Student Loan Forgiveness for ODs

Good afternoon!

Political opinions aside (and I know I'm going to get many emails sharing them, but please note my intent to strictly to be informative and not to initiate a debate), this week's announcement on student loan forgiveness was a big one and affects a lot of ODs. When released it raised more questions than answers so I have attempted to compile all relevant information here in a question and answer format so you can easily identify what affects your personal situation.

Please note this is very new and not all the details are worked out, so what is listed is accurate to the best of my knowledge but subject to error. 

What kinds of student loans are being forgiven?

Federal student loans only in the amount of $10,000 per borrower and Pell Grants up to $20,000 per borrower. These include undergraduate, graduate AND parent plus loans. Unsure if your loan is Federal? You can find a list of servicers here. To see if you have a Pell Grant, go to studentaid.gov and look at the "My Aid" section which breaks out what type of aid you have.

There are exceptions though. Forgiveness only applies to single tax payers who's adjusted gross income (AGI) was less than $125,000 per year or married filing jointly/head of household couples making less than $250,000 per year. I have not read the full document but haven't been able to find any specific information on married filing separately. If I had to guess it would be a $125,000 limit for each tax payer.

The limits apply to income for either the 2020 tax year or 2021. So you can use the lower AGI year to qualify even if you didn't in the other eligibility year. If you are behind filing tax returns, get on it!

Below if the line on your tax return you would look at to determine eligibility.

How will loans be forgiven?

It sounds like most of them will be automatic, but for anyone who isn't, there will be an application available in early October.

Is forgiveness taxable?

At the federal level, no, which should be a huge relief to anyone who this program applies to. There are 13 states that will need to address their tax codes for forgiveness to not be taxable, listed here:

Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin

What if I paid down/paid off my loan below the $10,000 level during deferment?

I am enormously proud of my clients who paid their loans down and off even though there was no obligation to do so. For those who paid their loans below the $10,000 mark, extra payments should be returned with no questions. Although I can't see where paid off loans are addressed, I would expect those to get reimbursed too but it might take some time.

What if I refinanced my loans?

I can see a number of folks cringing at this one. As of right now, it appears you are out of luck. I confess I was a proponent of refinancing with lower rates.

Wondering out loud, I'm not sure servicers can tell the difference between a pay off and a refinance so keep an eye out for the possibility of getting the $10,000 from a pay off scenario then applying it to a private loan.

What else should I know?

Student loan deferrals are officially postponed until 12/31/22 with payments resuming in January. Biden is also working on a program to revamp how federal loan forgiveness programs are addressed on an ongoing basis to include lower income calculations and reducing the forgiveness program time frame from 20 to 10 years.

As always, let me know what questions you have, and investors, hang in there- no amount of student loan euphoria could offset the federal reserve's intention to continue raising rates until inflation is defeated.

Have a great afternoon!

Natalie