How To Navigate Your Student Debt Relief Options

There are three major parts to Biden’s plan to help those dealing with student loan debt.

Over the past 12 months, the Department of Education under the Biden-Harris administration has championed a metric ton of program revisions and policy changes to the federal student loan system. The most recent Student Loan Debt Relief Plan, announced on Aug. 24, expands the October 2021 announcement of the Public Service Loan Forgiveness (PSLF) waiver and Income-Driven Repayment (IDR) Plan Reform publicized in April of this year.

The recent policy changes finally acknowledge that student loan debt is a systemic, structural problem. And despite the seemingly endless supply of opinions and rhetoric, the buzz about student loans has served as a catalyst for conversations around destigmatizing debt. These developments could be the first steps toward addressing the problems deeply embedded in today’s postsecondary education system (read: painfully high tuition costs. We’ll leave that can of worms for another article).

That said, fiduciary financial planners can (and should) only provide best-interest recommendations based on facts and current law, rather than speculate about unknowns. In the spirit of practicing that principle, here are the facts of the Student Loan Debt Relief Plan, a timeline of important dates and action items, as well as answers to the most common questions sent to our Education Planning Resource team at Buckingham Strategic Wealth.

Part 1: Final Extension of the Payment Pause

The Biden-Harris administration extended the federal student loan payment, interest and default pause for a final time, through Dec. 31, 2022. The extension will occur automatically. The additional months will continue to count nonpayment toward PSLF and maximum repayment terms under IDR plans. Regular payments will resume in January 2023.

Part 2: One-Time Student Loan Debt Relief

Borrowers are eligible for one-time student loan debt relief if their 2021 or 2020 adjusted gross income (AGI) was below $125,000 (individual or married, filing separately) or $250,000 (married, filing jointly or head of household). During a recent White House briefing, senior administration officials confirmed that borrowers would qualify for relief if their income met the criteria in either 2021 or 2020.

According to the Department of Education’s website, borrowers will receive the following amounts of relief if their AGI is below the income threshold:

  • Up to $20,000: If a borrower received a Pell Grant in college
  • Up to $10,000: If a borrower did not receive a Pell Grant in college

Direct Loan (including Parent PLUS), Perkins, Defaulted, and Federal Family Education Loan (FFEL) Program loans held by the Department of Education or in default at a guaranty agency with an outstanding balance as of June 30, 2022, are eligible for relief. If the outstanding loan balance is less than the maximum amount of debt relief a borrower is eligible for, the borrower will receive relief only up to the loan balance.

Relief will be awarded federal income tax-free potential for state income tax liability, depending on the state. Eligibility for debt relief is based on each borrower’s situation.

Part 3: The Creation of a New IDR Plan

The Biden-Harris administration also proposed creating a new IDR plan that substantially reduces future monthly payments for low- and middle-income borrowers.

The plan would:

  • Require borrowers to pay no more than 5% (10% or 15% currently) of their discretionary income monthly on undergraduate loans.
  • Raise the poverty-limit exemption to 225% (excluding more income from the discretionary income and payment calculation).
  • Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with loan balances of $12,000 or less.
  • Cover borrowers’ unpaid monthly interest as long as they make their monthly payments—even when that monthly payment is $0.

The Department of Education had initially proposed a new IDR plan that excluded graduate student loan borrowers. Since then, it appears that officials have softened on a total exclusion of graduate student loan borrowers. Instead, borrowers with both undergraduate and graduate loans will pay a weighted average rate.

While the details of the proposed new IDR plan look promising for many borrowers, the Department of Education has not yet released formal regulations governing the program, and many questions remain unanswered.

How will the new Student Loan Debt Relief plan benefit me?

The final extension of the federal student loan payment, interest and default pause benefits all borrowers with Direct Student Loans. The additional four months of nonpayment mean extra cash in borrowers’ budgets and a bit more time to create a plan once required payments start again in January.

Borrowers with federal student loans have two options to dispose of their loans. Borrowers can pursue loan forgiveness through the PSLF (or a similar program), or they can pursue forgiveness after paying the maximum IDR plan terms or by paying the loan off in full. (There are also some exceptions, such as borrower death or permanent disability.)

Borrowers often struggle choosing between taxable forgiveness through an IDR plan or paying down their entire loan balance. If applicable, PSLF should be considered the top choice. If not, borrowers whose total federal loan balance is less than their current annual income should consider paying their loans in full with a standard 10-year repayment plan. Borrowers whose total federal loan balance is higher than their annual income should consider taxable forgiveness through an IDR plan.

For borrowers who plan to pay down their loans in full or have made payments to pay off their loans since March 2020, one-time forgiveness will be beneficial, because it will decrease the overall balance of their total federal student loan debt. The Biden-Harris administration encourages borrowers to apply by Nov. 15 if they want relief by Dec. 31, 2022.

Borrowers with undergraduate loans aiming for IDR plan forgiveness should benefit from the initial information regarding the new IDR plan. If eligible, IDR plan borrowers should still apply for one-time forgiveness because it may slightly lower their tax bill in the year of forgiveness since their overall loan balance will likely be smaller.

How do I know what type of loan and repayment plan I have? How can I check if I received a Pell Grant?

Qualification for nearly all changes to student loan debt repayment plans, cancellation, forgiveness and relief depends on the loan program type.

To confirm your loan program type and/or repayment plan, use your FSA ID to sign into your account at Studentaid.gov. Click on the “My Aid” tab and download your .txt document report. To verify if you were a Pell Grant recipient, click on the “Grants” tab. If you received a Pell Grant, take a screenshot, or print out the document confirming that fact for your records.

I have multiple loans and/or multiple loan program types. How will the government apply my relief if I qualify?

For borrowers with multiple loans, the Department of Education announced it will apply relief in the following order:

  • Defaulted loans held by the ED; then
  • Defaulted commercial FFEL Program loans; then
  • Non-defaulted Direct Loan Program loans and FFEL Program loans held by the ED; then
  • Perkins Loans held by the ED.

If you have multiple loans in a program type (e.g., multiple Direct Loans), the Department of Education will apply the relief in the following order:

  • Loans with the highest statutory interest rate.
  • If interest rates are the same: unsubsidized loans before subsidized loans.
  • If interest rate and subsidy status are the same: most recent loan.
  • If interest rate, subsidy status and disbursement date are the same: loan with the lowest combined principal and interest balance.

I have made payments toward my loans since March 2020 or even paid off my loans during the pandemic. How can I request a refund for my payments?

According to the Federal Student Aid Data Center, approximately 9.1 million borrowers made at least one payment between April 2020 and March 2022. This includes about 1.9 million borrowers who paid off their accounts entirely.

All borrowers can request a refund for any payment (including auto-debit payments) made during the payment pause (beginning March 13, 2020) on qualifying loans. This gives borrowers the ability to claim back money they spent paying student loans during the pandemic. Borrowers must request a refund before applying for debt relief.

Borrowers pursuing PSLF with confirmed employment certification and payment count should strongly consider requesting a refund to allocate funds toward other financial goals or future payments. Requesting a refund will not affect their payment count.

Individuals who made voluntary payments and paid off their loans entirely or paid their balances down to an amount lower than what they believe will be forgiven should consider asking for a refund. Any amount refunded above their relief amount will still need to be paid off in the future.

For borrowers who still have a loan balance, it is not clear whether refunds will be automatically included in the relief amount or if they must request a refund. A refund must be requested for borrowers who paid off their balance. All eligible borrowers are encouraged to call and request the appropriate amount to be refunded to ensure it is received.

Important Upcoming Deadlines and Updates

Early October 2022 – Student loan debt relief application to be released

Actions to take:

  • Determine your eligibility and amount (based on your 2020 or 2021 AGI and Pell Grant awards).
  • For borrowers intending to request a refund for payments made during the pandemic, refunds must be requested before they apply for debt relief. Borrowers are encouraged to call their student loan servicer as soon as possible. Some servicers will request the dates and amount of each payment to refund.
  • The Application for Student Loan Debt Relief is Live. You can apply now (but no later than Dec. 31, 2023). https://studentaid.gov/debt-relief/application
  • “As of Sept. 29, 2022, borrowers with federal student loans not held by ED cannot obtain one-time debt relief by consolidating those loans into Direct Loans. Borrowers with FFEL Program loans and Perkins Loans not held by ED and who applied to consolidate into the Direct Loan Program prior to Sept. 29, 2022, are eligible for one-time debt relief through the Direct Loan Program.” https://studentaid.gov/manage-loans/forgiveness-cancellation/debt-relief-info#eligible-loans

Oct. 31, 2022 – Deadline to submit the PSLF waiver and consolidate FFEL loans for qualification

Actions to take:

  • Details and instructions on submitting your PSLF waiver or consolidating FFEL loans can be found in this article.
  • Unlike the most recent debt relief plan, PSLF eligibility is determined by past employment history. There are no maximum income thresholds to be eligible for PSLF.
  • All PSLF recipients receive income-tax-free forgiveness regardless of their annual income amount.

Dec. 31, 2022 – End of student loan moratorium

Actions to take:

  • Plan to resume required payments in January 2023.
  • This is also the preliminary deadline to apply for student loan debt relief.

Jan. 1, 2023 – One-time payment count revision for eligible IDR borrowers

Actions to take:

  • Per the recent IDR Plan Reform, all months a borrower was in repayment, regardless of which plan, will count toward the timeline to forgiveness on an IDR plan under the new One-Time Payment Count Revision.
  • If a borrower has commercially held FFEL loans, they can only benefit from the IDR account adjustment if they consolidate their FFEL loans to Direct Program loans before implementation of these changes, which is estimated to be no sooner than Jan. 1, 2023.

What exactly does the future of student loans look like in an ever-changing policy environment? Although it’s difficult to predict, there are steps both current and future borrowers can take to remain financially engaged and informed based on what we know today.

In a recent New York Times article, Travis Hornsby, founder of the Student Loan Planner, credited access to sound advice and having a plan with a clear path forward as two major factors to student loan repayment success. By becoming more aware of their own financial goals and student loan repayment strategy, borrowers can position themselves to navigate whatever lies ahead.

About the author: Becca Craig

Buckingham Strategic Wealth Associate Wealth Advisor Becca Craig, CFP®, CSLP®, ABA, has a passion for financial education. Championing the role of both financial advocate and advisor, she enjoys making money work for her clients—not against them—so they can focus on the people, endeavors, and causes they care about most. Becca’s specialty in student loan repayment planning provides her clients with a holistic financial framework in which they can build their net worth while simultaneously deploying strategies geared toward full repayment or forgiveness.

This commentary originally appeared October 7 on thestreet.com.

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