Federal Pell Grant program can receive up to $20,000. More generous plans to forgive up to $50,000 in federal student loans and another that set income eligibility requirements at $150,000 or less for single taxpayers were proposed earlier this summer, but both of those plans differ from the current plan. The plan has been criticized by some who believe it doesn't go far enough.
Borrowers seeking relief should monitor the Department of Education's website for information on how to submit an application for loan cancellation. That being said, President Biden’s student loan forgiveness barely makes a small dent in the $1.7 trillion Americans currently owe in student debt.
In addition, the plan adjusted the terms for making payments based on one's income. Undergraduate loan borrowers will now only have to pay back 5% of their disposable income each month. Those currently enrolled in income-driven repayment plans will have their payments cut in half. Modifications to these plans include speeding up the process by which debts of $12,000 or less are completely forgiven. A borrower whose original loan balance was $12,000 or less will now have their debt forgiven after only 10 years of on-time payments.
A big chunk of federal borrowers will either have a part of their loans forgiven or will have their debt completely wiped out. The Wall Street Journal says that up to 15 million people will be free of their debts.
If you have federal student loans and owe more than $10,000, the amount you owe will go down. Also, the stop-payment on federal student loans has been extended until the end of the year. This is the last time the government plans to give a delay. Payments will begin again in January 2023. But don't let partial loan forgiveness and another payment extension stop you from making a plan to pay back your remaining loan balance.
Tip: Now might be a good time to call your lender and make payments on your lower balance while the interest rate is 0% because of the moratorium. If you were thinking about turning your federal student loan into a private loan, you should still wait until the official end of the moratorium.
No, this debt relief will not be considered taxable income for federal income tax purposes due to the American Rescue Plan. Student loan debts are not taxable income and do not have to be disclosed as such on your tax return because they are debts that are meant to be repaid with interest. On your income tax return, you can, however, deduct interest from student loans. Typically, any debts that are forgiven are treated as taxable income by the IRS and are subject to taxes.
If you need help with your taxes, you can talk to an expert here at Vincere Tax who can guide you through the process and help you get the most out of your tax deductions and tax credits.
Private student loan relief is not part of the Biden plan. These loans are not given out by the Department of Education but rather by financial institutions like banks or credit unions.
Yes. By increasing Pell Grant funding, the Biden administration aims to address the rising cost of higher education. Because of the American Rescue Plan, the administration has given an additional $40 billion to colleges and universities.
Additionally, the Education Department is strengthening its oversight of the colleges and universities with the highest student loan debt. For high school seniors in their junior and senior years, as well as their families, they will start publishing an annual watchlist of the programs with the highest levels of student loan debt.
Americans owe $1.75 trillion in student loan debt, as was already mentioned. Theoretically, paying off less student debt would free up money for consumers to spend. This might raise demand and push up prices. However, given how things work, it was unsure to what extent that would occur. More spending will actually result in higher prices due to the already overheated economy and money printing. Because more money is being spent than saved by paying down debt, prices for everything from clothing to gasoline to furniture to housing will increase.
Some supporters of canceling student loans contend that the policy would have no effect on inflation and that a rise in wealth might not significantly increase spending because people are likely to use the funds to settle other debts instead of increasing their spending. As numerous households have done during the pandemic, they could also use that money to increase their savings.
Read more: Should I Buy a House During Inflation
Student Loan Forgiveness might create a risky precedent for universities and borrowers in the future. People might increase their student loan borrowing in the hopes that some of it will eventually be forgiven, and colleges will raise their costs to keep up.
The fact that Biden's plan for loan forgiveness doesn't tackle the root of the issue—astronomically high tuition—is one of its biggest criticisms. The cancellation of student loans, according to nonprofit student loan advocacy group Student Defense, is analogous to trying to stop a ship from sinking by simply plugging the leak.
Have a question on Student Loan Forgiveness? Speak with Jen about your student loan debt repayment, click here. Jen Swindler, CFP®, AFC®, MFPA is a Senior Wealth Manager and a Student Loan Analyst at Vincere Wealth. She works with clients to help them take financial control and make a plan to reach their money goals.
The amount of the canceled debt, the type of debt, and the date of the forgiveness must typically be disclosed on an IRS Form 1099-C. If a financial institution cancels a debt for more than $600, they give the borrower the form. However, the IRS has instructed lenders of student loans not to file or provide a 1099-C to any borrower who is eligible for the tax exemption under Biden's pandemic rescue law.
Remember that the legislation only offers short-term tax relief until 2025. If Congress doesn't take new action, student loan forgiveness would then be regarded as taxable.
While the president’s student loan forgiveness will be excused from federal taxation, your state may tax your canceled student debt.
Student loan forgiveness is not taxable in most states because they follow federal tax rules. Borrowers also won’t need to worry if they live in one of the nine states that don’t have an income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
But Arkansas, Mississippi and New Jersey are just a few states where borrowers may be taxed on Biden’s student loan relief. Unless these states make changes prior to the 2023 tax filing year, borrowers with forgiven student debt may expect a state income tax bill.
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