Federal Student Loan Forgiveness Update

In August 2022, President Biden announced the forgiveness of up to $20,000 of federal student loan debt for individuals as well as the extension of the student loan pause for a fifth time through December 31, 2022. The federal student loan debt relief application opened on October 17, 2022. However, on October 21, 2022, the Eighth Circuit Court of Appeals put the debt relief on hold while it considers an appeal from six states to abandon the debt relief program. The states involved claim the federal government doesn’t have the right to cancel debt on that scale without congressional approval. Additionally, the six states are arguing the plan will cost them future tax revenue (Nebraska v. Biden).

Other legal challenges have been raised against the federal loan forgiveness, but most have been dismissed by the courts. Recently, three other cases have been brought (Arizona v. Biden, Cato Institute v. US Department of Education, and Brown v. US Department of Education). So far, the Eighth Circuit case mentioned above has gone the furthest.    

For now, the student loan forgiveness program is paused until there’s a ruling from the Eighth Circuit Court of Appeals. It’s unclear how long the ruling will take and whether there are to be more legal challenges in the future. However, the federal student loan debt application is still open, and the US Department of Education (ED) is encouraging individuals to still apply for debt relief if they are eligible. The ED claims they will continue to review applications and process discharges when they are able to do so.

Filling out the debt relief application is easy and takes about five minutes. Individuals don’t need to log in or provide any documents to apply. Borrowers can apply for forgiveness any time before December 31, 2023. However, student loan payments are scheduled to restart at the beginning of 2023. The White House recommends applying as soon as possible so amounts can be forgiven before repayments start. Below is additional information about the federal student loan debt relief program.

Will student debt relief be taxed?

Student loan debt relief won’t be taxed at the federal level. Some states may be taxing this debt relief, so individuals should check with their state of residence for the latest information.

How much debt relief is available?

• Up to $20,000 for Federal Pell Grant recipients who meet the income requirements
• Up to $10,000 for non-Pell Grant recipients who meet the income requirements

What are the income requirements?

The income requirements are based on your adjusted gross income (AGI), which can be found on line 11 of the IRS Form 1040. You need to meet the AGI requirement on your 2020 or 2021 tax return, but you don’t need to meet it for both years:

• Single and Married Filing Separately– under $125,000
• Married Filing Jointly, Head of Household, and qualifying widow(er) – under $250,000

Do dependents qualify for debt relief?

Dependent students are eligible for the same amount of debt relief as everyone else, but their eligibility is based on one or both of their parents’ income, not their own income. If you’re a parent with eligible loans of your own, including parent PLUS loans, you can submit your own application. Your application will be processed separately from the one your child submits.

What are the steps to obtain debt relief?

1. Apply for debt relief at https://studentaid.gov/debt-relief/application
2. You’ll receive an email confirmation after you submit your application
3. The ED will review your application and confirm you’re eligible for debt relief
4. The ED will contact you if they need more information
5. The ED will notify you once your application is approved
6. Your loan servicer(s) will apply your debt relief and notify you

Which loans are eligible?

The following types of federal student loans disbursed on or before June 30, 2022, are eligible for relief:

• Direct Loan Program loans
• FFEL Program loans held by the ED or in default at a guaranty agency
• Federal Perkins Loan Program loans held by the ED
• Consolidation loans – if all the underlying loans were ED-held
• Defaulted loans (includes ED-held or commercially serviced Subsidized Stafford, Unsubsidized Stafford, parent PLUS, graduate PLUS; and Perkins loans held by ED)

Private loans (i.e., non-federal loans) are not eligible for debt relief.

How do you find your loans and loan servicers?

Log in to https://studentaid.gov and select ‘my aid’ in the dropdown menu under your name at the top right of your screen.

If you have multiple loans, in what order will debt relief be applied?

For borrowers with multiple loans, the ED will apply relief in the following order:

1. Defaulted ED-held loans
2. Defaulted commercial FFEL Program loans
3. Non-defaulted Direct Loans and FFEL Program loans held by ED
4. Perkins Loans held by ED

If you have multiple loans in a program type (e.g., multiple Direct Loans), the ED will apply the relief in the following order:

1. Apply relief to loans with the highest statutory interest rate
2. If interest rates are the same, apply to unsubsidized loans before subsidized loans
3. If interest and subsidy status are the same, apply to the most recent loan
4. If all the above are the same, apply to the loan with the lowest combined principal and interest balance

For more information on the federal student loan debt relief, visit https://studentaid.gov. 

Lutz’s year-end tax update webinar, scheduled on December 13, 2022, will cover federal student loan debt relief updates in further detail. You can register for the webinar here. If you have any questions, please contact us or your Lutz representative.