Huge news dropped today regarding student loans. There will be student loan forgiveness! That’s not all, as most people expected, student loan forbearance was extended through December 31st, 2022. Finally, there will be a new income-based repayment plan that will reduce the burden of student loan payments on the remaining balances.

The forbearance is pretty self-explanatory, but they included the wording of “final”. They used similar wording with previous extensions but after the forgiveness announcement, it’d be unlikely additional forbearances will occur.

Here are the big questions around student loan forgiveness and the details I’ve managed to pull together from multiple sources over the course of the day. I was hoping more logistics would be available, but I’ll keep you in the loop as I find out more.

How much is the student loan forgiveness?

• $20,000 if you were a Pell Grant Recipient
• $10,000 for other borrowers

What are the income limits? 

• $125,000 individual  
• $250,000 married and filing jointly and head of household

How will they confirm income? 

• Unfortunately, it’s not clear yet. An application process will be needed for most people unless the Department of Education already knows your “relevant” income.   What is relevant? In the past, a lot of government programs target your adjusted gross income from your tax return.
• If it’s based on 2021 you’re already locked in based on last year, but if it’s based on 2022 income and if you are near the bubble, you may want to be ready to take action
  • 401(k) biggest place to reduce your taxable income
  • HSA contributions if eligible
  • Tax loss harvesting
• Things that could blow up 2022 income: end-of-year bonuses, recognizing capital gains, stock options, 401k distributions

Which student loans?

• Not a ton of details, but they didn’t specify undergrad. It seems that all Federal Student loans. I did find specific wording that stated even current students are eligible. 
  • Dependent students will use parents’ income to qualify

Will it be automatic?

• No an application will be created, no later than December 31st. You can sign up to be notified directly here: https://www.ed.gov/subscriptions
  • For this reason, it’s important to share this information with the people you care about to make sure they don’t miss out on the application 

What if I have less than $10,000 in student loans?

• You’ll no longer have student loans! 
• You do not receive the difference.
• However, if you happened to make payments during the covid forbearance period, you are eligible to request a return of your payment so you can receive more forgiveness. 

Will I owe taxes on the amount forgiven?  

• No, previous laws were changed to exempt student loan forgiveness from being taxable.

I’ll be scouring any new updates and will bring them to you when available on potential strategies if you are near the bubble or concerned about the income verification part of the forgiveness.

A new income-based payment option is available

• They decreased the portion of your discretionary income that is used to calculate your monthly payments (this is good)
  • From that, they decreased the amount from the old 10% of discretionary income to 5% of your discretionary income
    • Essentially, student loan borrowers who have lower incomes will have their required payment cut by more than half of the old income-based repayment plans.
• Interest will not accrue if your payment doesn’t cover the normal interest!
  • In the past, this used to keep snowballing and was what caused the horror stories you’ve heard about student loans.
• A new shorter forgiveness time frame for initial student loan balances of $12,000 or less
  • Normally Forgiveness after 20 years, if a balance remains after making your required payments, it will be forgiven.
  • The new income-based payment option provides forgiveness after 10 years if a balance remains. If your student loan balance was greater than $12,000, the old timeframe of 20 years applies.