President Biden announced a three-part plan to provide more relief to America’s working families as they recover from the impact of COVID-19. President announced new steps to address student loan debt, including forgiving up to $20,000 for millions of borrowers and extending the payment freeze until the end of the year. Borrowers should expect to resume payment in January 2023.
The Biden administration has already canceled billions in outstanding federal student debt by expanding existing forgiveness programs for public workers, disabled borrowers, and students who for-profit colleges defrauded.
The amount of debt canceled depends on whether the borrower received a Pell grant to attend college.
Individual borrowers who make less than $125,000 yearly and married couples or heads of households who make less than $250,000 annually will have up $10,000 of their federal student loan debt forgiven if they did not receive a Pell grant as an undergraduate student. Individual borrowers who make less than $125,000 yearly and married couples or heads of households who make less than $250,000 annually but did receive a Pell grant as an undergraduate student will have up $20,000 of their student loan debt forgiven.
The Biden administration will launch an application soon for borrowers to provide their income information. Federal Student Aid (FSA) says the application will be available before the federal student loan repayment pause ends on December 31. Borrowers can sign up for updates when the application is open on the Department of Education’s subscriptions page.
The Biden administration is also proposing a rule to create a new income repayment plan in which borrowers pay no more than 5% of their monthly income on undergraduate loans, which is a decrease from the recently proposed 10% threshold. The rule would also increase the amount considered “non-discretionary income,” so no borrower earning below 225% of the federal poverty level will have to make a monthly payment.
For borrowers with loan balances of $12,000 or less, loan balances will be forgiven after ten years of payments instead of the current 20-year plan. In addition, to help prevent a borrower’s loan balance from growing while the individual makes monthly payments, under the proposed rule, the Biden administration would cover unpaid monthly interest, even if the monthly payment is zero, due to the borrower’s income level.
More guidance on student loan debt forgiveness will be released and communicated.
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Maria Stromple, CPA, MST
Maria is a Partner at Wilke & Associates, serving closely held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.