Student Loan Debt Relief Announced:  Here’s What it Means For You

Update: October 21, 2022:  A federal appeals court has temporarily blocked Biden’s student loan forgiveness plan following an emergency motion for an administration stay which prohibits discharging any student loan debt under the cancellation plan. While the court’s ruling is temporary, the current forgiveness timeline is frozen until the court’s briefing is due next week on the matter. If the court decides not to impose an injunction, the implementation will continue, if an injunction is imposed loan forgiveness could be blocked while proceedings continue. The online application for student loan forgiveness is still live and you can still apply for student loan debt relief. The administration can still collect applications during the stay. Remember when applying, only apply on the Federal Student Aid website. Check back with the TurboTax blog for more up to date information.

Update: October 15, 2022: The Department of Education has begun beta testing the student debt relief website. Borrowers are able to submit applications for the Biden-Harris Administration’s student debt relief program. This application will allow borrowers to begin signing up before the formal website is released later this month. The link to the application is: https://studentaid.gov/debt-relief/application .

On August 24, 2022,President Biden, Vice President Harris, and the U.S. Department of Education announced a three part student loan debt relief plan to help federal student loan borrowers following the pandemic. The three part plan includes an extension of the pause on student loan payments, debt cancellation, and proposal to create an income-driven repayment plan to help lower future monthly payments.

You may be asking “What does the new student loan relief mean to me?” and “How do I get the student loan relief?”. Don’t worry, we have you covered. Here is a breakdown of what is in the plan and how you can get student loan debt relief.

What is in the Biden-Harris Student Debt Relief Plan?

Student Loan Payment Pause

• The student loan payment pause that was set to expire 8/31/2022 has been extended to Dec 31, 2022 for federal student loans.

Note the pause includes suspension of loan payments, 0% interest, and stopped collections on defaulted loans. You may also see a lower student loan interest deduction when you file your taxes if you have been taking advantage of the student loan payment pause this year.

Debt Cancellation

• Up to $10,000 in debt cancellation for federal student loans to non-Pell Grant recipients and 
• Up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education if individual income is less than $125,000 and less than $250,000 for households

Borrowers employed by non-profit organizations, the military, or federal, state, tribal or local government may be eligible to have all of their student loan debt forgiven through the Public Service Loan Forgiveness Program.

Proposal to Create New Income-Driven Repayment Plan

The Biden-Harris Administration is also proposing a rule to create a new income-driven repayment plan that will substantially reduce future monthly payments for lower-and middle-income borrowers.

The new proposed plan:

• Would require the borrower to pay no more than 5% of discretionary income on undergraduate loans instead of 10% under most current income-driven repayment plans
• Would raise the income requirement for repayment guaranteeing that borrowers making under 225% of the Federal Poverty Level (about the annual equivalent of $15 minimum wage) will not have to make a monthly payment.
• Would forgive balances of $12,000 or less after 10 years of payments instead of 20 years
• Would cover borrowers unpaid monthly interest so that unlike existing income-driven repayment plans, borrowers loan balances will not grow as long as they are making monthly payments.

Do I Need to Do Anything to Receive the Pause on Student Loan Payments?

No you don’t need to do anything. The extension will be automatic.

How Do I Know If I’m Eligible for Student Loan Debt Cancellation and How Do I Get It?

The following types of federal student loans with an outstanding balance as of June 30, 2022, are eligible for relief:

• William D. Ford Federal Direct Loan (Direct Loan) Program loans
• Federal Family Education Loan (FFEL) Program loans held by ED or in default at a guaranty agency
• Federal Perkins Loan Program loans held by ED
• Defaulted loans (includes ED-held or commercially serviced Subsidized Stafford, Unsubsidized Stafford, parent PLUS, and graduate PLUS; and Perkins loans held by ED)

This means that subsidized loans, unsubsidized loans, parent PLUS loans, and graduate PLUS loans held by the U.S. Department of Education are eligible. Consolidation loans are also eligible for relief, as long as all of the underlying loans that were consolidated were U.S. Department of Education held loans and were disbursed on or before June 30, 2022. Additionally, consolidation loans comprised of any FFEL or Perkins loans not held by the U.S. Department of Education are also eligible, as long as the borrower applied for consolidation before Sept. 29, 2022.

Do I Need to Do Anything to Receive Student Loan Debt Cancellation? 

If you meet the income thresholds you may receive relief automatically because of relevant income data already available to the U.S. Department of Education. If you think the U.S. Department of Education doesn’t have your income data or if you don’t know if the U.S. Department of Education has your income data, you can submit an online application through the Department of Education beginning  in October . You will have until December 31, 2023 to submit your application 

If the U.S. Department of Education determines that you qualify for debt relief without applying; they will send you an email and text message (if you’re signed up for these alerts). The Department of Education will use Free Application for Federal Student Aid (FAFSA) and income driven repayment application information to identify borrowers – or their parents – who have submitted income data for tax years 2020 or 2021. Using this information they will determine which borrowers meet the income requirements for relief. If the Department of Education has data for both years, they will use the year with the lower income. 

Is my Private Loan (non-federal loans) Eligible for Debt Relief?

If your federal student loan is guaranteed by the government but held by a private lender it will be excluded from receiving debt relief; however, if you applied to consolidate your private loan into a Direct Loan by Sep 29, 2022 you will be eligible for one-time debt relief.

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Am I eligible for a refund if I made voluntary payments during the pandemic? 

Yes. You will automatically receive a refund of your payments during the payment pause if: 

• You successfully apply for and receive debt relief under the debt relief plan, AND 
• Your voluntary payments during the payment pause brought you below the maximum debt relief amount you’re eligible to receive but did not pay off your loan in full. 

For example, if you’re a borrower eligible for $10,000 in relief and had a balance of $10,500 prior to March 13, 2020; and made $1,000 in payments since then—making your balance $9,500 at the time of discharge— relief will be applied to your remaining balance of $9,500 and you will receive a $500 refund. 

Other borrowers can still receive refunds on voluntary payments made after March 13, 2020, by contacting their servicer.  If you expect to have a balance after discharge is applied and wish to request a refund, you can do so by contacting your servicer until December 31, 2023.

If you consolidated your loan after March 13, 2020, refunds aren’t available for any voluntary payments made prior to the consolidation.

Refund requests can only be made by you and refunded to you, even if someone else made a payment on your loan.

Will my debt relief be taxed? 

One-time student loan debt relief will not be subject to federal income taxes. However, specific state and local taxes may vary. 

If you would like to be notified by the U.S. Department of Education when the application is open, you can  sign up at the Department of Education subscription page.

Check back with the TurboTax blog for more up to date information and details as additional guidance is issued.