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President Biden Announces Student Loan Forgiveness Plan

By Aaron Blackburn, CPA, and Amy Sandlin, CPA, Senior Tax Manager

On Wednesday, August 24th, 2022, President Biden announced the broadest student loan forgiveness plan to date.

The plan included forgiving up to $10,000 in Federal Student Loans for individuals and families making under $125,000 and $250,000, respectively. If the borrower was a recipient of a Pell Grant, the individual would be forgiven up to $20,000 in Federal Student Loans. The plan also includes the final moratorium on student loan payments, which has been extended to December 31st, 2022.

The plan is based off of a 2003 law that hinges on a “National Emergency” clause that gives the Secretary of Education the ability to “change student financial assistance programs.” The national emergency in this case would be COVID-19.

This rollout of student loan forgiveness has been at the very top of the list for the Biden Administration since the start of his campaign.

President Biden promised on the campaign trail in 2020 that he would take steps to forgive $10,000 per individual in Federal Student Loans. The plan was announced during a time when the midterm elections were right around the corner and political pressures from both sides of the aisle were at their height.

While both sides agree that the college system and the federal student loan industry needs reform, this plan did not include details on how it would change things going forward. Regardless, this plan serves as major relief for an estimated 43 million borrowers, according to The White House.

It’s possible President Biden’s student loan forgiveness plan will be contested in court. Legal experts disagree as to whether the president has the authority to do this.

Only time will tell if this plan holds as it is. There are many moving pieces, especially with the midterm elections this fall, that only complicate matters further. There is one thing for sure – if it goes back to Congress, no one can predict when and what will come back to the President’s desk for signature.

The Highlights of the Student Loan Forgiveness Plan

  • The plan includes forgiving up to $10,000 in Federal Student Loans for individuals and families. The Department of Education is likely to use 2021 Adjusted Gross Income, from your 2021 Form 1040 (AGI), as the figure to benchmark the $125,000/$250,000 limit. (Your 2020 Form 1040 will likely be used if 2021 has not yet been filed). Final guidance is expected in the coming months.
  • Not taxable for Federal purposes
  • If the borrower was a recipient of a Pell Grant, the individual would be forgiven up to $20,000 in Federal Student Loans.
  • Cutting monthly payments in half for undergraduate loans. The Department of Education is proposing a new income-driven repayment plan that protects more low-income borrowers from making any payments and caps monthly payments for undergraduate loans at 5% of a borrower’s discretionary income—half of the rate that borrowers must pay now under most existing plans.
  • Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment.
  • Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less. The Department of Education estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.

Questions Borrowers May Have

  1. Will states treat this as taxable income?

A: It is unclear as of now whether states will treat this as taxable income. We do know that for Federal purposes, this will not be treated as income.

For some states, guidance has not been provided yet, but we can look to the past for some indication.

For example, Payroll Protection Program Loans (PPP) that were forgiven were not taxable for federal purposes, and 44/50 States did conform with that ruling, meaning 44 of the 50 did NOT treat it as taxable income. We can also look to the $10,200 of unemployment benefits that was not taxable for federal purposes.

Only 13 of the 50 States treated it as fully taxable, and Kentucky was one of them. However, the Kentucky Department of Revenue has already cited that they will not tax the student loan forgiveness, consistent with federal treatment.

Indiana enacted a provision in 2021 to tax federal student loan forgiveness, and the Indiana Department of Revenue confirmed they will tax forgiveness under President Biden’s plan.

Ohio passed legislation to conform to the Internal Revenue Code as of February 17, 2022. The IRC at that time excluded certain student loan forgiveness from income for 2021 – 2025. While the Ohio Department of Taxation has not confirmed how it will treat forgiveness under this new plan, we expect it to also be excluded from Ohio income tax.

  1. Do I need to fill out an application? When will the application be released?

Some borrowers may need to fill out an application for student loan forgiveness, especially if they are currently in school or do not have to file a tax return annually.

Click the link listed here to be notified with updates and to ensure you don’t miss any required applications to prevent your mandatory student loan payments resuming January 1, 2023.

  1. What will this cost the American Taxpayer?

It is unclear, some estimate “between $2,000 and $3,000”, according to the National Taxpayers Union. The Biden Administration will point to the deficit being cut with recent legislation.

  1. Can you get a refund of student loan payments, paid during the moratorium?

Yes, according to the Office of the U.S. Department of Education, “You can get a refund for any payment (including auto-debit payments) you make during the payment pause (beginning March 13, 2020). Contact your loan servicer to request that your payment be refunded.”

  1. Are private loans taken out for education forgiven as well?

No. An important distinction to note is the difference between Federal Student Loans and Private Student Loans. You can find a full list of eligible Federal Student Loan Servicers here.

There are still many unanswered questions in regard to the President’s plan. Please reach out to your local Blue & Co., LLC advisor with any other questions you may have.

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