Biden’s Student Loan Forgiveness Plan: Key Action Items

Two weeks ago, the Biden administration announced a Student Loan Debt Relief Plan, which, if implemented, will impact millions of student loan borrowers in the U.S.  The plan includes significant one-time student debt forgiveness, extension of the current freeze on student loan payments, and adjustments to ongoing loan forgiveness programs.  Elements of the plan are likely to face legal challenges though, possibly from loan servicers who stand to lose revenue as a result, especially since President Biden is attempting to enact his plan through emergency executive powers rather than Congressional legislation. 

Given that uncertainty still looms around the legality of the plan, we do not advise counting any debt-forgiveness chickens before they are hatched.  However, there are a number of key action items that borrowers should consider in order to take advantage of the plan provisions if/when they are implemented.

Lump Sum Debt Forgiveness.  The most prominent feature of Biden’s Student Loan Debt Relief Plan is forgiveness of up to $10,000 in student loans for eligible federal loan borrowers, or up to $20,000 in loans for borrowers who have received Pell Grants as well.  This debt forgiveness is limited to single tax filers with less than $125,000 in income or married couples with less than $250,000.

Action Items:

• Apply for Forgiveness.  Most borrowers will need to apply and submit proof of their income in order to qualify for loan forgiveness.  The application is not yet available but will purportedly be launched in October.  If borrowers have already recertified income with the Department of Education for 2020 or 2021, they may receive loan forgiveness automatically.
• Lower AGI.  The White House confirmed that borrowers’ 2020 and 2021 “income,” presumably Adjusted Gross Income (AGI) from their relevant tax returns, will be used to determine their eligibility for loan forgiveness.  Therefore, borrowers with income just over those thresholds do not have any opportunities to manipulate their AGI to stay under the stated caps, unless they have not yet filed their 2021 tax returns.   In that case, they could potentially lower AGI by contributing more to a SEP IRA (if self-employed), filing Married Filing Separately (if married), or filing independently rather than as a dependent (if a student).
• Request Refund of Payments.  If the following three conditions apply to you, you may want to contact your loan servicer and request a refund of payments made since the start of the pandemic:  1) you meet the income requirements mentioned above for loan forgiveness, 2) you made payments during the freeze that started in March 2020, and 3) you currently have less than a $10k remaining student loan balance (or less than $20k and you received a Pell Grant).  You may be able to recoup these payments and keep them if the whole balance is forgiven.  It is not clear yet if this strategy will work since the Biden administration could tie the amount forgiven to the loan balance outstanding at time of the plan announcement.  However, given the loan payment freeze, there is no downside risk to requesting a refund.  If the loan forgiveness does not work out as planned, a borrower could just send the money back to the loan servicer before the end of the year and not be any worse off.
• Budget for Tax on Loan Forgiveness.  While this one-time loan forgiveness will be exempt from federal income tax, manystates (including Virginia) will consider the amount forgiven to be taxable income for the borrower, unless they pass special legislation indicating otherwise.  Borrowers should verify the rules in their state and budget for the state income tax liability that will result if/when their debt is forgiven. 

Extension of Loan Payment Freeze.  Since March 2020, borrowers have enjoyed a freeze on student loan payments and interest.  They have had the option of making payments, but servicers have not required payments and interest has not been accruing on the loans.  President Biden’s announcement provided one final extension of this freeze, from August 31 to December 31, 2022. 

Action Items:

• Save (and Budget) for Monthly Payments.  Since the payment freeze essentially amounts to an interest-free loan from the federal government, there is no reason to send cash to loan servicers in advance.  Borrowers would benefit from: saving the payment amount monthly to an online savings account paying a competitive interest rate (e.g. Ally Bank, Capital One, Discover), collecting interest on the payment amounts until late December, and then paying a lump sum against their student loans.  This would allow borrowers to:  1) earn some interest on a monthly basis, and 2) ensure that they still have room in their budget for monthly student loan payments, which are set to resume shortly.
• Adjust Monthly Payment Expectations.  Depending on whether a borrower is on a standard or income-based repayment plan, the amount of monthly payments for their loan will change in January or July 2023, from the monthly payment amounts prior to pandemic.  If a significant portion of the loan is forgiven, this change will hopefully be for the better, but it would be wise to verify and begin to budget for the new payment amount in advance.
• Consider When to Recertify Income.  If your income has increased since 2018 and you are on an income-based repayment plan, it would be beneficial to wait as long as possible (i.e. until July 2023) to recertify your income, assuming you are on track toward full loan forgiveness.  That way, your monthly payment will stay lower for a longer time period.  Conversely, if your income has decreased since 2018, it would be beneficial to recertify income before the freeze expires on December 31^st.

Public Service Loan Forgiveness (PSLF) Waiver.  The PSLF program aims to forgive the federal Direct loans of government or non-profit employees after they have made 10 years of qualifying payments.  In the past, certain technicalities have restricted the scope of the types of loans, repayment plans, and payments that count toward the PSLF.  In October 2021, the Biden administration announced a year-long waiver of some of those technicalities to allow more borrowers to benefit from the PSLF program. 

Action Items:

• Check for Waiver Eligibility.  If you work as a government or non-profit employee and have not already done so, check whether you may be eligible for loan forgiveness through the PSLF and whether the waiver may help add to the number of qualifying payments you have made.  If you had a previously ineligible type of loan (e.g. FFEL loans), ineligible type of repayment plan, or nonqualifying monthly payments (e.g. late, short, or lump sum payments), the waiver may benefit you.  Similarly, if you consolidated loans with overlapping repayment periods or if your loan was in deferment while you served in the Peace Corps, AmeriCorps, National Guard, or active military service, the waiver might further your progress toward PLSF.  Importantly, if you are eligible for these benefits, you must apply for the waiver by October 31^st .  Biden’s plan proposes extending some aspects of the PSLF waiver, but that is not set in stone, so borrowers should be sure to meet the October deadline.
• Consider How the Freeze Impacts Your PLSF Potential.  Remember that the months since the loan payment freeze was enacted in March 2020 count toward the 10 years of qualifying payments for PSLF.  If this policy (possibly in combination with the waiver) will enable you to qualify for PSLF, you may want to request a refund of any superfluous payments made during the payment freeze, per the action item above.
• Consolidate Loans as Needed.  If you have a previously ineligible type of loan (e.g. FFEL), you may need to consolidate into a Direct loan in order to qualify for the PSLF waiver.

New Income-Driven Repayment (IDR) Plan.  Biden’s proposal also included a new IDR plan, which varies from the existing plans in the following key ways:  it lowers the percentage of discretionary income that must be dedicated to loan payments (only 5% for undergraduate loans and 10% for graduate school loans), it decreases the amount of income considered discretionary (only income over 225% of the poverty line), and it guarantees that borrowers will not suffer from negative amortization (when the interest accrued on a loan surpasses the amount of payments made in a given year).  This element of Biden’s plan is still light on details, but this generous option is set to be available starting in July 2023.

If you have questions about how Biden’s debt relief plan impacts you—or how to manage student loans while pursuing your other financial goals—please call or email us any time.