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What Student Loan Forgiveness Means for Your Clients

Here, we answer some common questions about the recent federal actions around student loan forgiveness.

The Biden administration triggered a media blitz recently when it announced that it was forgiving billions of dollars in student and parent federal loans.

At the same time, the administration also extended the federal college loan pause, which has permitted borrowers to temporarily stop making payments on their federal loans without any financial consequences. The pause began in March 2020, at the beginning of the pandemic, and is expected to end on Dec. 31, 2022.

Here are some common and not-so-common questions asked about the federal actions:

What loans are eligible for forgiveness?

Any federal college loans that were issued no later than June 30, 2022, are eligible for forgiveness. (July 1 always represents the first day of the new federal financial aid year.)

These are the four types of federal student loans:

Another category of loan, the Federal Family Education Loan (FFEL), will also be eligible, but it will be more of a hassle to have debt discharged. The FFEL, which hasn’t been issued since 2010, facilitated private lenders issuing college loans backed by the federal government.

Some FFELs are held by federal loan servicers, and others are held commercially. If the loans are held by federal servicers, the borrower can combine these loans into a federal direct consolidation loan, which would qualify them for loan forgiveness. Federal officials are suggesting that the same thing could ultimately happen with commercially held FFELs, but it isn’t a sure thing yet.

How much can be forgiven?

Borrowers who received Pell Grants while in college can have $20,000 of their loan balance wiped out. The Pell Grant is designed for low- and middle-income students, and most recipients today have household income below $60,000.

To be eligible for loan forgiveness, the borrower only has to have received the Pell Grant once.

Borrowers who did not receive a Pell Grant while in college can be eligible for $10,000 in federal loan forgiveness.

What are the income caps for loan forgiveness?

The loan forgiveness is limited to individuals having an adjusted gross income of less than $125,000 per year or an adjusted gross income of less than $250,000 for married couples filing together. Borrowers can choose either the 2020 or 2021 tax year to be considered.

Are private loans or federal loans that were refinanced into private loans eligible?

No, private loans don’t qualify for a refund. Private loans can be tantalizing for borrowers, with very good credit scores, who want to refinance for a lower interest rate. Borrowers, however, give up federal perks when they make this move. Those benefits include income-based repayment plans and the federal Public Service Loan Forgiveness program.

Can you get a refund if you made payments during the federal pause?

I imagine the loan forgiveness announcement triggered regret among borrowers who have been voluntarily making payments during the loan pause with the aim of getting their college debt paid off faster. It’s obviously depressing to think that all those payments might have been forgiven.

There is, however, good news for these borrowers. These individuals can ask their loan servicer for a refund of their federal loan repayments during the payment pause. Wording in the CARES Act, which is the legislation that started the federal loan repayment pause 2 ½ years ago, is what makes getting a refund possible.

Are people who were delinquent or who defaulted on their federal loans when the loan pause happened eligible for loan forgiveness?

Yes, they are eligible. Equally encouraging news for these struggling borrowers is that they will no longer be in the delinquent or default status. A federal program called Fresh Start will fully take effect after the federal loan pause has ended, which is supposed to happen on Dec. 31.

It's hazy regarding what exactly delinquent borrowers need to do to take advantage of Fresh Start. The government website simply says that borrowers will be contacted.

Defaulted loans that won’t be eligible for the rehabilitation are loans that go into default anytime after the loan payment pause ends.

Will borrowers owe taxes on their forgiven federal debt?

No federal taxes will be owed. That’s because the American Rescue Plan, which Congress passed in 2021, stated that student loan forgiveness wouldn’t be subject to federal taxes through 2025.

A few states, however, might tax the discharged debt.

How can borrowers learn the latest on this initiative?

Borrowers can get updates by signing up for emails with the U.S. Department of Education. Click the link and check this box – NEW!! Federal Student Loan Borrower Updates.

Is this loan forgiveness program a sure thing?

No, it is expected that critics of the move will try to stop it via the courts.

Opponents say the plan does nothing to stop the underlying reason why colleges are expensive and that the president doesn’t have the power to forgive student loan debt in such a broad fashion.

Lynn O’Shaughnessy, a nationally recognized college expert, offers an online course—Savvy College Planning—exclusively for financial advisors.

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