New Repayment Extension Will Still Require 2022 Tax Filing Planning

The President announced another extension to the Student Loan Repayment Forbearance due to the recent lawsuits.  Currently, two cases contest the validity of the One-Time student loan forgiveness program.  Borrowers must realize that the new repayment extension will still require 2022 Tax filing planning.  Due to the IRS data integration to the Department of Education systems by mid-2023, IDR payments will be entirely dependent on the 2022 tax return, no matter when the restart happens.

These lawsuits created a stay on the President’s Student Loan Relief Plan.  These actions resulted in the President’s decision to extend the National Forbearance until these suits get settled.  The new extension has a flexible start date different from the prior extensions.  The President also requested the Department of Justice to file a request for the Supreme Court to resolve these suits.

Summary of New Student Loan Repayment Extension

The new National Forbearance Extension has a flexible restart date.  It has a maximum restart date of August 31, 2023, but that is unlikely to happen.  Here are the things you need to know:

  • Federal Student Loan Repayment will not restart on 1/1/2023
  • Repayment will resume 60 days after the court litigation is finalized or 6/30/2023, whichever comes first.
  • Repayment amount will be dependent on the litigation outcome
  • No announcement on changes of Income Recertification Dates – currently starts 7/1/2023
  • Current registration form is not available due to lawsuits
  • Notification of approved borrowers will be issued

To date, over 26 million people have applied for student loan forgiveness.  Approximately 16 million borrowers were approved for the one-time forgiveness, yet their balances will not be adjusted until after the litigation is finalized.  According to the original Student Debt Relief Plan rules, the loan balance adjustments will be made through the loan servicers.  This adjustment will occur when the lawsuits are finalized and ruled in favor of the Department of Education.

Importance of 2022 Tax Return Even with the Extension

Even with the new extension, borrowers must continue to plan for the repayment restart.  This planning is especially critical for borrowers who use an Income-Driven Repayment (IDR) method or those considering Public Service Loan Forgiveness (PSLF).

Starting in Mid-2023, the IRS data will populate many Department of Education systems.  This integration is approved through a separate program called FAFSA Simplification.  For borrowers, no matter when the restart happens, your 2022 tax data will impact those using the IDR methods.  This planning is why you must do the proper repayment and tax planning now, even with the extension.

Currently, over 54% of federal student debt dollars are repaid using an IDR method.  In addition, IDR recertification has been postponed numerous times due to these extensions.  Due to the increased use of IDR and the income recertification delays, borrowers must now recognize the importance e of their taxes.  Borrowers in repayment need to review their taxes as a household and not just as an individual.  A simple adjustment could mean thousands of dollars in repayment amount annually.

Proper Advice Gap

The IDR methods have added more complexity to the student debt problem.  Borrowers expect to get the right advice from the loan servicer.  With the increased use of the IDR methods, loan servicers are legally unable to give borrowers all the guidance needed to make the right decision.  With the IDR methods, the payment amount is based on a borrower’s tax filing income reported on their tax form’s Adjusted Gross Income line.  The loan servicers can not legally provide any tax or personal finance advice, which most borrowers need help understanding.

On the other hand, many tax and financial professionals understand how to manage taxes and Adjusted Gross Income properly but need help understanding the loan repayment and forgiveness process.

In both these cases, the primary focus for each advice provider is different.  The loan servicer’s goal is to keep the borrower current and make payments.  The financial and tax professionals’ goal is to lower your taxes.  The borrower needs these two experts to come together so they can get the right advice.

Benefits of Better Tax Planning In Student Loan Repayment

Here is a simple example of a couple who filed their taxes, married and joint.  By knowing the taxes and loan repayment options, this borrower could save over $5,000 in student loan repayment per year with just a few simple tax planning adjustments.

Using the PayForED Student Loan Repayer, borrowers can easily see how adjusting their repayment, and tax scenario can lower their monthly payments. (See the image below.)  As the chart displays, the borrower’s payment is $804/month if they file married/joint.  If they file married/separately, the payment is reduced to $34/month.  After the borrower factors in the increased tax cost of approximately $2,700 dollars annually, the net saving is over $470 per month.

Comparing Tax and IDR Repayment Options

 

 

This advice is often not explained due to the advice sources that most borrowers get and pursue.  With the IRS data automation, proper planning becomes critical.

New Extension Planning Summary

With the new extension, the borrower still needs to be proactive due to the future changes in the IRS integration.  Proper tax planning will need to be improved with this automation.  Tax and financial professionals need to increase their knowledge in this repayment area as borrowers will become more dependent on their tax filing decision when repayment restarts.

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