On Wednesday, August 24, President Biden announced his long-awaited Student Debt Relief Plan. It addressed the growing problem of student debt in the country and the transition back to normalcy after COVID. Many details are unavailable at this time, but this article will give you insights into what we know and what actions borrowers can start taking.
From our perspective, there were four major components of the announcement that we needed to react to. We put them on a list to prioritize your action items and the legal approval associated with each part of the plan.
- PSLF Limited Waiver Expiration on October 31, 2022
- End of National Forbearance on December 31, 2022
- One-Time Federal Loan Forgiveness Amount and Rules
- New Income-Driven Repayment (IDR) Plan
One of the problems with the plan is the cost. The program cost projection ranges from 300 billion to 900 billion dollars, depending on the various model assumptions. This program price tag has raised a red flag for most Republicans and some Democrats.
Legality of the Plan
The first two items of the plan are legally allowed actions under the Presidential Executive Order. Constitutionally, Congress would typically need to grant or create these laws, and then the President could sign them into law. The questions are on the one-time forgiveness and the new IDR method. Both are possible but questionable via the Executive Order Privilege.
We could see a series of lawsuits preventing or delaying these last two items from becoming law. The government has a few months to determine these due to the final extension of the National Forbearance.
PSLF Limited Waiver Expiration
In October 2021, the President established the PSLF Limited Waiver program. It is the most effective loan forgiveness program that the government has implemented. This program fixed many errors or misconceptions that the Public Service Loan Forgiveness (PSLF) program had. Before the Student Debt Relief Plan was announced, there was talk that the Limited Waiver program would be extended. It will expire on October 31, 2022, and borrowers need to know this.
To date, our average saving per client is over $120,000 of student loan forgiveness. The typical person who qualifies will be between 35 and 50, have been classified as a full-time employee, and employed by a government agency or non-profit 501(c)3 company. Most of them have FFEL loans or were in the wrong repayment methods and were denied PSLF due to the strict rules. Here is a helpful guide to navigating PSLF Limited Waiver Process.
National Forbearance Ends on December 31, 2022
Part of the COVID program was the halt of student loan repayment and applying a zero-interest rate on all Federal Student Loans. The final extension was announced as part of the Student Debt Relief Plan. This, too, will not require congressional approval.
Borrowers will need to prepare for this restart since it will be over 30 months from their last required loan payment. Many borrowers had changes in their finances and marital status during that time. These items will impact their monthly payments and should be reviewed before repayment starts again.
As we see increases in the use of the IDR methods, tax planning will become a more significant part of student loan repayment. According to the current government plan under the FAFSA Simplification, IDR verification will be automated by the 2023 summer. This means income and some other information from the IRS system will directly feed the Department of Education systems. It will impact both loan repayment and the financial aid process.
With these changes, this Fall’s benefits enrollment period will become more critical for federal loan borrowers. The decisions on pre-tax benefits decisions will have a direct impact on a borrower’s loan repayment amount. Borrowers need to be prepared for a significant increase in their monthly payment since their current IDR payment amount is based on income 3 to 4 years old.
One-Time Loan Forgiveness Amount
The one-time student loan forgiveness decision has been a long-anticipated and debated item for the President. We have summarized the major features of the forgiveness plan in the chart below. There are still many open items that we have questions about at this time, but we wanted to get the information out for people to plan and manage expectations correctly. As stated above, this part of the plan may have some legal hurdles that could change the rules significantly.
One of the most significant advantages is the amount that is forgiven will be tax-free. Under the CARES Act, all student loan forgiveness through 2025 is tax-free for your federal taxes. Most states use federal rules to determine their definition of taxable income but some states do not. Borrowers will need to confirm that with a tax professional.
Another essential item is the income limits associated with the forgiveness program. These income limits are based on how a person filed their taxes. Based on the White House fact sheet, the taxes used will be 2020 or 2021. It is unclear at this time how it will be determined.
Some could receive their forgiveness automatically since their income is already available through the IRS interface with the Department of Education.
For some older borrowers, you may need to establish an FSA ID and Password. In 2015 this replaced the 4-digit FAFSA pin. The FSA ID will give you access to your federal loan account and past federal financial awards. The StudentAid.gov site is where you can determine if you ever received a Pell grant. Pell Grant recipients can qualify for up to $20,000 of these forgiveness dollars. Without the Pell grant award, the forgiven amount is limited to $10,000.
Some Federal Loan Borrowers Will Not Qualify
On September 29, 2022, a significant change was made by the Department of Education on the Student Debt Relief FAQ webpage. It now stated that a majority of FFEL loan and Perkin loan borrowers will not qualify for the Student Debt Relief Forgiveness. This change was driven by a new lawsuit and the amount of harm it could cause to some financial institutions. It is expected to impact approximately 4 million borrowers.
How to Apply for Student Debt Relief
According to a recent White House Press Briefing, the Student Debt Relief website will be available in early October. Borrowers can complete the form and expect relief within four to six weeks. A proposed date of roughly November 15th could help borrowers get their relief notification before repayment begins, according to Bharat Ramamurti, deputy director of the National Economic Council.
It will be essential to complete the form with the correct documentation. This quick turnaround will depend on the borrower’s information being verified electronically. The Department of Ed will most likely use the Data Retrieval Tool, which links the IRS system to the Department of Ed systems. If paper documentation is needed, then it will take much longer for those borrowers. Borrowers can use the StudentAid.gov website to confirm both loan and grant information.
The government has estimated about 8 million borrowers will qualify for automatic forgiveness. Based on the rules and income information available to the Department of Ed, this will most likely be borrowers who submitted FAFSA in 2021 and 2022. The FAFSA will have the income numbers for the two qualifying income years. The other people would be people who are using the IDR method that recertified during COVID and have a tax return on file for 2020 or 2021. People outside of these two groups will most likely need to use the online submission process.
For borrowers with a remaining balance after the forgiveness, some may see a change in their payment if they are using a fixed payment method. According to a recent announcement, the government will be re-amortizing your loan payment schedule based on the new balance. For borrowers using the Income-Driven Repayment (IDR) methods, their payments will not change until their next Income Recertification date.
In both cases, borrowers could see an increase in their payments. It is unclear if there will be an appeal process if the loan payment increase due to the forgiveness amount. For IDR users, payments have not changed in years due to delays in income recertification. It is recommended that you review your tax information that is on file and how you plan on submitting your 2022 taxes since that will be used for many IDR upcoming recertifications.
New 5% Income-Driven Method
This part of the plan had limited details and, in my opinion, will most likely need congressional approval to be implemented. This New IDR method could be costly to the U. S. taxpayer based on the rules since it changes many of the underlining IDR rules on unpaid interest and capitalization. It also lowers the percentage of discretionary income to 5%, which is the lowest of the IDR methods.
It also had a shorter repayment period to qualify for loan forgiveness. Due to the lack of information, I will not spend time trying to speculate what will happen since it will change.
Student Debt Relief Summary and Action Plan
As you can see, a significant amount of changes need to be reviewed and then personalized. I would take a systematic approach to these opportunities. Each of the items could be worth thousands of dollars to each borrower.
As more details are released in the coming months, we will keep you updated on the process and the ways to apply. As we have seen with the PSLF Limited Waiver program, there are specific ways the information needs to be organized to navigate the system. As the deadline approaches, we are anticipating additional adjustments for approval.
I would also be careful with any significant financial commitment until legal confirmation on the one-time forgiveness approval. As stated above, this program may face some significant hurdles.
Student Debt Relief Action Plan
- Get an FSA ID and Password (Different than your Loan Servicer log in)
- Can view federal debt types and Pell Grant information
- Review PSLF Limited Waiver Qualifications
- Prepare for repayment restart with proper 2022 tax planning and benefits selection.
- Stay aware of the rules and registration page for One-time forgiveness
- Submit required documentation once the platform is available
Training and Webinar For Financial Advisors and Tax Professionals
To help financial advisors get the training they need to provide this service to their clients, PayForED has a new FINRA designation (Student Loan Repayment Advisor – SLRA). The program is approved for 13 CFP CE. Here is the link for SLRA Designation Program.
PayForED and Envestnet’s MoneyGuide presented a webinar on Student Loan Repayment and Forgiveness on August 30, 2022. A recording of the presentation is available. The program covered Student Debt Relief Plan and other items like tax-free reimbursement and SECURE 2.0. Here is the link to register.
On October 6, 2022, PayForED and Envestnet’s MoneyGuide will also present an updated webinar on the Student Loan Relief Plan and provide new information on FAFSA Simplification. Here is the link to register.