Student Loan Forgiveness

Summit Wealth Advocates |
Categories
Tax Planning
Education

It looks like there’s a good chance that student debt forgiveness is going to come into play sooner versus later and we want to take a few minutes to give you some insight into what this new tax law will look like.

National Forbearance Period Ends on 12/31/2022:

Repayments will begin 1/1/2023:

  • Over 33 months has passed without payments being required.
  • As of now, this is the final extension of payments being frozen.
  • New loan providers have been added; existing ones are still in place as well.

One-Time Student Loan Forgiveness:

Federal Direct Loans Only:

  • Forgiveness will be up to $10,000 if no Pell Grant or up to $20,000 if borrower had Pell Grants.
  • Adjusted Gross Income limit for forgiveness, in either 2020 or 2021:
    • Single:  $125,000
    • Married / Head of Household:  $250,000
  • Current students may qualify for forgiveness if their parents’ income is under the limitations.
  • There is no refund for any amount of unused forgiveness.
  • In order to be eligible, borrowers will have to prove their income (a webpage will be available mid-October).  Processing will take 4 to 6 weeks (confirmed by 11/15/2022).
  • Loans taken after 6/30/2022 will not be eligible for forgiveness.

Tax Implications:

  • Federal:  Per the press release, there will no Federal tax on the amount forgiven
  • State:
    • Some states are considering taxing the forgiveness as income to the recipient.
    • Will tax: MS, NC, IN
    • Considering taxing: MN, WI, AK, WV

New Income-Driven Repayment Plan: 

  • Will need congressional approval:
    • Reduces payment to 5% (down from 10%) of Adjusted Gross Income (AGI) for an income-driven plan.
    • Possible forgiveness after 10 years if the loan balance is below $12,000.
    • Interest on outstanding loans may not continue to accrue under this proposed payment method.