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Student Loan Forgiveness

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Federal Student loan forgiveness has been front and center in the news for the last week or so. Regardless of your opinion of the program, if you have student loans outstanding, it’s worth taking a look at the options on the table. While details are currently scarce, here is what we can gather at this time:

  • Only federal student loans are eligible for forgiveness. If you aren’t sure whether yours are federal or private, you can check with your servicer or call 1-800-4-FED-AID.
  • The amount of this forgiveness is capped at $10,000, or $20,000, if the borrower received at least one Pell Grant during college. Pell Grants are generally awarded to students from lower-income families.
  • Household income must be below $125,000 for individuals or $250,000 for joint filers to qualify for forgiveness. It appears this refers to Adjusted Gross Income as reported on form 1040. 
  • It does appear that if two spouses have loans, both would be qualified for the full amount of forgiveness as long as the household income is under the ceiling.
  • It does appear that Direct Parent PLUS loans are eligible for the program as long as the parents truly have loans directly from the federal government.
  • Usually, when a debt is forgiven, that is considered taxable income, just like you earned the money that paid off the debt. The administration has suggested that this student loan forgiveness will be protected from federal tax. It’s unlikely it will be taxable in Tennessee, but Tennessee residents, as well as citizens of other states, should consider tax consequences carefully if participating in this program.
  • This $10k/$20k forgiveness is getting all the press, but other changes were announced too. 
    • Regardless of your job, if you work for federal, state or local government organizations, the military, a 501 (c)(3) non-profit, or certain other employers, you potentially can qualify for public service loan forgiveness over time. The rules are changing to become more inclusive, and even if you previously did not qualify, you have until October 31st to file new paperwork to possibly participate in this program.
    • Additionally, the rules are changing significantly for income-based repayment. Even if you’ve checked before, it’s worth looking again as the maximum income and requirements of this program have relaxed somewhat. It has been suggested that under this program, your loan payments could now be capped at 5% of your income. One of the great benefits of this program is that even if your monthly payment is zero or near zero, your interest accrual may be effectively capped such that your loan balance can never go up.

If you or your loved ones have student loans, it’s worth looking at these programs. Some borrowers might see their balances automatically reduced, but others may need to apply. Details are still forthcoming, and the administration recommends signing up for “Federal Student Loan Borrower Updates” at https://www.ed.gov/subscriptions to keep updated on the steps required to follow through on these opportunities.

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