Student Loan Forgiveness Update (October 2022)
Forgiveness
President Biden has announced up to $20,000 in federal student loan forgiveness for borrowers earning less than $125,000 ($250,000 for married joint filers and heads of household). Borrowers with federal student loans who earn less than the income limits qualify for $10,000 of forgiveness, while borrowers who qualify and were awarded Pell grants qualify for up to $20,000 in forgiveness.
The application for forgiveness is live and will remain available until December 31, 2023. The Department of Education recommends applying by November 15th in order to obtain forgiveness prior to the end of the payment pause on January 1, 2023.
Payment Pause Extended
The student loan payment pause has been extended until December 31, 2022, with payments resuming on January 1, 2023. This means that payments on federal student loans are not required during this time period, and balances will not accumulate interest. This is expected to be the final extension of the payment pause in place since March 2020.
New Proposed Payment Plan
The Biden administration is proposing a new rule to create a new income-based repayment (IBR) plan. The new plan would cap payments at 5% of discretionary income for undergraduate loans (down from 10% for current IBR plans), raise the threshold for non-discretionary income to 225% of the federal poverty level (approximately minimum wage), forgive loan balances under $12,000 after 10 years of payment rather than 20 years of payments, and cover borrowers’ monthly unpaid interest for borrowers whose payments are less than the monthly interest on their loans, including borrowers whose payments are $0 because of their income. The net effect for many borrowers would be reduced monthly payments, and loan balances would not increase dramatically due to unpaid interest. Small balances would be eligible for forgiveness in a shorter time period. The payment of unpaid interest will also reduce the tax impact of forgiveness for borrowers as forgiven balances will be smaller because borrowers will either pay enough to prevent the accumulation of interest or the government will cover the unpaid interest.
Reimbursement of Payments During Pause
Borrowers who have made payments towards eligible student loans during the pandemic payment freeze from March 2020 until December 31, 2022 are eligible to have those payments refunded. This option may be beneficial for people who paid off loans or paid balances below the amount of forgiveness for which they are eligible. For other borrowers, it may be more beneficial not to refund their payments as the interest rate on eligible loans was set to 0% during the payment pause so the entire payment would have been applied to the principal on their loans.
See https://studentaid.gov/debt-relief-announcement/ for more information.