You’ve seen the headlines: like fall, student loan forgiveness is in the air (and that air certainly smells sweet).
On August 24th, President Biden announced his plan for student loan forgiveness and ongoing student debt relief for current and future borrowers.
While the plan details are buried in the White House brief, the magic number making headlines is $10,000—that’s how much you may be eligible to wipe away from your balance sheet.
But several questions still percolate:
- Does the loan forgiveness program apply to me?
- If not, how do I prepare? If so, what should I do with the extra cash?
- I’m on an income-driven repayment plan. What changes in loan payments should I expect?
We’ve got a lot to cover, so let’s dive in.
Are You Eligible for $10,000 In Student Loan Forgiveness?
The President’s primary goal with this forgiveness decision was to provide low and middle-income households with vital debt relief exacerbated by the pandemic. As such, there’s an income cap on eligibility.
You Might Make Too Much
You can get $10,000 in federal student debt forgiveness if you earn less than $125,000 filing single and $250,000 married filing jointly. Those who attended college with a Pell Grant will receive up to $20,000 in debt cancellation. Since the forgiveness doesn’t count as income, you don’t have to pay tax on the amount forgiven.
But your qualification isn’t technically based on what you “earn”; instead, it’s from your adjusted gross income (AGI).
What’s your AGI?
To calculate your AGI, you take what you brought in during the year, like wages, dividends, and capital gains (also known as your gross income), and subtract it from any deductions or adjustments like medical expenses, qualified interest payments, alimony, etc.
The Department of Education plans to pull your adjusted gross income (AGI) data from the 2020 or 2021 tax years to determine your eligibility.
Don’t remember exactly what you made a couple of years ago? No worries. Grab out your tax return (Form 1040), and your AGI should be on line 11, which, conveniently, sits on the first page.
How To Get Forgiveness Faster
Even though about 8 million people will see their debt canceled immediately (since loan servicers have their tax information on file), the rest of us may need to fill out an application with the Department of Education to claim forgiveness. The application hasn’t officially launched yet (the expected timeframe is early October), but you can sign up for email notifications via their website, altering you to when the process is live.
If you qualify, submitting your application as soon as possible is best to expedite the process. Since the Department of Ed anticipates a 6 to 8-week turnaround time, it’s crucial to apply before November 15th, 2022, if you’d like to see your loan balance erased or reduced before the payment pauses lift in the new year (more on that below).
Keep in mind that this cancellation effort only applies to federal loans, like direct subsidized and unsubsidized, Parent Plus, and grad loans. The relief doesn’t extend to those with private loans.
By now, you’re either breathing a sigh of relief or shaking your head in disappointment. Either way, there are some key considerations and next steps.
When Will I Have To Start Paying Back My Student Loans?
So, there’s good news and bad news.
Let’s get the “bad” out of the way first: student loan payments will resume.
The “good” news is that the government extended the pause on federal student debt until December 31, 2022. As with the previous extensions, you won’t have to pay any interest on your loans.
But you’ll need to prepare to start making payments on your student loans by January 2023—what a way to ring in the new year.
If you’re stressed about building a repayment plan, don’t worry. We’re working on a guide to help you navigate the repayment process once payments begin.
What If I Owe Less Than $10,000?
This is where the phrase “up to” comes into play. The Department of Education will forgive your outstanding debt up to the $10,000 or $20,000 limit for qualified borrowers.
So if you owe $5,000, you’ll receive $5,000 in relief.
$10,000 Is Gone, Now What?
Let’s be clear: this student loan forgiveness announcement isn’t the same as the government cutting you a check. Creating a plan for what this forgiveness could mean for you is essential.
- Does the forgiveness plan completely wipe away your student debt?
- Will it ultimately lower your projected monthly payments, and by how much?
Whether student loan payments are in your rearview mirror or you’re nearing the finish line, you’ll want to consider how to reallocate all or some of the cash flow you were putting toward your debt.
- Shore up your emergency fund. If you had to dip into your emergency money in the last two years, now is an excellent opportunity to build it back up again. Allotting even a couple hundred dollars a month into an accessible, liquid account can boost your balance.
- Pay down other debt. Just because your student loan payment decreases doesn’t mean you’re automatically debt-free. Look at the other debt you have: auto loan, personal loan, business loan, credit card, etc., and see where those previous student loan dollars could make the most significant impact (hint: it’s usually the debt with the highest interest).
- Max out your retirement savings. This debt cancellation could be the cash flow push you need to start maxing out your retirement accounts, like a 401k and IRA. Increasing your retirement contributions helps set you up for flexibility and financial independence in the future.
- Boost your “fun” fund. If you’re already doing the three things above, there are additional creative ways to put your money to work. One avenue might be a brokerage account. Think of a brokerage account as your “fun” fund. You can invest and save for a known or unknown future expense, like helping your child pay for a wedding, caring for an aging parent, or taking a 6-week sabbatical. By investing regularly, you set yourself up to say “yes” to meaningful opportunities that come your way.
- Increase the college fund. What a full-circle moment: you could redirect the cash flow from student debt cancellation to help your child avoid unnecessary debt. For example, you might be able to increase your monthly contribution to a 529 Plan, depending on your goals.
And that’s just to name a few!
There are so many avenues to building wealth. The right path for you depends on your goals, values, family, and more.
If Not Totally Canceled, How About A Refund?
If you’ve been making payments on your loans throughout the pandemic and are disappointed that those payments won’t be forgiven, this tidbit might just cheer you up.
Say you made student loan payments at any point during the “pause” (beginning on March 13, 2020). In that case, you might be able to contact your loan servicer and ask for a refund on those payments.
This strategy can be particularly helpful for those under the forgiveness threshold. Say in March 2020, you had a $10,000 student loan balance. But even with the payments on pause, you paid off $3,000 over the last two years, bringing your balance to $7,000.
Assuming you meet the qualifications, you’d have your remaining $7,000 balance canceled. But all isn’t lost for the $3,000 you paid during the pandemic. All you have to do is call your loan servicer, ask for a refund from payments made within the qualifying period, and then get your money back. That extra $3,000 might be well worth waiting on hold.
The Future of Income-Driven Repayment Plans
Loan cancellation isn’t the only juicy news from this student loan reformation. The President’s plan certainly sweetens the pot for those on an income-driven repayment plan, aiming to drastically reduce payments across the board.
Current and future borrowers on one of the qualified income-driven repayment plans can expect the following changes:
- Cap payments at 5% of discretionary income, down from 10% for undergraduate loans.
- Raise the bar for what counts as non-discretionary income, protecting more money from repayment.
- For balances of $12,000 or less, forgive the loans after 10 years instead of 20.
These updates can help relieve the long-term burden of student debt. The Department of Education is also undergoing a drastic overhaul of the Public Service Loan Forgiveness Program. Learn more about those changes and if you qualify here.
P.S if you think a past loan payment could qualify for PSLF, fill out the waiver by October 31, 2022.
The recent student loan forgiveness updates could impact you in various ways, so be sure to check out your options and take advantage of any program that could help you reduce your debt—while you’re sipping on your PSL (pumpkin spice latte), of course.