Student Loan Forgiveness

If you haven’t heard, the beta version of the public student loan forgiveness application went live.  This application for student loan forgiveness is the largest ever one-time student loan discharge ever offered by the US government. While student loan forgiveness has become a polarizing political issue it has also become a reality for millions of Americans and the potential planning implications are too important to ignore.

 

First the facts:

  • Currently there are 1.6 trillion dollars in outstanding public student loan debt in the United States.
  • Over 43 million Americans currently have student loan debt.
  • The current student loan forgiveness program will discharge up to $10,000 per individual[1].
  • The current student loan forgiveness program will also discharge up to $20,000 per Pell Grant recipient[2].

How to:

The Beta version, or test version, of the student loan forgiveness application is live.  Anyone can apply to have their student loan balance forgiven through the free to use online portal.  Currently, the site is accepting applications though these will not actually be processed and reviewed until the final version of the application is up and running.  There is no word on specific dates, although the White House has noted that it should be “a matter of weeks” with the target for forgiveness as 1/1/2023.

The forgiveness application is user friendly and only requires name, date of birth, and social security number; it should take less than 10-minutes.  The application will be reviewed and then can be checked against recent tax returns to determine eligibility.  The WhiteHouse.gov site notes that they expect 95% of applicants to be approved with no issues and the remainder will be contacted for additional documentation to prove income level.

 

Scope:

So, what’s eligible to be forgiven?   Well, up to $10,000 in outstanding student loans per person or up to $20,000 if the recipient has Pell Grants outstanding. These numbers are subject to income limits of $125,000 per individual or $250,000 for a married couple.  Additionally, there is an exclusion for anyone in the top 5% of households as measured by net worth regardless of income.  Lastly, these are only for current outstanding loans and any paid-off balance is ineligible for reimbursement.

[1] subject to AGI limits
[1] subject to AGI limits

The White House has mentioned that they are including service with the military, non-profits, and federal, state, and local governments for increased loan forgiveness above the already entrenched Public Service Loan Forgiveness Program or PSLF.  The details here are murky to say the least, though it’s worth monitoring.

 

Bugs:

Currently, the Beta version of the application portal is experiencing some bugs with several sources noting that if it doesn’t work just try it again 30 minutes later.  This shouldn’t prove to be a big deal as all applications are being held until the final application portal is opened.  Then applicants, all 43 million of them, must apply by December 31st of 2023.  The White House set January 1st of 2022 as the target date for the beginning of the forgiveness.

 

Planning Considerations:

Student loan forgiveness has significant planning implications for many households.  First and foremost a reoccurring liability is either completely discharged or is significantly reduced.  This newfound income can be put towards retirement savings, education funding for children or a convertible… preferably not the convertible.

Its also worth noting that while this loan forgiveness isn’t taxable at the federal level it may be taxable at the state level for some borrowers.  If electing for forgiveness be sure to research the potential tax consequences or reach out to a trusted advisor to review how the student loan forgiveness may impact your financial picture.

 

Potential Legal Hurdles:

While researching and writing this blog post, a lawsuit was filed that temporarily blocked student loan forgiveness citing funding and tax concerns.  While this case was thrown out by a judge the following day there has been a pause to the program as there have been several petitions and lawsuits filed in opposition to student loan forgiveness around the country.  Persons eligible for forgiveness are still encouraged to apply for it through either the beta application portal or when fully rolled out the regular application site.

 

Written by Devin McCombs

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