Student Loan Debt Relief Plan

On August 24th, President Biden and his administration announced their plan to provide student loan relief through an executive order. For many, this has been eagerly anticipated as student loan relief was a key platform for the current administration.

Because it’s an executive order, the final execution will likely be similar to what has been communicated on the 24th. Those opposed to the executive order may try to take the matter to court, but the relief plan will not pass through the hands of the Senate and House, which makes it unlikely to see significant adjustments between now and final execution.

Student Debt Landscape

According to the Federal Reserve, there is about $1.75 trillion in outstanding student loans (The Fed - Consumer Credit - G.19 (federalreserve.gov)), and it is estimated that one in seven Americans are borrowers. Given the large population of borrowers and the reality that so many more are indirectly impacted by the potential relief package, it has been a hot topic in the political sphere.

Cancellation of Student Debt

For those following the announcement of the relief plan, most understand that borrowers may qualify for student loan forgiveness of up to $10,000 depending on income levels and the type of loan. Additionally, borrowers who received a Federal Pell Grant can be forgiven as much as $20,000.

Income Levels

According to the announcement, each borrower must be under a maximum income level of $125,000 as an individual or $250,000 as a married couple to qualify for the forgiveness. Although it is unclear what measure of income will be used, Adjusted Gross Income (AGI) is a likely choice given its use for Income Driven Repayment (IDR) Plans (they are tied to specific student loans).

Tax years 2020 and 2021 will be used to determine a borrower’s relief eligibility. Although there is limited ability to adjust a borrower’s 2021 income, being below the threshold in either year will qualify them for relief. This provision is helpful to borrowers who may have had a uniquely high income in one of the two years but generally find themselves below $125,000 (or $250,000 for married couples).

According to the White House Fact Sheet, this package will not phase out. Rather, it is a “cliff” schedule that will cause a borrower to lose out on the full relief benefit if their income level exceeds the threshold by a single cent.

Types of Loans

The announced relief package applies to Federal loans (both for undergraduate and graduate school) that were funded as of June 30, 2022. While this generally excludes privately held loans from relief eligibility, there is not a final decision on Federal Family Education Loans (FFEL) which are privately funded but federally backed.

Additionally, Parent Plus Loans are reportedly eligible for relief. Parents are limited to a total of $10,000 in debt forgiveness even if they have multiple loans across multiple children. Parents’ income levels will determine if a Parent Plus Loan qualifies for debt forgiveness.

As we understand it today (and there remains some ambiguity), a maximum of $30,000 of student debt across one family may be forgiven if the student received a Federal Pell Grant and parents held $10,000 in Parent Plus Loans.

Refunds

Borrowers who made voluntary, principal-reducing payments since March 13, 2020, can request refunds from their loan servicer. And according to the Department of Education, the loan servicer is required to provide a refund on those payments. This is an important note for those who may be reading and feel like they missed out on the potential cancellation of the debt that was recently paid off.

Although it is not clear whether refunded loan payments will receive debt forgiveness, there may be an opportunity for current borrowers to increase their outstanding loan level to meet or exceed their potential maximum loan forgiveness.

Example

As of March 13, 2020, John had $22,000 of outstanding Federal Student loans. He received a Federal Pell Grant award, and his income in 2020 was $75,000. Despite the moratorium on student loan debt payments from the CARES Act (see below), John made voluntary payments to get ahead of his student debt, paying down an additional $12,000 while he had income. As of today, he has $10,000 in outstanding principal remaining on his loan.

John heard the announcement by the Biden Administration, and he plans to take a refund of the $12,000 he paid off so he may have the potential to receive the full benefit of the student loan relief package. According to the announcement, John will receive $10,000 in loan forgiveness for the remainder on his loan and may receive an additional $10,000 in loan forgiveness based off the $12,000 refund he requested.

By taking the refund, John creates a potential opportunity to receive the entire $20,000 in loan forgiveness because he met the income and Federal Pell Grant requirements.

Because the extension of the pause on payments will last through 2022, taking a refund of the outstanding loan is a limited risk. The borrower can evaluate what to do next once the order is more concrete.

Final Payment Extension

The CARES Act was passed in March of 2020 to provide stimulus and relief for those affected by the coronavirus pandemic. With it, the Department of Education was directed to suspend monthly payments and interest accrual for most outstanding student loans.

The initial pause was set for at least 60 days and was continuously extended back by each administration. This most recent announcement has signaled an end to the pause on payments. The “final” extension will last through the end of the year, and payments are set to resume in January of 2023.

Although they could continue to extend the moratorium on payments, it is most likely that this will be the end since the relief package along with debt forgiveness has been announced.

Other Key Provisions

In addition to the extension of payments and plans for student debt cancellation, other provisions in the White House Fact Sheet included:

• Establishing a new income-driven repayment (IDR) plan, which will cut the payment for most borrowers in half.

• Establishing permanent provisions related to the Public Service Loan Forgiveness (PSLF) program. The goal is to provide borrowers working at nonprofits, in the military, or in government additional assistance and proper credit for their service time.

These provisions are nuanced but worth diving into if you find yourself in one of these applicable groups (IDR or PSLF eligible).

Although the current administration still has many loose ends to tie up, we know the plan will receive plenty of attention from the media and individuals along the way. It will be interesting to watch it unfold, what the total cost will be and how it will impact Americans, both directly and indirectly.

We are constantly reviewing and reading how these events are unfolding. If you are curious or if any of the topics mentioned above apply to you, we encourage you to reach out and would be happy to have a conversation.