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Robert Bloink and William H. Byrnes

Financial Planning > College Planning > Student Loan Debt

How to Qualify for Biden’s Student Loan Debt Forgiveness

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What You Need to Know

  • Clients should check their student loans to determine whether they received a Pell Grant, which can double the forgiveness amount.
  • Taxpayers should also check their federal income tax return to determine whether their income falls below the maximum threshold to qualify.
  • Since private loans do not qualify for forgiveness, those borrowers may consolidate their loans into the Direct Loan Program to do so.

Now that President Joe Biden has announced a comprehensive plan to forgive up to $20,000 in student loan debt per taxpayer, many clients may be wondering whether they qualify — and how to obtain the forgiveness.

According to the Department of Education, a simple application for obtaining student loan forgiveness will be effective in a matter of weeks — and no later than the end of the year, when the president’s freeze on student loan repayments expires. 

While the Biden administration has promised that the process will be simple and easy to understand, we all know that’s rarely the case when it comes to sweeping programs like this forgiveness plan. There are some steps, however, that student loan borrowers can take to qualify for forgiveness today — and advisors can play a valuable role in making the process run as smoothly as possible for their clients.

How Do Student Loan Borrowers Determine Whether They Qualify for Forgiveness?

To prepare for the rollout of President Biden’s student loan forgiveness plan, clients should first check their student loan accounts to determine whether they have received a Pell Grant (which can increase the amount of forgiveness from $10,000 to $20,000). The client’s online account at studentaid.gov should specify whether the client has received a Pell Grant. 

Taxpayers should also check their federal income tax returns to determine whether their annual income falls below the $125,000 threshold for single filers or $250,000 threshold for joint returns. Taxpayers can qualify if their adjusted gross income was below the threshold in either 2020 or 2021. 

It’s also important to evaluate the type of loan. Loans under the William D. Ford Federal Direct Loan Program will qualify for forgiveness. Borrowers with Direct Stafford Loans (whether subsidized or unsubsidized), Direct Plus Loans and Grad Loans will qualify.

According to current guidance, borrowers should apply no later than Nov. 15, 2022 to have their loans forgiven before the current repayment pause expires on Dec. 31, 2022.

What Can Borrowers Do to Qualify for Forgiveness?

Borrowers with private loans do not qualify for debt forgiveness. As such, those borrowers may wish to take steps now to consolidate their loans into the Direct Loan Program to ensure they qualify for forgiveness. For borrowers who do not consolidate, the Department of Education has indicated that it may take steps to work with private lenders to expand qualification for forgiveness.

Taxpayers who requested an automatic extension to file their 2021 returns in October 2022 should review their anticipated income now to determine whether they may qualify for forgiveness based on 2021 income. 

Taxpayers who do not qualify for outright forgiveness should also note that the plan will modify the income-based repayment programs to lower monthly payments for many borrowers with undergraduate loans. Currently, the income-based repayment plans cap what borrowers pay each month at 10% of their discretionary income. Under the new plan, that amount will be reduced to 5% — so that many borrowers will see their payments cut. 

For borrowers with original loan balances of $12,000 or less, the plan proposes to forgive loan balances after 10 years of repayment, rather than the current 20-year period.

Conclusion

Note that the debt relief provided under the student loan forgiveness plan will not count as taxable income — as other forms of debt forgiveness may be, depending on the borrower’s circumstances when the debt is forgiven. As such, the debt relief program will be even more beneficial for student loan borrowers — although none of the new benefits will be automatic.

It’s also important to note, however, that some still anticipate challenges to the president’s authority to implement the program — meaning that forgiveness may be delayed. Student loan borrowers should pay close attention in the meantime.

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