Student Loan Forgiveness

Written on August 24, 2022


Photo by Juan Ramos on Unsplash

Today the White House announced their long awaited plan for student loan debt and repayment. It had three important provisions, which are spelled out here.

Here are the summaries of the three sections, and what these mean for you:

Federal Student Loan Pause Extension

One last time, the government is extending the pause on student loan repayments until January 2023. This pause is a special benefit of federal student loans. No interest will accrue on your loans during this final pause.

During this extended pause our recommendation has been to refrain from making payments on the student loans, instead using that money to get a larger return in other ways. These might include building an investment portfolio, or paying down higher interest debts. We recommend to continue on the path that you have discussed with your advisor.

If you have student loans, start to prepare yourself, and your finances, for them to restart in January.

Federal Student Loan Forgiveness

You’re probably going to hear most about this.

For Pell grant recipients, the plan will forgive $20,000 per borrower.

For non-Pell grant recipients, the plan will forgive $10,000 per borrower.

There is an income cap: $125,000 for those filing as individuals, and $250,000 for those filing married or head of household.

Due to a clause in the American Rescue Plan of 2021, this student loan forgiveness will not count as taxable income.

The process of loan forgiveness should be automatic, because the department of education will already have your income information. However, if you aren’t sure the DoE has the most accurate information, they’ll have an application coming out in the next few weeks that you’ll be able to fill in.

Also important is the Public Service Loan Forgiveness Program. This program was created in 2007, and it’s been streamlined and made easier recently. If you work full-time for federal, state, Tribal, or local government; military; or a qualifying non-profit, be sure to check this out.

Click here to go to the PSLF site for more information.

Income Based Repayment Plans

Most likely, this section will fly under the radar, but it holds a lot of opportunities for student loan borrowers.

Income Based Repayment Plans aren’t new, but White House is changing a few of the rules to the benefit of borrowers:

  • The monthly payment cap will go from 10% to 5% of discretionary income.
  • Non-discretionary income will go from 150% of the federal poverty level to 225% of the federal poverty level. This means that a smaller amount of your income will be considered discretionary when calculating your monthly payments.
  • Loans will be forgiven after 10 years of monthly payments instead of 20, for borrowers with balances of $12,000 or less.
  • The government will cover the borrower’s unpaid monthly interest. What this means is that even if the repayment plan calculates that their monthly payments will be less than the monthly interest, as long as the borrower makes monthly payments, the balance of the loan won’t grow. This is a large subsidy for low-income households who would otherwise see their loans compound over time.

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