What About Taxes On Student Loan Forgiveness
Taxes on forgiven student loans are often a surprising bombshell: Borrowers receive relief on their debt, only to find they owe a huge tax bill for the income that their forgiveness generated.
With the American Rescue Plan Act of March 2021, however, student loan forgiveness was made tax-free through 2025. This tax relief applies to forgiveness for federal and private education debt.
If youre in line to receive student loan forgiveness in 2026 or beyond, contact your states tax agency via taxadmin.org to determine how your relief could be handled at the state level.
Will My Monthly Payments Be Adjusted After Some Of My Debt Is Erased
Monthly payment amounts will likely be recalculated by loan servicers, especially for those who move to the new income-driven repayment plan that caps payments at 5% of their discretionary income . Borrowers should stay up to date on this information by checking their loan servicers website and reading any emailed or mailed correspondence.
I Miscalculated The Return On Investment Of My Degree
One way to avoid these student loan horror stories is to pursue a degree with a good return on investment . Ensuring that your earning potential makes sense for the amount of debt you take on can prevent stress later in life.
Aaron Fraser acquired $120,000 in student loan debt while pursuing an MBA. He believed the degree would give him an advantage, but soon realized that employers found him to be overqualified as he was competing with younger candidates.
Our solution: Its important to do research and speak to others in your intended field to calculate whether earning a degree is worth the cost. Some of the best ROI degrees include IT, nursing, engineering, and finance.
If youve already graduated, be innovative. Regardless of your major, your college degree isnt a box its a steppingstone into a range of possible career paths.
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What Private Student Loan Borrowers Should Do
While private loan borrowers can’t count on sweeping student loan forgiveness to erase their debt, there are steps they can take to make their loans more manageable. Refinancing for a lower interest rate is certainly not as good as having your loans completely wiped out, but it’s a smart financial move that will pay off the sooner you choose to make it.
When private student loan borrowers refinance, they swap their current private student loan for one new loan. This can be from the same lender or through a different lender of their choice.
Although rates have been rising, they’re still relatively low so now is a good time for private student loan borrowers to consider refinancing before they go up again. The Fed is expected to continue raising rates so refinancing may not be as cheap. And if your is better than when you applied for your private student loan, you have a better chance of qualifying for a low rate.
Other Recent Student Loan Forgiveness Developments
The U.S. Department of Education and the Justice Department are reviewing whether the President has the legal authority to cancel up to $50,000 in federal student loan debt through executive action. There is no timetable on when these reports will be issued. There may be delays because Congress has not yet confirmed key policy advisors in both departments.
The White Houses Domestic Policy Council will consider how student loan forgiveness should be targeted, regardless of whether it is implemented through executive action or legislation.
Borrowers should beware of student loan scams that promise debt forgiveness, in exchange for a fee. When student loan forgiveness is implemented, it will most likely be automatic and free. The U.S. Department of Education will publish an update on the StudentAid.gov web site.
The U.S. Department of Education has recently taken a few steps toward providing student debt relief for which they have clear legal authority:
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Biden Student Loan Forgiveness
Biden issued an executive order to eliminate $10,000 in student loan debt for people making less than $125,000 and an extra $10,000 for those who received Pell Grants while in school.
It means more than 90% of the 47 million student loan borrowers will get some form of relief from the debt they racked up pursuing a college education. The executive order will completely eliminate the debt of an estimated 12 million borrowers and that number could grow to 20 million.
The Department of Education is creating forms that will be distributed in October that will require borrowers to prove they qualify under the income standards. The DOE says borrowers can expect relief within 4-6 weeks.
Here are some other tidbits of news that you should know if youre hoping for relief from student loans:
The Biden Student Loan Forgiveness Plan: Budgetary Costs And Distributional Impact
President Biden has recently announced a fact sheet for a student loan relief proposal that includes:
- Debt cancellation: Individuals earning less than $125,000 a year will be eligible for up to $10,000 in debt cancellation. Pell Grant recipients earning less than $125,000 a year are eligible for up to $20,000 in debt reduction.
- Forbearance: Student loan forbearance extended through December 31, 2022.
- New Income-Driven Repayment : This plan proposes:
- Capping monthly payments to 5% of the discretionary income for undergraduate loan borrowers 1
- Covering the borrowers unpaid monthly interest so that debt balances will not grow even when monthly payments are zero
- Raising the amount excluded from the calculation of discretionary income from 150% to 225% of the poverty line and,
- Forgiving loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less.
The estimation methods herein largely follow our previous brief on student loan debt forgiveness, along with some updates to accommodate the new details released by the Biden Administration. Our previous brief also provides additional background into existing income-based repayment programs.
Table 1. Conventional Budget Estimates of the Broad Student Debt Forgiveness, FY2022 – 2031
Billions of Dollars
Table 2. Student Debt Forgiveness Benefit Distribution, FY2022
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Work With Your Servicer
âI would encourage borrowers to gather information about their loan servicer and become familiar with available repayment plans,â says Karen McCarthy, vice president for public policy and federal relations at the National Association of Student Financial Aid Administrators .
Even if you qualify for forgiveness, you may have some remaining debt. If so, Thompson advises reaching out to your servicer to see if youâre in the best repayment plan available and, if needed, taking steps to reapply.
How Do I Apply For Loan Forgiveness
Go to studentaid.gov and in the section on student loan debt relief, click Apply Now.
Be ready to type in some basic personal information. The form asks for: name, Social Security Number, date of birth, phone number and email address. It does not require documentation about your income or your student loans.
Next, review the eligibility rules and confirm that youre a match. For most people, that means attesting that they make less than $125,000 a year or that their household makes less than $250,000 a year. If you meet the eligibility rules, click the box confirming that everything you provided is true.
Latest Student Loan Forgiveness Updates
President Biden announced on August 24th, 2022 that Americans earning less than $125,000 annually would receive up to $10,000 in federal student loan forgiveness, while Pell Grant recipients would have $20,000 forgiven.
Additionally, the payment pause on federal loans will continue through the end of 2022, but payments will resume thereafter. The Education Department will soon lay out the plan in detail and provide information on an application that will be used to obtain the forgiveness.
Aside from the forgiveness component, Biden said that income-driven repayment plans would be capped at 5% of discretionary income, compared to the current 10% limit.
Prior to the latest announcement, the Biden Administration had focused on discharging student loans borrowed to attend for-profit colleges that were found to be defrauding student borrowers, such as Corinthian Colleges. The Education Department announced a $5.8 billion group discharge to cancel loans associated with those schools on June 1, 2022.
Also recently, an overhaul of the Public Service Loan Forgiveness program was announced to restore the promise of PSLF, according to the Education Department factsheet. A key aspect of the development is a one-time waiver that will allow payments from all federal student loan programs, including those not previously eligible, to be counted toward progress for Public Service Loan Forgiveness. These changes will expire on October 31, 2022.
What Types Of Student Loans Can Be Forgiven
There are two types of student loans federal and private. Federal student loans are insured by the government and typically have lower interest rates, while private student loans are backed by private lenders and usually allow you to borrow large sums of money.
Typically, federal student loans are more likely to be forgiven than private student loans, but this varies depending on the forgiveness program youre applying for. Theres also a cap on how much debt can be forgiven, depending on your student loan forgiveness program.
Well walk you through the different programs next, so you can find out if youre eligible for forgiveness.
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When Will Loan Forgiveness Be Processed
Some 8 million borrowers will receive their debt cancellation automatically, since the Department of Education already has their relevant income information on file. Others will have to wait until the Department of Education launches a simple online application in early October once their application is submitted, borrowers can expect to see their debt cancellation within four to six weeks.
Who Qualifies For Student Loan Forgiveness
Only borrowers with federal loans are eligible for relief if their individual income is less than $125,000 or $250,000 for households. Pell Grant recipients can get up to $20,000 canceled, and everyone else up to $10,000.
Public service workers with at least 10 years of service may be eligible to have all their debt canceled.
The government recently tweaked the requirements for the program to allow more borrowers to qualify for forgiveness, but it’s a limited-time offer. Interested borrowers must apply before Oct. 31 if they want to take advantage of the temporary flexibility.
A parent with parent PLUS loans for their child may qualify for debt relief if they meet the income eligibility criteria.
Private loans arent eligible for any forgiveness.
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Are There Other Income
There are five income-driven repayment plans available to federal student loan borrowers. The exact rules vary by plan, but you can expect payments to be capped at 10% to 20% of your discretionary income. After making payments for 20 or 25 years, any remaining balance can be forgiven. Not all types of federal loans are eligible for every plan.
If youre not sure which repayment option is best for you, use Federal Student Aids Loan Simulator tool to see how different plans will affect your loans.
Who Pays For Student Loan Forgiveness
For federal or state-offered loan forgiveness, it can be logically argued that the taxpayer is ultimately footing the bill their taxes funded the loans for students, and those ex-students wouldnt be repaying the debt in full. For other forgiveness programs, it could be employers or charitable donations that are paying for student loan forgiveness.
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Is Biden Allowed To Forgive Student Loans Will Forgiveness Really Happen
There are growing questions around the legality of Biden canceling federal student loans. The plan is expected to face legal challenges in the coming months however, legal experts remain divided over whether or not it will be struck down by a court. Borrowers should refer to StudentAid.gov for the latest information.
Student Loan Repayment Assistance For Nurses
In addition to national programs, many states offer loan repayment assistance to nurses. The Illinois Nurse Educator Program, for example, awards up to $5,000 per year for four years to qualifying nurses and nurse educators in Illinois.
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How To Avoid Walking Into Your Very Own Student Loan Horror Story
While student loan debt can easily get out of control, careful financial planning and research can help you avoid being the star of your own student loan horror story.
Laurel Taylor: $10000 Would Be Great But Dont Count On It
Based on all the relief that student borrowers have been given in the last year, there will be some debt forgiveness, according to a former Google executive who founded a student loan repayment platform. The question is, how much?
I think the $10,000 in forgiveness is likely, but Im cautious about anything more than that, says Laurel Taylor, CEO and founder of FutureFuel.io.
Even forgiving just $10,000 in student debt would completely eliminate student loans for about 16 million people. It would make a huge difference, especially for those who are most likely to default, Taylor says.
But no borrower should depend on that possibility, Taylor cautions: it might not pass anytime soon, or at all. Biden is examining whether he has the executive authority, but the bottom line is that there is a lot of confusion. Thats what were seeing on our platform when our users are engaging with their student debt, says Taylor.
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Biden Rallies On Student Debt Cancellation With Eye On Younger Voters
In the days and even weeks after President Joe Biden took the dramatic step to order the cancellation of student loan debt for up to 40 million Americans, it wasnt clear that hed ever focus publicly on the issue again.
Passing references deep into broad policy speeches were as much as Biden was willing to give the issue, a reflection of both the arduous and divided internal policy process and caution inside the White House political team about the broader salience of the issue.
But that changed in a major way Friday when Biden traveled to Delaware State University for an event tied explicitly to his executive action, where he talked up the debt relief program, provided an update on sign-ups and called out Republican lawmakers who have attacked the program.
This is a game changer. Were hearing from people all over the country. Over 10,000 students have written me letters so far literally, Biden said from the podium in Dover.
Embedded in the decision to try and thrust the issue to center stage is what White House officials have seen in polling about its effect on youth voters and engagement particularly young Black voters, several sources say. While officials expected some impact, the scale caught some by surprise and helped push the issue further to the front-burner inside the West Wing.
The President, who delivered the remarks in his home state less than three weeks before the midterm elections, zeroed-in on the Republican critics of his debt relief plan.
Do Parent Plus Loans Qualify
Parent Plus loans are included in the forgiveness plan, subject to the same $250,000 income cap for families that applies to the rest of cancellation.
Parent Plus loans differ from other federal education loans in that they can go towards covering expenses other than tuition, such as books, and room and board for college students. As of March 2022, parents of 3.6 million students owe more than $107 billion in Parent Plus loans, according to the Department of Education. That represents about 6 percent of the total amount of federal student debt held by Americans.
If a parent received a Parent Plus loan on behalf of a student and the same student received a direct loan, both would receive relief, as the cancellation is on a per-borrower, not a per-student basis. That means that each person who has Education Department-held federal student loans and meets the income requirements qualifies for cancellation.
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What Is The Source Of The Problem
At the heart of the debt problem is the high cost of college an issue that loan reforms and one-shot debt forgiveness do not address. Too many students and their families take on more debt than their post-college careers can support, and colleges dont have an incentive to stop students from doing so, said philanthropist Scott MacDonald, author of Education Without Debt: Giving Back and Paying It Forward.
MacDonald says a lack of financial literacy among students and parents leaves them vulnerable to the debt trap. College financial aid officers will tell students, You dont have to pay anything, just sign these papers, MacDonald said. Then they take these kids, they dont mentor them, they just throw them in, and lo and behold the kids drop out of school and default on their loans. That school has zero liability.
A few years ago, he said, Indiana University decided to tell students not only how much they were borrowing, but also their likely earnings in their chosen fields of study. Lo and behold, kids started borrowing less money, he said. So financial literacy is a huge deal.
For families of modest means, though, loans are the key that opens the gate to college. And income disparities before and after graduation make the debt burden fall harder on women and Black and Latino Americans, researchers say.
Times staff writers Debbie Truong and Teresa Watanabe contributed to this report.
About The Times Utility Journalism Team