It’s been a long time coming, but President Biden and his advisors have announced their plan to address the ongoing student loan crisis. In keeping with a promise he originally made back in 2020, the administration plans to forgive up to $10,000 of federal student loans for borrowers who make less than $125,000 annually and haven't received a Pell Grant. Pell Grant recipients will receive up to $20,000 in student loan forgiveness.
This current plan differs from proposals floated earlier this summer, including more generous proposals to forgive up to $50,000 of federal student loans, and another that set income eligibility requirements at $150,000 or less for single taxpayers. A few critics are saying the plan doesn’t go far enough. All borrowers looking for relief will have to keep watch of the Education Department's website for updates on the forthcoming loan forgiveness application.
“President Biden’s student loan forgiveness is a step forward, but it barely makes a small dent in the $1.7 trillion Americans currently owe in student debt,” says Kristen Carlisle, General Manager, Betterment at Work, a 401(k) retirement plan provider.
And the plan tweaked the income-driven repayment rules. Now, those with undergraduate loans can cap repayment at 5% of their monthly income. This essentially cuts payments in half for those currently enrolled in income-driven repayment plans. Tweaks to these plans also include shorting the time frame of when balances under $12,000 or less are fully discharged. Now, original loan balances of $12,000 or less will be forgiven after 10 years of on time payments instead of 20 years.
What Does This Mean for You?
A large swath of federal borrowers will have either a portion of their loans forgiven or see their debt canceled completely. According to a recent piece from the Wall Street Journal, up to 15 million borrowers will come out debt-free thanks to the administration’s plan.
If you owe more than $10,000 in federal student loans, your balance will be reduced. Plus, the moratorium pausing federal student loan payments is extended through the end of the year. This is the last extension that the administration plans to give, with payments starting back in January 2023. But don’t let partial loan forgiveness and another payment extension stop you from creating a plan to pay back your remaining loan balance.
Now may be the time to contact your lender and make payments on your currently lower balance, taking advantage of the moratorium’s zero percent interest rate. If you were considering refinancing your federal student loan into a private loan, still hold off until the moratorium officially ends.
Are There Any Tax Implications?
No. Thanks to the American Rescue Plan, this debt relief will not be treated as taxable income for federal income tax purposes.
Because student loans are debts that are intended to be repaid with interest, they are not taxable income and do not need to be reported as such on your tax return. However, you can deduct student loan interest on your income tax return.
What About Borrowers with Private Student Loans?
The Biden plan does not include relief for private student loans. These loans are issued by financial institutions such as banks or credit unions, not the Education Department.
However, you can call your lender to negotiate better loan terms or refinance to a loan with a lower rate.
Do Reforms Extend to Current and Future College Students?
Surprisingly yes. The Biden administration hopes to address the growing cost of college by doling out more money for Pell Grants. The administration has distributed an additional $40 billion to colleges and universities thanks under the American Rescue Plan.
The Education Department is also stepping up oversight of colleges and universities with the worst student loan debt. They will start publishing an annual watchlist of programs that have the highest amounts of student loan debt for rising high school seniors and their families to read. The department will also require some of these bad actors to submit improvement plans connected to reducing their student's debt.
Rivan joined Kiplinger on Leap Day 2016 as a reporter for Kiplinger's Personal Finance magazine. She's now a staff writer for the magazine and helps produce content for Kiplinger.com. A Michigan native, she graduated from the University of Michigan in 2014 and from there freelanced as a local copy editor and proofreader, and served as a research assistant to a local Detroit journalist. Her work has been featured in the Ann Arbor Observer and Sage Business Researcher.
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