Aug 25, 2022
President Biden’s Student Loan Forgiveness Executive Action: 4 Things You Need to Know About Student Loan Forgiveness
President Biden announced an Executive Action on Wednesday, August 24, 2022—essentially canceling up to $10,000 of Student Loan Debt (or up to $20,000 if there are Pell Grants) for Americans who qualify. Here’s what you need to know.
1. Not Everyone Will Qualify
The forgiveness of up to $10,000 in student loans is being reserved for individuals who earn less than $125,000 per year and for Married Couples or Heads of Households earning less than $250,000 per year. We don’t yet know if there will be a phase out that could enable people who earn more than the limit to at least partially take advantage of this historical moment.
2. Eligibility is Unclear
The White House has also confirmed that a simple application will be required to request the forgiveness and that the application will be filed with the Department of Education. What hasn’t been confirmed is if the prior year’s tax return or 2022 information can be used to determine your income.
If the government does plan to use your 2022 Tax Return, select taxpayers may have financial planning opportunities to delay certain income items in order to stay at or below the income limit. For example, if a corporate professional doesn’t have to exercise stock options this year, it might make sense to delay until next year. Business owners may want to consider if their business accounting practices would allow for the delay of income or an acceleration of expenses to bring themselves under the income limit. Another option if your 2022 Tax Return will be used is to consider filing separately from your spouse—if that changes the eligibility for either spouse. If you think you may be close to the income limit, it might make sense to reach out to a financial or tax professional.
3. New Revised Payment Cap for Income-Driven Repayment Plans
President Biden didn’t just announce the forgiveness of billions of dollars of student loans, but also an order that caps the monthly payment of remaining federal loans at 5% of your monthly income for those on income-driven repayment plans. If a cap on the monthly payment creates a meaningful change to your monthly cash flow, it may be time to reevaluate what to do with that extra cash. Depending on your unique situation, your financial goals, and the interest rate on your loan, you may have a lot of options to save your excess cash flow, pay down other debt, or make lump sum payments directly to the principal of your student loan.
4. Pause on Payments Extended through December 31, 2022
Since the beginning of the COVID-19 pandemic, no payments have been due and no interest has accrued on Federal Student Loan balances. As the final piece of his announcement, President Biden shared that he will extend the payment pause for Federal loans one last time through the end of 2022.
It’s worth noting that even though the pause will be ending, as long as you make your calculated payment on income-driven repayment plans, THE BALANCE OF YOUR STUDENT LOANS WILL NOT GROW, even if your calculated payment doesn’t cover the amount of the interest.
President Biden’s Student Loan Forgiveness Announcement is an unprecedented move to boost the financial situation of many Americans. Of course, with so much unknown, it’s important to review your own personal situation and your eligibility to see what this historical announcement means for you.
