On August 24, 2022, a few days prior to when federal student loan payments were set to go back into effect after a lengthy pause during the covid-19 pandemic, President Biden announced plans for student loan debt relief. When the pandemic initially began in March 2020, federal relief was granted to temporarily cease student loan repayment.
How Does This Change Things?
There is loan cancellation! According to the plan information, $10,000 of federal student loan debt will be canceled for all borrowers with an adjusted gross income of less than $125,000 (or $250,000 for married couples filing jointly). The debt relief also allows borrowers of Pell Grants to receive an additional $10,000 of debt/loan forgiveness. Pell Grants are awarded to borrowers from low-income households to try to help ensure higher education is affordable to individuals of all socio-economic statuses. Income eligibility can be determined based on adjusted gross income from 2020 or 2021 but not 2022. The Department of Education estimates that 21% of the eligible borrowers are age 25 and younger, 44% are aged 26 through 39 and the remaining 35% are ages 40 and over, including approximately 5% of the borrowers who are senior citizens. Approximately 27 million borrowers are Pell grant recipients and will be eligible for up to $20,000 in debt relief/forgiveness.
What is the Payment Pause and how does it help?
The payment pause relief on federal student loans has been extended one final time through December 31, 2022. President Biden announced that borrowers should expect to resume their monthly payments in January 2023, and advised that student loan borrowers should start planning for repayment status. Likely, student loan servicers will be sending out notices about three weeks to a month before the payment in January 2023, becomes due and owing.
Is the Public Service Loan Forgiveness Program (PSLF) affected by this change?
Borrowers who are employed by a government service agency, a nonprofit organization, the military or other government may be eligible to have their federal student loans forgiven through the PSLF program. There are certain changes to the standard program that have been temporarily implemented, but they expire on October 31, 2022. If you are potentially in a category of employment to seek PSLF forgiveness, which is temporarily waiving certain eligibility criteria and making it easier for the borrower to receive credit for past periods, it is important that you take action to seek loan forgiveness before the expiration of the program. You can research at https://www.whitehouse.gov/publicserviceloanforgiveness to determine eligibility criteria.
What is the New Income-Based Repayment Plan?
The Department of Education is recommending a new income-driven repayment plan that allows for the following:
- For undergrad loans, the monthly payment is capped at 5% of a borrower’s discretionary income (the current cap is 10%);
- For borrowers with an original balance of $12,000 or less, the loan will be forgiven after 10 years of payments (currently 20 years of payments are required);
- Non-discretionary income amount is raised such that a borrower who earns an annual salary based on a $15 per hour minimum wage would not be required to make any payments (the monthly payment is calculated at $0);
- A borrower’s unpaid monthly interest is covered so that the borrower’s loan balance will not grow due to interest as long as the borrower is making monthly payments;
- Allows for automatic recertification of income, allowing the Department of Education to retrieve a borrower’s income information every year instead of making borrowers recertify their income annually;
Are Student Loans Cancelled Automatically?
For most borrowers, no. The Department of Education will be creating a simple application for borrowers to claim relief which will be available in the next month or so. Borrowers who want to be notified when the application is available can sign up on the department of education’s page. Once an application is completed, the loan cancellation will take four to six weeks to complete. The department of education recommends that borrowers apply for relief by November 15th to ensure loan cancellation before the payment pause expires on December 31, 2022.
What Loans are Eligible?
Current students are eligible for loan cancellation as long as the loan was obtained before July 1, 20202. Subject to income limits, graduate loans are generally eligible for forgiveness, but private loans are not. Parent PLUS loans qualify for forgiveness, provided the income limits are met. Any private loans taken out by parents to pay for their child’s education are not eligible, however.
Will Cancelled Student Loans be Subject to Taxes (for Cancelled Debt)?
At the federal level, borrowers will not be taxed. The American Rescue Plan Act of 2021, protects this loan forgiveness at the federal level. A handful of states, however, have not aligned their laws with this act and could still tax student loan debt forgiven.
How Does All of this Affect Your Family Law Case?
Obviously in any family where one spouse has student loans forgiven, potentially, the effect on debt forgiveness may be a consideration of your family’s division of assets and debts. Further, if you and/or your former partner have agreed to divide responsibility for parent PLUS loans, it is important that the effect of loan forgiveness be considered. Finally, in many families where monthly budgets are being considered for child support and/or maintenance payments, it is important to consider the impact on each spouse’s monthly expenses if student loan debt is forgiven.
If you have further questions about how forgiveness of student loans will affect your family law case, call Pingel Family Law today at (816) 208-8130 to schedule your consultation.