From 1980-2020 the average cost of college increased by 180%. In 2020, more than half of bachelor’s degree graduates walked away from graduation with debt. The average debt among them was $28,400. Early in the pandemic, the Trump administration put a pause on payments for federal student loans and the accrual of interest on those loans. While most other pandemic assistance initiatives have since gone by the wayside, this one was finally set to expire on September 1st. Last week, President Biden announced a move that would not only extend the pause on loan payments until January 2023 but would also provide widespread debt forgiveness to current and former students. While the plan may not affect you directly, it could impact your child, grandchild, friend, neighbor, and so on.

Do I Qualify?
Borrowers of most federal student loans taken out prior to July 2022 qualify for forgiveness. The income threshold for tax years 2020 and 2021 is $125,000 if filing single, and $250,000 if married filing jointly. It should be noted that these eligibility thresholds apply to the student’s parents if they are still dependents. This is of particular importance for current students. You also qualify whether or not you finished school and graduated.

Which Loans are Eligible for Forgiveness?
Federal undergraduate, graduate, and Parent PLUS loans all qualify. PLUS loans allow parents to borrow funds for their children’s undergraduate studies. The loans are not need based, but the student must be enrolled full-time. The amount borrowed can be as high as the total cost of schooling. Borrowers with Pell Grants can qualify for up to $20,000 in relief. Pell Grants are also only available to undergraduate students, although part-time students do qualify for them. They are given on the basis of substantial financial need. Private loans, from an institution such as a bank for example, would not qualify.

How Much is Forgiven?
Borrowers are eligible for up to $10,000 in relief, and that figure jumps up to $20,000 for those with Pell Grants. This is capped at the amount of debt you have, if that figure is less than $10,000.

How Many People Will This Actually Affect?
It is reported that 43 million people are eligible to claim forgiveness, and 20 million of them will see their student debt completely eliminated.

How Do You Apply?
The Department of Education already has the income information for about 8 million borrowers. Those people likely will not need to apply. However, most borrowers will need to apply through a form that should become available by the end of the year.

What if I Made Payments During the COVID Pause?
The pause went into effect on March 13, 2020. If you continued to make payments on your federal student loans during the pause, you could be eligible for a refund. If your payments would have qualified for forgiveness, it would be wise to collect that refund.

Will My Remaining Loans be Affected?
If you still have student loans leftover after the forgiveness, those loans may undergo a new income-based repayment plan. Whereas the old plan capped bills at 10% of the borrower’s discretionary income, they will now be capped at 5%. The goal of this is to decrease the average annual loan payment required for former students.

Will This Plan Come to Fruition?
It will be interesting to see how this plays out in the coming weeks. Simply put, this has never been done before. Traditionally, an act of Congress is required to change the loan system. However, now that the plan has been announced, it would likely create quite an uproar if it were to be challenged and/or overturned.

About the Author: Jared Konen

Jared is an Investment Advisor Associate for our Wealth Management Team. He focuses on client service, as well as reporting and planning. Prior to joining Cherry Tree, Jared interned with Bernicke Wealth Management, where he was introduced to all different areas of a wealth management firm.
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.